Nicholas Financial walks back expansion plans

Nicholas Financial is walking back expansion plans as it struggles to regain profitability. The 38-year-old lender has become a shadow of its former self — shuttering branches, laying off employees and slashing originations — as it works to free up capital. Even as recently as a year ago, Nicholas was implementing what it called a “methodical expansion” of its branch network as it pushed further west into the Lone Star State. At the time, the subprime lender was celebrating the opening of its Houston branch office — its 47th nationwide — a move meant to pave the way for fresh outposts in Dallas, Fort Worth and San Antonio. [caption id="attachment_57334311" align="alignnone" width="2560"] © Can Stock Photo / Fahroni [/caption] With 200 employees and operations in 18 states, Nicholas was originating about $20 million of indirect loans per month. The company’s direct lending business was surging , too, averaging $8 million of monthly originations. Then, in May 2022, Chief Executive Douglas Marohn resigned . The company’s board circulated a letter to shareholders lamenting the company’s growth rate in equity capital and outlining a plan to improve investment returns. The board pointed out that most subprime auto lenders hold $2.50 to $3.50 of receivables for every $1 of equity capital, but Nicholas’s ratio was $1.45 of receivables per $1 of equity capital. The upshot: The board was seeking a “healthier balance of equity and debt usage going forward.” A new sheriff in town Enter Michael Rost, Marohn’s successor, who dismantled the branch network he previously headed, opting to replace Nicholas’s decentralized structure with a regionalized business model. He shuttered all but two of Nicholas’s branches, retaining the company’s Clearwater, Fla., headquarters, along with offices in Charlotte, N.C., and Columbus, Ohio. Rost also orchestrated the company’s retreat from the direct lending sector, which had been posting double- and triple-digit growth quarter after quarter. The decision came despite a four-pronged approach to generate more customers and revenue, delineated in the company’s May 2022 shareholder letter. Namely, Nicholas had planned to increase direct lending text campaigns to quarterly from semiannually, expand live checks to new customers with credit bureau providers, develop sales finance programs to local stores and invest in new direct loan products with competitive pricing and collateral requirements. Rost implemented sweeping measures on the back end, too, outsourcing the company’s servicing, collections and recovery operations to Westlake Financial’s Portfolio Management division . The expectation is that the move will enable Nicholas to reduce overhead, streamline operations and limit compliance risk. Rost’s restructuring efforts dropped Nicholas down to a headcount of 18. Last month, Rost addressed Nicholas’s financial position. He negotiated a two-year, $50 million credit facility with another Westlake Financial subsidiary — Westlake Capital Finance — to replace a revolving line of credit from Wells Fargo upon which it had defaulted. Nicholas had $43 million outstanding on the $175 million Wells Fargo credit line. Losses could soar Even with months of restructuring under its belt, Nicholas has yet to reap the rewards of its expansive cost-cutting efforts. Year over year, operating expenses have climbed 9.1% to $9.7 million, primarily attributable to the branch closures, severance expenses and impairment charges for leased assets and contractual services. For the quarter ended Dec. 31, 2022, Nicholas lost $13.4 million. Additionally, the company’s provision for credit losses has skyrocketed 540.6% to $10.7 million — and it will likely climb higher. Typically, increased originations mask rising loss rates because the payments from new borrowers offset the missing payments of delinquent borrowers. But with originations at drastically lower than normal levels, Nicholas’s losses are likely to soar. Meanwhile, Nicholas’s board “is exploring opportunities to allocate any excess capital to increase shareholder returns, whether by acquiring loan portfolios or businesses or by investing outside of the company’s traditional business,” said Jeff Royal, chairman of the Nicholas board of directors, in the company’s earnings release last week. More specifically, Rost noted that Nicholas is “looking to go all digital down the road,” adding that “those are really the cost efficiency things that we have to do in order to keep it rolling.” But perhaps another solution for Nicholas hinges on its new servicing and funding partner, Westlake Financial. In the past few years, Westlake Portfolio Management has become the servicer of choice for several lenders that have closed up shop, including Coastal Credit LLC , Honor Finance , Pelican Auto Finance , Security National Automotive Acceptance Co. and Total Finance . Time will tell whether Nicholas will emerge from its retrenchment or linger in Westlake’s servicing portfolio. Auto Finance Summit East, Auto Finance News’ new spring event, is set for May 10-12 at the JW Marriott Nashville featuring a fireside chat with Peter Muriungi, CEO of Chase Auto. Visit autofinance.live.

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