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 September 30, 2021

☐ 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, 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

As of November 10, 2021, approximately 12.7 million common shares, no par value, of the Registrant were outstanding (of which 5.1 million shares were held by the Registrant’s principal operating subsidiary and pursuant to applicable law, not entitled to vote and 7.6 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
	Consolidated Balance Sheets as of September 30, 2021 and March 31, 2021	1
	Consolidated Statements of Income for the three and six months ended September 30, 2021 and 2020	2
	Consolidated Statements of Shareholders’ Equity for the three and six months ended September 30, 2021 and 2020	3
	Consolidated Statements of Cash Flows for the six months ended September 30, 2021 and 2020	4
	Notes to the Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
Part II .	Other Information
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	29

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Nicholas Financial, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

	September 30, 2021 (Unaudited)			March 31, 2021
Assets
Cash	$	15,611		$	22,022
Restricted cash		7,240			10,955
Finance receivables, net		165,561			170,318
Repossessed assets		859			685
Operating lease right-of-use assets		4,801			3,392
Prepaid expenses and other assets		1,192			1,271
Income taxes receivable		240			653
Property and equipment, net		1,242			859
Deferred income taxes		1,722			2,283
Total assets	$	198,468		$	212,438
Liabilities and shareholders’ equity
Credit facility, net of debt issuance costs	$	69,599		$	86,154
Note payable		3,244			3,244
Net long-term debt		72,843			89,398
Operating lease liabilities		4,817			3,367
Accounts payable and accrued expenses		3,719			4,451
Total liabilities		81,379			97,216
Shareholders’ equity
Preferred stock, no par: 5,000 shares authorized; none issued		—			—
Common stock, no par: 50,000 shares authorized; 12,665 and 12,653 shares issued,    respectively; and 7,583 and 7,708 shares outstanding, respectively		35,151			35,064
Treasury stock: 5,082 and 4,945 common shares, at cost, respectively		(73,895	)		(72,343	)
Retained earnings		155,833			152,501
Total shareholders’ equity		117,089			115,222
Total liabilities and shareholders’ equity	$	198,468		$	212,438
The following table represents the assets and liabilities of our consolidated variable interest entity as follows:
	September 30, 2021 (Unaudited)			March 31, 2021
Assets
Restricted cash	$	7,240		$	10,955
Finance receivables, net		131,033			150,706
Repossessed assets		745			631
Total assets	$	139,018		$	162,292
Liabilities
Credit facility, net of debt issuance costs	$	69,599		$	86,154
Accounts payable and accrued expenses		324			405
Total liabilities	$	69,923		$	86,559

See Notes to the Consolidated Financial Statements.

1

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,				Six Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Interest and fee income on finance receivables	$	12,572	$	14,064	$	25,166	$	28,215
Unrealized gain on equity investments		—		45		—		45
Total revenue:		12,572		14,109		25,166		28,260
Expenses:
Marketing		373		358		950		577
Salaries and employee benefits		4,668		4,798		9,507		8,950
Administrative		2,780		2,923		5,636		5,826
Provision for credit losses		1,395		3,050		2,125		6,350
Depreciation		96		52		172		121
Interest expense		1,121		1,569		2,309		3,218
Total expenses		10,433		12,750		20,699		25,042
Income before income taxes		2,139		1,359		4,467		3,218
Income tax expense		536		92		1,135		521
Net income	$	1,603	$	1,267	$	3,332	$	2,697
Earnings per share:
Basic	$	0.21	$	0.16	$	0.44	$	0.34
Diluted	$	0.21	$	0.16	$	0.44	$	0.34

See Notes to the Consolidated Financial Statements.

2

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Unaudited)

(In thousands)

	Three Months Ended September 30, 2021
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at June 30, 2021		7,650		$	35,110	$	(73,008	)	$	154,230	$	116,332
Issuance of restricted stock awards		10			—		—			—		—
Share-based compensation		—			41		—			—		41
Treasury stock		(77	)		—		(887	)		—		(887	)
Net income		—			—		—			1,603		1,603
Balance at September 30, 2021		7,583		$	35,151	$	(73,895	)	$	155,833	$	117,089
	Three Months Ended September 30, 2020
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at June 30, 2020		7,802		$	34,916	$	(71,466	)	$	145,580	$	109,030
Issuance of restricted stock awards		10			—		—			—		—
Share-based compensation		—			48		—			—		48
Treasury stock		(25	)		—		(201	)		—		(201	)
Net income		—			—		—			1,267		1,267
Balance at September 30, 2020		7,787		$	34,964	$	(71,667	)	$	146,847	$	110,144
	Six Months Ended September 30, 2021
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at March 31, 2021		7,708		$	35,064	$	(72,343	)	$	152,501	$	115,222
Issuance of restricted stock awards		12			—		—			—		—
Exercise of stock options		—			—		—			—		—
Cancellation of restricted stock awards		—			—		—			—		—
Share-based compensation		—			87		—			—		87
Treasury stock		(137	)		—		(1,552	)		—		(1,552	)
Net income		—			—		—			3,332		3,332
Balance at September 30, 2021		7,583		$	35,151	$	(73,895	)	$	155,833	$	117,089
	Six Months Ended September 30, 2020
	Common Stock										Total
	Shares			Amount		Treasury Stock			Retained Earnings		Shareholders' Equity
Balance at March 31, 2020		7,806		$	34,867	$	(71,438	)	$	144,150	$	107,579
Issuance of restricted stock awards		11			—		—			—		—
Share-based compensation		—			97		—			—		97
Treasury stock		(30	)		—		(229	)		—		(229	)
Net income		—			—		—			2,697		2,697
Balance at September 30, 2020		7,787		$	34,964	$	(71,667	)	$	146,847	$	110,144

See Notes to the Consolidated Financial Statements.

