Despite furloughing staff, Nicholas Financial continues to accept loan applications

Despite furloughing 15% of its employees last week, Nicholas Financial is still accepting new loan applications, several dealers confirmed to Auto Finance News, validating the subprime lender’s solvency amid the COVID-19 crisis.

In fact, one Ohio-based auto dealer told AFN he hasn’t seen any lender halt its intake of new loan applications. Most auto financiers’ profits are based on interest and principal collected from the loans on their books, as well as servicing fees associated with those accounts. As loans amortize off their portfolio, it’s vital for lenders to originate new loans to keep their revenue stream flowing.

Since the outbreak, new- and used-vehicle sales have plummeted, with used-vehicle retail sales volume down 50% year over year through the first half of April, compared with the 67% YoY decline in March, according to Manheim.

Last year, Nicholas Financial originated $22.4 million of loans through its direct and indirect channels, Chief Executive Doug Marohn confirmed. Assuming Nicholas is able to retain the same market share during the pandemic as sales volume cuts in half, the Clearwater, Fla.-based lender will need about $11.2 million worth of available liquidity to sustain itself.

Figures from the subprime lender’s latest 10-Q filing with the Securities and Exchange Commission show Nicholas likely has plenty of available liquidity to see it through the coronavirus economic crisis, with $15.8 million in cash as well as $56 million of undrawn capital on its $175 million credit facility.

Still, many subprime borrowers are exposed to higher credit losses as a result of record unemployment — which reached 22.6 million today — and shelter-at-home directives that have closed essential businesses. In turn, subprime lenders are also at risk of a spike in delinquencies. In fact, Florida, where Nicholas is headquartered, has the third-highest concentration of subprime auto loans in the country, representing 9.68% of all outstanding subprime loans by volume, according to DBRS Morningstar.

Nicholas has set 7.5% of its finance receivables aside as an allowance for credit losses for the nine months ended Dec. 31, 2019. Net charge-offs for the same period were 9.63%. The lender’s total auto portfolio was $190.3 million at yearend 2019 prior to the additional $19 million acquired after purchasing a part of Platinum Auto Finance’s active indirect portfolio.

The lender has yet to implement CECL, and plans to increase its allowance for credit losses under the new accounting standard by Dec. 22, 2022, in line with the Financial Accounting Standards Board guidelines.

Nicholas Financial [NASDAQ: NICK] was trading up 4.72% at $5.50 per share with a market cap of $43.53 million at market close today.