Nicholas Financial Gears Up for Return to ‘Disciplined’ Subprime Underwriting

Amid a 41% year-over-year decline in originations during the fourth quarter of 2017, Nicholas Financial hopes to get “back to the basics” and reestablish its presence in the deep-subprime market, new Chief Executive Doug Marohn told Auto Finance News.

“Nicholas is a lot of things, and Nicholas has enjoyed a very specific reputation for decades, a positive one,” he said. “We have somehow slowly evolved — or devolved, if you will — away from that over the last several years. We really kind of lost our brand identity, lost our niche, and got lost in the noise of every other lender out there.”

The company’s originations declined to $27 million in the fourth quarter, compared with $46 million the same time the year prior. Nicholas chalked up the drop in originations to a change in underwriting guidelines — including the use of alternative data — that were implemented to improve the quality of contracts being purchased, according to a press release.

For the three-month period ended in December, delinquencies declined 16%. Yet charge-offs grew to 10.6% of the lender’s portfolio, compared with 8.9% during the same period the year prior, according to earnings.

Marohn, who was previously with the company from 1998 to 2011, returned to Nicholas Financial in December 2017 and is working to shift the company’s focus back to being “one of the most disciplined underwriters in the subprime space,” Marohn said. “You’re going to see a smaller dollar deal with a higher yield, shorter term, smaller payments, lower advance, etc.,” Marohn said. “Hopefully, that will translate into increased contracts as we get our marquee message out.”

Marohn took over for former President Ralph Finkenbrink who retired in September 2017. Most recently, Marohn served as president and CEO of Metrolina Credit Co., a position he held since January 2014.

Clearwater, Fla.-based Nicholas specializes in purchasing and servicing auto loans made by franchised and independent auto dealers.

AFN spoke with Marohn about his return to Nicholas Financial and changes the lender intends to make this year as it returns to its “core discipline.” Following are edited excerpts from the interview:

Auto Finance News: In addition to alternative data, what caused the 41% drop in contract acquisitions?

Doug Marohn: The drop has been somewhat intentional. We are trying to return back to the core product that made Nicholas Financial so successful for so many years, that the company has gotten away from. At Nicholas, we never chased competition, we stuck to our core disciplines, we sacrificed growth for profit, and we were known as one of the most disciplined underwriters in the subprime space. That’s what helped us weather three or four really crazy cycles.

The last cycle has been in existence for the last couple of years or more, with a lot of competition and a bunch of players in the space jumping in at all levels of the credit spectrum. Nicholas got away from that discipline, tried to chase that competition, and tried to be a lot of things to a lot of people — as opposed to being a subprime lender focused on primary transportation to-and-from work for our customers. As a result, our originations this year and the year before that were very robust and greatly inflated, not only in terms of the number of contracts but the size of those contracts. The volume number and the volume dollars were much higher in prior years. I only came back in the middle of December, but even before my return there was somewhat of a return to that more ‘traditional’ Nicholas deal, and going forward you’re going to see more of a concerted effort to that more traditional deal.

AFN: Do you expect volume to increase or decrease in 2018?

DM: I think volume is going to increase in 2018 because the bottom line is, we actually perform better and compete better when we focus on our true niche — which is the deep-subprime customer who is trying to finance that primary mode of transportation. When we compete in that realm, we actually get away from competing on things like pricing, term, and advance. The other lenders who service that [deep-subprime] niche are more in line with our pricing, term, and advance, so we can sell our other benefits and value proposition. For example, we can sell that local relationship, our excellent service, our quick funding, and our other propositions that make Nicholas so great without having to acquiesce on price or advance like we were having to do. We tried to compete with the wrong competition. We were up lined up against … other companies that were designed to handle a different pricing metric. We did not compete well. As we shifted to more quality-driven underwriting, Nicholas had to [shift] away from that competition. Now that I’m back, we’ll focus more on lenders … that are much more aligned with our pricing parameters and, again, with our focus on that type of business.

AFN: What are your priorities in this new role?

DM: Let’s get Nicholas Financial back to the basics. … We’re not centralized, and we have higher overhead. We have the branch model by design, but when we try to compete in an arena that is focused more in a centralized model with a different pricing structure, we just don’t do well. We’re not set up for that. We’re [working on] stabilizing our branch operations [to focus] on our core product. As we do that and get all of our existing branches back to where they need to be in terms of profitability, … then we’ll focus on expansion and new markets, as well as layering in new products — such as direct loans. The first goal is getting us back to the basics, getting us focused on our core product, selling the benefits of that core product, and reestablishing ourselves to the independent dealer as the preferred subprime lender.

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