3

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Six Months Ended September 30,
	2021			2020
Cash flows from operating activities
Net income	$	3,332		$	2,697
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		172			121
Amortization of debt issuance costs		215			214
Amortization of operating lease right-of-use assets		678			818
Loss on sale of property and equipment		(2	)		(2	)
Unrealized gains on equity securities		—			(45	)
Provision for credit losses		2,125			6,350
Amortization of dealer discounts		(3,237	)		(3,218	)
Amortization of insurance and fees commissions		(1,308	)		(1,207	)
Accretion of purchase price discount		(116	)		(305	)
Deferred income taxes		561			(95	)
Principal reduction on operating lease liabilities		(776	)		(738	)
Share-based compensation		88			97
Changes in operating assets and liabilities:
Repossessed assets		(174	)		484
Accrued interest receivable		(120	)		347
Prepaid expenses and other assets		78			35
Accounts payable and accrued expenses		(593	)		(1,203	)
Income taxes receivable		413			3,450
Unearned insurance and fee commissions		(36	)		(156	)
Net cash provided by operating activities		1,300			7,644
Cash flows from investing activities
Purchase and origination of finance receivables		(51,962	)		(40,362	)
Principal payments received		59,411			59,297
Purchase of equity investments		—			(2,968	)
Purchase of property and equipment		(553	)		(311	)
Proceeds from sale of property and equipment		—		—
Net cash provided by investing activities		6,896			15,656
Cash flows from financing activities
Repayments on credit facility		(16,770	)		(17,830	)
Proceeds from PPP Loan		—			3,244
Repurchases of treasury stock		(1,552	)		(229	)
Net cash used in financing activities		(18,322	)		(14,815	)
Net (decrease) increase in cash and restricted cash		(10,126	)		8,485
Cash and restricted cash at the beginning of period		32,977			24,684
Cash and restricted cash at the end of period	$	22,851		$	33,169
Supplemental Disclosures:
Interest paid		2,160			3,129
Income taxes		161			727
Leased assets obtained in exchange for new operating lease liabilities		1,693			1,213

See Notes to the Consolidated Financial Statements.

4

Notes to the Consolidated Financial Statements

1. Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada” or the Company) 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 consolidated balance sheet as of September 30, 2021, which has been derived from audited financial statements, and the accompanying unaudited interim 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, 2022. It is suggested that these 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, 2021 as filed with the Securities and Exchange Commission on June 22, 2021. The March 31, 2021 consolidated balance sheet included herein has been derived from the March 31, 2021 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 and fair value of the assets and liabilities for business combination. 

2. Revenue Recognition

Interest income on finance receivables is recognized using the interest method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. The Company reverses the accrual of interest income when the loan is contractually delinquent 61 days or more.

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 (BK13), 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.

A dealer discount represents the difference between the finance receivable of a Contract, and the amount of money the Company actually pays for the Contract. The discount negotiated by the Company is a function of the lender, the wholesale value of the vehicle and competition in any given market. In making decisions regarding the purchase of a particular Contract the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer, and the value of the automobile in relation to the purchase price and the term of the Contract.

The dealer discount is amortized as an adjustment to yield using the interest method over the life of the loan. The average dealer discount associated with new volume for the three months ended September 30, 2021 and 2020 was 6.7% and 6.8%, respectively, in relation to the total amount financed.

Unearned insurance and fee commissions consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit life insurance, involuntary unemployment insurance coverage, and forced placed automobile insurance. These commissions are amortized over the life of the contract using the effective interest method. 

5

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. Diluted earnings per share includes the dilutive effect of additional potential common shares from stock compensation awards. Earnings per share have been computed based on the following weighted average number of common shares outstanding:

	Three months ended September 30, (In thousands, except per share amounts)						Six months ended September 30, (In thousands, except per share amounts)
	2021			2020			2021			2020
Numerator
Net income per consolidated statements of income	$	1,603		$	1,267		$	3,332		$	2,697
Percentage allocated to shareholders *		100	%		99	%		100	%		99	%
Numerator for basic and diluted earnings per share	$	1,596		$	1,260		$	3,319		$	2,682
Denominator
Denominator for Basic earnings per share - weighted-average shares outstanding		7,620			7,731			7,622			7,722
Dilutive effect of stock options		—			—			—			—
Denominator for diluted earnings per share		7,620			7,731			7,622			7,722
Per share income from continuing operations
Basic	$	0.21		$	0.16		$	0.44		$	0.34
Diluted		0.21			0.16			0.44			0.34
* Basic weighted-average shares outstanding		7,620			7,731			7,622			7,722
Basic weighted-average shares outstanding and unvested restricted stock units expected to vest		7,652			7,777			7,651			7,766
Percentage allocated to shareholders		100	%		99	%		100	%		99	%

4. Finance Receivables

Finance Receivables Portfolio

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

	(In thousands)
	September 30, 2021			March 31, 2021			September 30, 2020
Finance receivables	$	177,013		$	184,237		$	198,168
Accrued interest receivable		2,405			2,285			2,817
Unearned dealer discounts		(6,787	)		(7,290	)		(7,411	)
Unearned insurance commissions and fees		(2,360	)		(2,396	)		(2,460	)
Purchase price discount		(248	)		(364	)		(610	)
Finance receivables, net of unearned		170,023			176,472			190,504
Allowance for credit losses		(4,462	)		(6,154	)		(11,469	)
Finance receivables, net	$	165,561		$	170,318		$	179,035

Contracts and Direct Loans each comprise a portfolio segment. The following tables present selected information on the entire portfolio of the Company:

	As of September 30,
Contract Portfolio	2021			2020
Average APR		22.9	%		22.7	%
Average discount		7.5	%		7.6	%
Average term (months)		50			51
Number of active contracts		20,927			24,656

6

	As of September 30,
Direct Loan Portfolio	2021			2020
Average APR		29.0	%		27.7	%
Average term (months)		27			27
Number of active contracts		5,006			3,673

The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The Contracts are predominantly for used vehicles. As of September 30, 2021, the average model year of vehicles collateralizing the portfolio was a 2012 vehicle.

Direct Loans are typically for amounts ranging from $500 to $15,000 and are generally secured by a lien on an automobile, watercraft or other permissible tangible personal property. The majority of 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 the typical Contract due to the customer’s prior payment history with the Company; however, the underlying collateral is “typically” less valuable. In deciding whether to make a loan, the Company considers the individual’s credit history, job stability, income, and impressions created during a personal interview with a Company loan officer. Additionally, because most of the Direct Loans made by the Company to date have been made to current or former customers, the payment history of the borrower is a significant factor in making the loan decision. As of September 30, 2021, loans made by the Company pursuant to its Direct Loan program constituted approximately 10.7% of the aggregate principal amount of the Company’s loan portfolio. Changes in the allowance for credit losses for both Contracts and Direct Loans were driven primarily by consideration of 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 adequacy of the allowance for credit losses. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision would be recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. Additionally, credit loss trends over several reporting periods are utilized in estimating future losses and overall portfolio performance. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Each portfolio segment consists of smaller balance homogeneous loans which are collectively evaluated for impairment.

Allowance for Credit Losses

The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts and Direct Loans for the three months ended September 30, 2021 and 2020:

	Three months ended September 30, 2021									Six months ended September 30, 2021
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of    period	$	5,268		$	(18	)	$	5,250		$	6,001		$	153		$	6,154
Provision for credit losses		460			935			1,395			1,190			935			2,125
Charge-offs		(3,128	)		(182	)		(3,310	)		(5,901	)		(373	)		(6,274	)
Recoveries		1,116			11			1,127			2,426			31			2,457
Balance at September 30, 2021	$	3,716		$	746		$	4,462		$	3,716		$	746		$	4,462
	Three months ended September 30, 2020									Six months ended September 30, 2020
	Contracts			Direct Loans			Consolidated			Contracts			Direct Loans			Consolidated
Balance at beginning of    period	$	10,651		$	597		$	11,248		$	10,433		$	729		$	11,162
Provision for credit losses		3,050			-			3,050			6,350			-			6,350
Charge-offs		(4,073	)		(142	)		(4,215	)		(8,407	)		(298	)		(8,705	)
Recoveries		1,349			37			1,386			2,601			61			2,662
Balance at September 30, 2020	$	10,977		$	492		$	11,469		$	10,977		$	492		$	11,469

7

The Company uses the trailing six-month charge-offs, annualized, and applies this calculated percentage to ending finance receivables to calculate estimated future probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management’s total estimate of probable credit losses and its assessment of the overall adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believes that the allowance for credit losses reflects the current trends of incurred losses within the portfolio and is better aligned with the portfolio’s performance indicators.

The following table is an assessment of the credit quality by creditworthiness:

	(In thousands)
	September 30, 2021						September 30, 2020
	Contracts		Direct Loans		Total		Contracts		Direct Loans		Total
Performing accounts	$	153,991	$	18,646	$	172,637	$	179,723	$	12,509	$	192,232
Non-performing accounts		3,949		198		4,147		5,564		211		5,775
Total		157,940		18,844		176,784		185,287		12,720		198,007
Chapter 13 bankruptcy accounts		214		15		229		161		0		161
Finance receivables	$	158,154	$	18,859	$	177,013	$	185,448	$	12,720	$	198,168

A performing account is defined as an account that is less than 61 days past due. The Company defines an automobile contract as delinquent when more than 10% of a payment contractually due by a certain date has not been paid immediately by the following due date, which date may have been extended within limits specified in the servicing agreements or as a result of a deferral. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable.

In certain circumstances, the Company will grant obligors one-month payment extensions. The only modification of terms in those circumstances is to advance the obligor’s next due date by one month and extend the maturity date of the receivable. There are no other concessions, such as a reduction in interest rate, or forgiveness of principal or of accrued interest. Accordingly, the Company considers such extensions to be insignificant delays in payments rather than troubled debt restructurings.

A non-performing account is defined as an account that is contractually delinquent for 61 days or more or is a Chapter 13 bankruptcy account for which the accrual interest income has been suspended. The Company’s charge-off policy is to charge off an account in the month the contract becomes 121 days contractually delinquent.

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.

The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and Direct Loans, excluding Chapter 13 bankruptcy accounts:

	Contracts
	(In thousands, except percentages)
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+			Total
September 30, 2021	$	157,940	$	7,990		$	2,905		$	1,024		$	19		$	11,938
				5.06	%		1.84	%		0.65	%		0.01	%		7.56	%
March 31, 2021	$	170,195	$	6,289		$	2,430		$	896		$	42		$	9,657
				3.70	%		1.43	%		0.53	%		0.02	%		5.67	%
September 30, 2020	$	185,287	$	10,232		$	3,962		$	1,560		$	42		$	15,796
				5.52	%		2.14	%		0.84	%		0.02	%		8.53	%

8

	Direct Loans
	Balance Outstanding		30 – 59 days			60 – 89 days			90 – 119 days			120+			Total
September 30, 2021	$	18,844	$	416		$	145		$	53		$	—		$	614
				2.21	%		0.77	%		0.28	%		—			3.26	%
March 31, 2021	$	13,909	$	253		$	101		$	81		$	10		$	445
				1.82	%		0.73	%		0.58	%		0.07	%		3.20	%
September 30, 2020	$	12,720	$	349		$	159		$	52		$	—		$	560
				2.74	%		1.25	%		0.41	%		—			4.40	%

5. Credit Facility

Ares Credit Facility

On March 29, 2019, NF Funding I, a wholly-owned, special purpose financing subsidiary of NFI entered into a senior secured credit facility (the “Ares Credit Facility”) pursuant to a credit agreement with Ares Agent Services, L.P., as administrative agent and collateral agent, and the lenders that are party thereto (the “Ares Credit Agreement”).

Pursuant to the Ares Credit Agreement, the lenders agreed to extend to NF Funding I a line of credit of up to $175,000,000, which was used to purchase motor vehicle retail installment sale contracts from NFI on a revolving basis pursuant to a related receivables purchase agreement between NF Funding I and NFI (the “Receivables Purchase Agreement”). Under the terms of the Receivables Purchase Agreement, NFI sold to NF Funding I the installment sale contracts. NFI serviced the motor vehicle retail installment sale contracts transferred to NF Funding I pursuant to a related servicing agreement (the “Servicing Agreement”).

The availability of funds under the Ares Credit Facility was generally limited to 82.5% of the value of non-delinquent receivables, and outstanding advances under the Ares Credit Facility accrued interest at a rate of LIBOR plus 3.75%. If LIBOR dropped below 1%, the Company still accrued interest at a rate of 1% plus 3.75%. The commitment period for advances under the Ares Credit Facility was three years. At the end of the commitment period, the outstanding balance would convert to a term loan and require monthly principal and interest payments over a four-year amortization period.

In connection with the Ares Credit Facility, NFI guaranteed NF Funding I’s obligations under the Ares Credit Agreement up to 10% of the highest aggregate principal amount outstanding under the Ares Credit Agreement at any time pursuant to a limited guaranty. The Company was also obligated to cover any losses of the lender parties resulting from certain defined “bad acts” of the Company or its subsidiaries, such as fraud, misappropriation of funds or unpermitted disposition of the assets.

Pursuant to the related security agreement (the “Security Agreement”), NF Funding I granted a security interest in substantially all of its assets as collateral for its obligations under the Ares Credit Facility. In addition, NFI pledged the equity interests of NF Funding I, as additional collateral.

The Ares Credit Agreement and the other loan documents contained customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of receivables. If an event of default occurred, the lenders could have increased borrowing costs, restricted NF Funding I’s ability to obtain additional advances under the Ares Credit Facility, accelerated all amounts outstanding under the Ares Credit Facility, enforced their interest against collateral pledged under the Ares Credit Facility or enforced their rights under the Company’s guarantees.

Once sold to NF Funding I, the assets described above were separate and distinct from the Company’s own assets and were not available to the Company’s creditors in case of the Company’s insolvency, although they are presented on a consolidated basis on the Company’s balance sheet see “Note 11-Variable Interest Entity”.

As of September 30, 2021, the Company had aggregate outstanding indebtedness under the Ares Credit Facility of $71.5 million, compared to $88.3 million as of March 31, 2021.

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Future maturities of debt as of September 30, 2021 were as follows:

(in thousands)
FY2022	$	2,882
FY2023		18,243
FY2024		17,883
FY2025		17,883
FY2026		17,883
	$	74,774

As disclosed in Note 14 - Subsequent Events, the Ares Credit Facility was repaid in full on November 5, 2021 using the proceeds from a new credit facility with Wells Fargo Bank, N.A.

Note 6. Income Taxes

The Company recorded an income tax expense of approximately $536,000 for the three months ended September 30, 2021 compared to income tax expense of approximately $92,000 for the three months ended September 30, 2020. The Company’s effective tax rate increased to 25.1% for the three months ended September 30, 2021 from 6.8% for the three months ended September 30, 2020. The Company recorded an income tax expense of approximately $1,135,000 for the six months ended September 30, 2021 compared to income tax expense of approximately $521,000 for the six months ended September 30, 2020. The Company’s effective tax rate increased to 25.4% for the six months ended September 30, 2021 from 16.2% for the six months ended September 30, 2020. The lower effective tax rate for the three and six months ended September 30, 2020 was attributed to discrete and other non-recurring items.

Note 7. Leases

The Company maintains lease agreements related to its branch network and for its corporate headquarters. The branch lease agreements range from one to five years and generally contain options to extend from one to three years. The corporate headquarters lease agreement was renewed with a lease maturity date of March 2023. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease payments are dependent on a rate or index that may change after the commencement date, other than the passage of time.

The Company’s lease liability was $4.8 million and $3.4 million as of September 30, 2021 and March 31, 2021, respectively. This liability is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate. The lease asset was $4.8 million and $3.4 million as of September 30, 2021 and March 31, 2021, respectively.

Future minimum lease payments under non-cancellable operating leases in effect as of September 30, 2021, are as follows:

in thousands
FY2022 (remaining six months)	$	749
FY2023		1,452
FY2024		976
FY2025		764
FY2026		463
Thereafter	$	737
Total future minimum lease payments		5,141
Present value adjustment		(324	)
Operating lease liability	$	4,817

The following table reports information about the Company’s lease cost for the three months ended September 30, 2021 (in thousands):

Lease cost:
Operating lease cost	$	430
Variable lease cost		85
Total lease cost	$	515

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The following table reports information about the Company’s lease cost for the three months ended September 30, 2020 (in thousands):

Lease cost:
Operating lease cost	$	372
Variable lease cost		85
Total lease cost	$	457

The following table reports information about the Company’s lease cost for the six months ended September 30, 2021 (in thousands):

Lease cost:
Operating lease cost	$	820
Variable lease cost		170
Total lease cost	$	990

The following table reports information about the Company’s lease cost for the six months ended September 30, 2020 (in thousands):

Lease cost:
Operating lease cost	$	783
Variable lease cost		182
Total lease cost	$	965

The following table reports other information about the Company’s leases for the three months ended September 30, 2021 (dollar amounts in thousands):

Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	391
Operating Lease - Operating Cash Flows (Liability Reduction)	$	343
Weighted Average Lease Term - Operating Leases		4.3 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the three months ended September 30, 2020 (dollar amounts in thousands):

Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	390
Operating Lease - Operating Cash Flows (Liability Reduction)	$	352
Weighted Average Lease Term - Operating Leases		2.4 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the six months ended September 30, 2021 (dollar amounts in thousands):

Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	776
Operating Lease - Operating Cash Flows (Liability Reduction)	$	678
Weighted Average Lease Term - Operating Leases		3.7 years
Weighted Average Discount Rate - Operating Leases		6.5%

The following table reports other information about the Company’s leases for the six months ended September 30, 2020 (dollar amounts in thousands):

Other Lease Information
Operating Lease - Operating Cash Flows (Fixed Payments)	$	818
Operating Lease - Operating Cash Flows (Liability Reduction)	$	738
Weighted Average Lease Term - Operating Leases		2.7 years
Weighted Average Discount Rate - Operating Leases		6.5%

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8. Fair Value Disclosures

The Company’s financial instruments consist of cash, finance receivables, repossessed assets, and the credit facility. For each of these financial instruments, the carrying value approximates fair value.

Finance receivables, net, approximates fair value based on the price paid to acquire Contracts. The price paid reflects competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic environment. This market is highly liquid as the Company acquires individual loans on a daily basis from dealers.

The initial terms of the Contracts generally range from 12 to 72 months. Beginning in December 2017, the maximum initial term of a Contract was reduced to 60 months. The initial terms of the Direct Loans generally range from 12 to 60 months. If liquidated outside of the normal course of business, the amount received may not be the carrying value.

Repossessed assets are valued at the lower of the finance receivable balance prior to repossession or the estimated net realizable value of the repossessed asset. The Company estimates the net realizable value using estimated auction wholesale proceeds less costs to sell plus insurance claims outstanding, if any.

Based on these market conditions, the fair value of the Ares Credit Facility as of September 30, 2021 was estimated to be equal to the book value. The interest rate for the Ares Credit Facility is a variable rate based on LIBOR pricing options.

	(In thousands)
	Fair Value Measurement Using
Description	Level 1		Level 2		Level 3		Fair Value		Carrying Value
Cash and restricted cash:
September 30, 2021	$	22,851	$	-	$	-	$	22,851	$	22,851
March 31, 2021	$	32,977	$	-	$	-	$	32,977	$	32,977
Finance receivables:
September 30, 2021	$	-	$	-	$	165,561	$	165,561	$	165,561
March 31, 2021	$	-	$	-	$	170,318	$	170,318	$	170,318
Repossessed assets:
September 30, 2021	$	-	$	-	$	859	$	859	$	859
March 31, 2021	$	-	$	-	$	685	$	685	$	685
Credit facility:
September 30, 2021	$	-	$	-	$	71,530	$	71,530	$	71,530
March 31, 2021	$	-	$	-	$	88,300	$	88,300	$	88,300
Note Payable:
September 30, 2021	$	-	$	-	$	3,244	$	3,244	$	3,244
March 31, 2021	$	-	$	-	$	3,244	$	3,244	$	3,244

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Level 2 assets are financial assets and liabilities that do not have regular market pricing, but whose fair value can be determined based on other data values or market pricing. Management has determined that this level to be most appropriate for the credit facility and note payable shown in the table above.

9. Commitments and Contingencies

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, none of which, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

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The extent to which the COVID-19 pandemic will ultimately impact our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of vaccination efforts, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. It is likely that prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows. For further disclosure on COVID-19, please refer to Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations.

10. Summary of Significant Accounting Policies

Recent Accounting Pronouncements

In June 2016, the FASB issued the 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. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Recently, the FASB voted to delay the implementation date for this accounting standard, for smaller reporting companies, the new effective date is beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements and is collecting and analyzing data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. At this time, the Company believes the adoption of this ASU will likely have a material effect and is expected to increase the overall allowance for credit losses.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitating of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions in which the reference LIBOR or another reference rate is expected to be discontinued as a result of the Reference Rate Reform. This ASU is intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The new guidance was effective immediately and through December 31, 2022. The Company is currently evaluating the effect the adoption of this standard will have on its 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. 

11. Variable Interest Entity

In March 2019, the Company entered into a new senior secured credit facility collateralized by consumer finance receivables by transferring the receivables into a bankruptcy-remote variable interest entity (VIE). Under the terms of the transaction, all cash collections and other cash proceeds of the customer receivables went first to the servicer and the holders of the asset-backed notes, and then to the residual equity holder. The Company retained the servicing of the portfolio and received a monthly fee of 2.5% (annualized) based on the outstanding balance of the financed receivables, and the Company held all of the residual equity as of September 30, 2021. In addition, the Company, rather than the VIE, retained certain credit insurance income together with certain recoveries related to credit insurance and on charge-offs of the financed receivables, which would continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as the Company consolidated the VIE.

The Company consolidated the VIE when the Company determined that it is the primary beneficiary, the Company has the power to direct the activities that most significantly impact the performance of the VIE and it has the obligation to absorb losses and the right to receive significant residual returns.

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The assets of the VIE served as collateral for the obligations of the VIE. The lender had no recourse to assets outside of the VIE.

The following table presents the assets and liabilities held by the VIE (for legal purposes, the assets and the liabilities of the VIE remained distinct from the Company):

	September 30, 2021 (Unaudited)		March 31, 2021
Assets
Restricted cash	$	7,240	$	10,955
Finance receivables, net		131,033		150,706
Repossessed assets		745		631
Total assets	$	139,018	$	162,292
Liabilities
Credit facility	$	69,599	$	86,154
Accounts payable and accrued expenses		324		405
Total liabilities	$	69,923	$	86,559

Note 12. Stock Plans

In May 2019, the Company’s Board of Directors (“Board”) authorized a new stock repurchase program allowing for the repurchase of up to $8.0 million of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other structures in accordance with applicable federal securities laws. The authorization was effective immediately.

The timing and actual number of repurchases will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

In August 2019, the Company’s Board authorized additional repurchases of up to $1.0 million of the Company’s outstanding shares.

The table shown on the next page summarizes treasury share transactions under the Company’s stock repurchase program.

	Three months ended September 30, (In thousands)
	2021					2020
	Number of Shares		Amount			Number of Shares		Amount
Treasury shares at the beginning of period		5,005	$	(73,008	)		4,838	$	(71,466	)
Treasury shares purchased		77		(887	)		25		(201	)
Treasury shares at the end of period		5,082	$	(73,895	)		4,863	$	(71,667	)
	Six months ended September 30, (In thousands)
	2021					2020
	Number of Shares		Amount			Number of Shares		Amount
Treasury shares at the beginning of period		4,945	$	(72,343	)		4,833	$	(71,438	)
Treasury shares purchased		137		(1,552	)		30		(229	)
Treasury shares at the end of period		5,082	$	(73,895	)		4,863	$	(71,667	)

For the three months ended September 30, 2021, the Company repurchased a total of 76,563 shares of common stock at an aggregate cost of $887 thousand and average cost per share of $11.25.

Note 13. Note Payable

On May 27, 2020, the Company obtained a loan in the amount of $3,243,900 from a bank in connection with the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company used the proceeds of the PPP Loan for payroll costs and other covered expenses and sought full forgiveness of the PPP Loan, but there can be no assurance that the Company will obtain any forgiveness of the PPP Loan. The Company submitted the forgiveness application to Fifth Third Bank, the

14

lender, on December 7, 2020 and submitted supplemental documentation on January 16, 2021. Currently the application is pending SBA decision. Therefore, per the Paycheck Protection Flexibility Act of 2020, P.L. 116-142, all loan payments are deferred while the Company awaits the SBA’s decision on loan forgiveness. If the PPP Loan is not fully forgiven, the Company will remain liable for the full and punctual payment of the outstanding principal balance plus accrued and unpaid interest.

Unless forgiven, the outstanding principal balance plus accrued and unpaid interest (accruing at the rate of 1.00% per annum) is due on May 22, 2022. The PPP Loan is unsecured. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The related promissory note contains events of default and other provisions customary for a loan of this type.

Note 14. Subsequent Events

On November 5, 2021, Nicholas Financial, Inc., a Florida corporation (“Nicholas-Florida”) and Nicholas Data Services, Inc., a Florida corporation (“NDS” and collectively with Nicholas-Florida, the “Borrowers”), two wholly-owned subsidiaries of Nicholas Financial, Inc. (the “Company”) entered into a senior secured credit facility (the “Credit Facility”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “Credit Agreement”). A copy of the Credit Agreement is attached hereto as Exhibit 10.1 and incorporated herein by reference. The prior credit facility pursuant to a credit agreement among the Company’s subsidiary NF Funding I, LLC, Ares Agent Services, L.P. and the lenders party thereto was paid off in connection with entering into this Credit Facility.

Pursuant to the Credit Agreement, the lenders have agreed to extend to the Borrowers a line of credit of up to $175,000,000. The availability of funds under the Credit Facility is generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the Credit Facility will accrue interest at a rate equal to the Secured Overnight Financing Rate (SOFR) plus 2.25%. The commitment period for advances under the Credit Facility is three years (the expiration of that time period, the “Maturity Date”).

Pursuant to the Credit Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the Credit Facility. Furthermore, pursuant to a separate collateral pledge agreement, NDS pledged its equity interest in Nicholas-Florida as additional collateral.

The Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets. If an event of default occurs, the lenders could increase borrowing costs, restrict the Borrowers’ ability to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforce their interest against collateral pledged under the Credit Facility or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

If the lenders terminate the Credit Facility following the occurrence of an event of default under the loan documents, or the Borrowers prepay the loan and terminate the Credit Facility prior to the Maturity Date, then the Borrowers are obligated to pay a termination or prepayment fee in an amount equal to a percentage of $175,000,000, calculated as 2% if the termination or prepayment occurs during year one, 1% if the termination or repayment occurs during year two, and 0.5% if the termination or prepayment occurs thereafter.

In connection with the refinancing and as required under GAAP, the Company expects to recognize a non-cash charge of approximately $1.9 million in the quarter ending December 31, 2021, representing the unamortized portion of debt origination costs associated with its prior credit facility.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q 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., including 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 Quarterly 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 plans, objectives, strategies, goals and intentions, (4) statements regarding the capabilities, capacities, market position and expected development of our business operations, and (5) 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:

the ongoing impact on us, our employees, our customers and the overall economy of the COVID-19 pandemic 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, employee misconduct or misconduct by third parties;

media and public characterization of consumer installment loans;

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;

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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;

the impact of changes in accounting rules and regulations, or their interpretation or application, which could materially and adversely affect the Company’s reported consolidated financial statements or necessitate material delays or changes in the issuance of the Company’s audited consolidated financial statements;

uncertainties associated with management turnover and the effective succession of senior management;

our ability to realize our intentions regarding strategic alternatives, including the failure to achieve anticipated synergies;

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 under “Item 1A – Risk Factors” in our Annual Report on Form 10-K, and our other filings made with the U.S. Securities and Exchange Commission (“SEC”).

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 Quarterly Report are based on information available to the Company as the date of filing of this Quarterly 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 SEC, including its reports on Forms 10-K, 10-Q, 8-K and annual reports to shareholders.

Litigation and Legal Matters

See “Item 1. Legal Proceedings” in Part II of this Quarterly Report below.

COVID-19

The temporary expansion of unemployment benefits by the CARES Act, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 and the American Rescue Plan Act of 2021 to eligible individuals collectively had a beneficial effect on the Company; however, the impact of these benefits has mostly disappeared, as our customers no longer qualify for such benefits. The Company continued to experience strong cash collections and experienced positive trending on gross charge-off balances for the three months ended September 30, 2021.

In accordance with our policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts and Direct Loans. Due to COVID-19, the number of deferments increased to 3,114 in April 2020 from 724 in March 2020. For the year ended March 31, 2021 the Company experienced an average monthly number of deferments of 696, which would represent approximately 2.6% of total Contracts and Direct Loans as of March 31, 2021. For the three months ended September 30, 2021, the average monthly number of deferments was 247, which would represent approximately 0.95% of total Contracts and Direct Loans as of September 30, 2021. The number of deferrals is also influenced by portfolio performance, including but not limited to, inflation, credit quality of loans purchased, competition at the time of Contract acquisition, and general economic conditions.

The Company believes the number of one-month principal payments deferrals is now largely consistent with pre-pandemic levels.

However, the extent to which the COVID-19 pandemic eventually impacts our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of vaccination efforts among other factors, will determine the ultimate severity of the COVID-19 impact on our business. It is likely that prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.

Regulatory Developments

As previously reported, Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which became operational on July 21, 2011. Under the Dodd-Frank Act, the CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products, such as the Contracts and the Direct Loans that we offer, including explicit supervisory authority to examine, audit, and investigate companies offering a consumer financial product such as ourselves. Although the Dodd-Frank Act expressly provides that the CFPB has no authority to establish usury limits, efforts to create a federal usury cap, applicable to all consumer credit transactions and substantially below rates at which the Company could continue to operate

17

profitably, are still ongoing. Any federal legislative or regulatory action that severely restricts or prohibits the provision of consumer credit and similar services on terms substantially similar to those we currently provide could if enacted have a material, adverse impact on our business, prospects, results of operations and financial condition. Some consumer advocacy groups have suggested that certain forms of alternative consumer finance products, such as installment loans, should be a regulatory priority and it is possible that at some time in the future the CFPB could propose and adopt rules making such lending or other products that we may offer materially less profitable or impractical. Further, the CFPB may target specific features of loans by rulemaking that could cause us to cease offering certain products. Any such rules could have a material adverse effect on our business, results of operations and financial condition. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to any of our current or future lines of business, which could have a material adverse effect on our operations and financial performance.

On October 5, 2017, the CFPB issued a final rule (the “Rule”) imposing limitations on (i) short-term consumer loans, (ii) longer-term consumer installment loans with balloon payments, and (iii) higher-rate consumer installment loans repayable by a payment authorization. The Rule requires lenders originating short-term loans and longer-term balloon payment loans to evaluate whether each consumer has the ability to repay the loan along with current obligations and expenses (“ability to repay requirements”). The Rule also curtails repeated unsuccessful attempts to debit consumers’ accounts for short-term loans, balloon payment loans, and installment loans that involve a payment authorization and an Annual Percentage Rate over 36% (“payment requirements”). The Rule has significant differences from the CFPB’s proposed rules announced on June 2, 2016, relating to payday, vehicle title, and similar loans.

On February 6, 2019, the CFPB issued two notices of proposed rulemaking regarding potential amendments to the Rule. First, the CFPB is proposing to rescind provisions of the Rule, including the ability to repay requirements. Second, the CFPB is proposing to delay the August 19, 2019 compliance date for part of the Rule, including the ability to repay requirements. These proposed amendments are not yet final and are subject to possible change before any final amendments would be issued and implemented. We cannot predict what the ultimate rulemaking will provide. The Company does not believe that these changes, as currently described by the CFPB, would have a material impact on the Company’s existing lending procedures, because the Company currently underwrites all its loans (including those secured by a vehicle title that would fall within the scope of these proposals) by reviewing the customer’s ability to repay based on the Company’s standards. Any regulatory changes could have effects beyond those currently contemplated that could further materially and adversely impact our business and operations. The Company will have to comply with the final rule’s payment requirements since it allows consumers to set up future recurring payments online for certain covered loans such that it meets the definition of having a “leveraged payment mechanism”. The payment provisions of the final rule are expected to go into effect on August 19, 2019. If the payment provisions of the final rule apply, the Company will have to modify its loan payment procedures to comply with the required notices within the mandated timeframes set forth in the final rule.

The CFPB defines a “larger participant” of automobile financing if it has at least 10,000 aggregate annual originations. The Company does not meet the threshold of at least 10,000 aggregate annual direct loan originations, and therefore would not fall under the CFPB’s supervisory authority. The CFPB issued rules regarding the supervision and examination of non-depository “larger participants” in the automobile finance business. The CFPB’s stated objectives of such examinations are: to assess the quality of a larger participant’s compliance management systems for preventing violations of federal consumer financial laws; to identify acts or practices that materially increase the risk of violations of federal consumer finance laws and associated harm to consumers; and to gather facts that help determine whether the larger participant engages in acts or practices that are likely to violate federal consumer financial laws in connection with its automobile finance business. At such time, if we become or the CFPB defines us as a larger participant, we will be subject to examination by the CFPB for, among other things, ECOA compliance; unfair, deceptive or abusive acts or practices (“UDAAP”) compliance; and the adequacy of our compliance management systems.

We have continued to evaluate our existing compliance management systems. We expect this process to continue as the CFPB promulgates new and evolving rules and interpretations. Given the time and effort needed to establish, implement and maintain adequate compliance management systems and the resources and costs associated with being examined by the CFPB, such an examination could likely have a material adverse effect on our business, financial condition and profitability. Moreover, any such examination by the CFPB could result in the assessment of penalties, including fines, and other remedies which could, in turn, have a material effect on our business, financial condition, and profitability.

Critical Accounting Policy

The Company’s critical accounting policy relates to the allowance for credit losses. It is based on management’s opinion of an amount that is adequate to absorb losses incurred in the existing portfolio. Because of the nature of the customers under the Company’s Contracts and Direct Loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative.

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The Company uses trailing six-month net charge-offs as a percentage of average finance receivables, annualized and applies this calculated percentage to ending finance receivables to calculate estimated future probable credit losses for purposes of determining the allowance for credit losses. The Company then takes into consideration the composition of its portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts and adjusts the above, if necessary, to determine management’s total estimate of probable credit losses and its assessment of the overall adequacy of the allowance for credit losses. Management utilizes significant judgment in determining probable incurred losses and in identifying and evaluating qualitative factors. This approach aligns 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. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Contracts are purchased from many different dealers and are all purchased on an individual Contract-by-Contract basis. Individual Contract pricing is determined by the automobile dealerships and is generally the lesser of the applicable state maximum interest rate, if any, or the maximum interest rate which the customer will accept. In most markets, competitive forces will drive down Contract rates from the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company generally purchases Contracts on an individual basis.

The Company utilizes the branch model, which allows for Contract purchasing to be done at the branch level. The Company has detailed underwriting guidelines it utilizes to determine which Contracts to purchase. These guidelines are specific and are designed to provide reasonable assurance that the Contracts that the Company purchases have common risk characteristics. The Company utilizes its District Managers to evaluate their respective branch locations for adherence to these underwriting guidelines, as well as approve underwriting exceptions. The Company also utilizes field auditors to assure adherence to its underwriting guidelines. Any Contract that does not meet the Company’s underwriting guidelines can be submitted by a branch manager for approval from the Company’s District Managers or senior management.

Introduction

For the three months ended September 30, 2021, the net dilutive earnings per share increased to $0.21 as compared to net dilutive earnings per share of $0.16 for the three months ended September 30, 2020. Net income was $1.6 million for the three months ended September 30, 2021 as compared to a net income of $1.3 million for the three months ended September 30, 2020. Revenue decreased 10.6% to $12.6 million for the three months ended September 30, 2021 as compared to $14.1 million for the three months ended September 30, 2020, due to a 10.7% decrease in finance receivables, compared to the prior year quarter.

For the six months ended September 30, 2021, the net dilutive earnings per share increased to $0.44 as compared to net dilutive earnings per share of $0.34 for the six months ended September 30, 2020. Net income was $3.3 million for the six months ended September 30, 2021 as compared to a net income of $2.7 million for the six months ended September 30, 2020. Revenue decreased 10.8% to $25.2 million for the six months ended September 30, 2021 as compared to $28.3 million for the six months ended September 30, 2020, due to a 13.5% decrease in average finance receivables, compared to the prior year period.

The Company finances primary transportation to and from work for the subprime borrower. We do not finance luxury cars, second units or recreational vehicles, which are the first payments customers tend to skip in time of economic insecurity. We finance the main and often only vehicle in the household that is needed to get our customers to and from work. The amounts we finance are much lower than most of our competitors, and therefore the payments are significantly lower, too. The combination of financing a “need” over a “want” and making that loan on comparatively affordable terms incentivizes our customers to prioritize their account with us.

Non-GAAP financial measures

From time-to-time the Company uses certain financial measures derived on a basis other than generally accepted accounting principles (“GAAP”), primarily by excluding from a comparable GAAP measure certain items the Company does not consider to be representative of its actual operating performance. Such financial measures qualify as “non-GAAP financial measures” as defined in SEC rules. The Company uses these non-GAAP financial measures in operating its business because management believes they are less susceptible to variances in actual operating performance that can result from the excluded items and other infrequent charges. The Company may present these financial measures to investors because management believes they are useful to investors in evaluating the primary factors that drive the Company’s core operating performance and provide greater transparency into the Company’s results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating these non-GAAP financial measures are significant components to understanding and assessing the Company’s financial

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performance. Such non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, the Company’s GAAP financial measures. Further, because these non-GAAP financial measures are not determined in accordance with GAAP and are, thus, susceptible to varying calculations, any non-GAAP financial measures, as presented, may not be comparable to other similarly titled measures of other companies.

	Three months ended September 30, (In thousands)						Six months ended September 30, (In thousands)
	2021			2020			2021			2020
Portfolio Summary
Average finance receivables (1)	$	178,873		$	203,407		$	180,364		$	208,608
Average indebtedness (2)	$	72,044		$	113,233		$	75,611		$	117,983
Interest and fee income on finance receivables	$	12,572		$	14,064		$	25,166		$	28,215
Interest expense		1,121			1,569			2,309			3,218
Net interest and fee income on finance receivables	$	11,451		$	12,495		$	22,857		$	24,997
Gross portfolio yield (3)		28.11	%		27.66	%		27.91	%		27.05	%
Interest expense as a percentage of average finance receivables		2.51	%		3.09	%		2.56	%		3.09	%
Provision for credit losses as a percentage of average finance    receivables		3.12	%		6.00	%		2.36	%		6.09	%
Net portfolio yield (3)		22.48	%		18.57	%		22.99	%		17.87	%
Operating expenses as a percentage of average finance receivables		17.70	%		15.99	%		18.04	%		14.84	%
Pre-tax yield as a percentage of average finance receivables (4)		4.78	%		2.58	%		4.95	%		3.03	%
Net charge-off percentage (5)		4.88	%		5.56	%		4.23	%		5.79	%
Finance receivables							$	177,013		$	198,168
Allowance percentage (6)								2.52	%		5.79	%
Total reserves percentage (7)								6.50	%		9.84	%

Note: All three-month and six-month of income performance indicators expressed as percentages have been annualized.

(1)Average finance receivables represent the average of finance receivables throughout the period. (This is considered a non-GAAP financial measure).

(2)Average indebtedness represents the average outstanding borrowings under the Credit Facility. (This is considered a non-GAAP financial measure).

(3)Portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables. Net portfolio yield represents (a) interest and fee income on finance receivables minus (b) interest expense minus (c) the provision for credit losses, as a percentage of average finance receivables. (This is considered a non-GAAP financial measure).

(4)Pre-tax yield represents net portfolio yield minus operating expenses (marketing, salaries, employee benefits, depreciation, and administrative), as a percentage of average finance receivables. (This is considered a non-GAAP financial measure).

(5)Net charge-off percentage represents net charge-offs (charge-offs less recoveries) divided by average finance receivables outstanding during the period. (This is considered a non-GAAP financial measure).

(6)Allowance percentage represents the allowance for credit losses divided by finance receivables outstanding as of ending balance sheet date.

(7)Total reserves percentage represents the allowance for credit losses, purchase price discount, and unearned dealer discounts divided by finance receivables outstanding as of ending balance sheet date.

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 as opposed to chasing competition for the sake of simply generating volume. The Company’s principal goals are to increase its profitability and its long-term shareholder value. During fiscal 2022, the Company is focusing 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;

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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.

The Company continues to focus on selecting the right markets to have branch locations. As of September 30, 2021, the Company operated brick and mortar branch locations in 17 states — Alabama, Florida, Georgia, Idaho, Illinois, Indiana, Kentucky, Michigan, Missouri, North Carolina, Nevada, Ohio, Pennsylvania, South Carolina, Tennessee, Utah and Wisconsin. The Company also originated business in its expansion states of Kansas, and Texas without a physical branch in such markets.

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 8% and 12% of its total portfolio for the foreseeable future.

Analysis of Credit Losses

The Company uses a trailing six-month charge-off analysis, annualized, to calculate the allowance for credit losses. Management believes that using the trailing six-month charge-off analysis, annualized, will more quickly reflect changes in the portfolio as compared to a trailing twelve-month charge-off analysis.

In addition, the Company takes into consideration the composition of the portfolio, current economic conditions, 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 adequacy of the allowance for credit losses. By including recent trends such as delinquency, non-performing assets, and bankruptcy in its determination, management believes that the allowance for credit losses reflects the current trends of incurred losses within the portfolio and is better aligned with the portfolio’s performance indicators.

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. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

Non-performing assets are defined as accounts that are contractually delinquent for 61 or more days past due or Chapter 13 bankruptcy accounts. For these accounts, the accrual of interest income is suspended, and any previously accrued interest is reversed. Upon notification of a bankruptcy, an account is monitored for collection with other Chapter 13 accounts. In the event the debtors’ balance is reduced by the bankruptcy court, the Company will record a loss equal to the amount of principal balance reduction. The remaining balance will be reduced as payments are received by the bankruptcy court. In the event an account is dismissed from bankruptcy, the Company will decide based on several factors, whether to begin repossession proceedings or allow the customer to begin making regularly scheduled payments.

The Company defines a Chapter 13 bankruptcy account as a Troubled Debt Restructuring (“TDR”). Beginning March 31, 2018, the Company allocated a specific reserve using a look back method to calculate the estimated losses. Based on this look back, management calculated a specific reserve of approximately $118,000 and $86,000 for these accounts as of September 30, 2021 and September 30, 2020, respectively.

The provision for credit losses decreased to $1.4 million for the three months ended September 30, 2021 as compared to $3.1 million for the three months ended September 30, 2020. The decreases were largely due to decreases in the average finance receivables balance and a decrease in the net charge-off percentage (see note 5 in the Portfolio Summary table in the “Introduction” above for the definition of net charge-off percentage).

Net charge-offs decreased to 4.23% for the fiscal year ended September 30, 2021 from 5.79% for the fiscal year ended September 30, 2020, primarily resulting from the Company‘s active management of the portfolio. The delinquency percentage for Contracts more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of September 30, 2021 was 7.56%, a decrease from 8.53% as of September 30, 2020. The delinquency percentage for Direct Loans more than twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of September 30, 2021 was 3.26%, a decrease from 4.40% as of September 30, 2020. The changes in delinquency percentage for both Contracts and Direct Loans was driven primarily by the Company’s continued focus on local branch-based servicing. Based on these actions, improving servicing, and stricter underwriting policies, management has seen improvements in the delinquency rates.

In accordance with our policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts and Direct Loans. For further information on deferrals, please see the disclosure under “COVID-19” above.

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Three months ended September 30, 2021 compared to three months ended September 30, 2020

Interest and Fee Income on Finance Receivables

Interest and fee income on finance receivables, which consist predominantly of finance charge income, decreased 10.6% to $12.6 million for the three months ended September 30, 2021, from $14.1 million for the three months ended September 30, 2020. The decrease was primarily due to a 10.7% decrease in finance receivables to $177.0 million for the three months ended September 30, 2021, when compared to $198.2 million for the corresponding period ended September 30, 2020. The decrease in finance receivables was primarily the result of a reduction in the aggregate dollar amount and volume of Contracts purchased, as the Company continued implementing its strategic focus of financing primary transportation to and from work for the subprime borrower. Continuing this operating strategy allowed us, despite continuing competitive pressure, to acquire Contracts at similar yields (albeit lower discounts) during the three months ended September 30, 2021, compared to the corresponding period ended September 30, 2020, although the combined effect of the same average yield and lower discount could not entirely offset the reduction in the aggregate dollar amount of Contracts purchased.

The gross portfolio yield increased to 28.1% for the three months ended September 30, 2021, compared to 27.7% for the three months ended September 30, 2020. The net portfolio yield increased to 22.5% for the three months ended September 30, 2021, compared to 18.6% for the three months ended September 30, 2020. The net portfolio yield increased primarily due to the decrease in the provision for credit losses, as described under “Analysis of Credit Losses”.

Operating Expenses

Operating expenses decreased to $7.9 million for the three months ended September 30, 2021 compared to $8.1 million for the three months ended September 30, 2020. The decline in operating expenses was primarily attributed to a reduction in administrative, salaries and employee benefits expenses. Operating expenses as a percentage of average finance receivables, however, increased to 17.7% for the three months ended September 30, 2021 from 16.0% for the three months ended September 30, 2020 due to a proportionally greater decline in finance receivables.

Provision Expense

The provision for credit losses decreased to $1.4 million for the three months ended September 30, 2021 from $3.0 million for the three months ended September 30, 2020, largely due to a decrease in the net charge-off percentage to 4.9% for the three months ended September 30, 2021 from 5.6% for the three months ended September 30, 2020.

Interest Expense

Interest expense was $1.1 million for the three months ended September 30, 2021 and $1.6 million for the three months ended September 30, 2020. The following table summarizes the Company’s average cost of borrowed funds:

	Three months ended September 30,						Six months ended September 30,
	2021			2020			2021			2020
Variable interest under the Line of Credit facility		1.00	%		1.79	%		1.00	%		1.71	%
Credit spread under the Line of Credit facility		3.75	%		3.75	%		3.75	%		3.75	%
Average cost of borrowed funds		4.75	%		5.54	%		4.75	%		5.46	%

LIBOR rates have decreased to 0.08%, which represents the one-month LIBOR rate as required under our Ares Credit Facility, as of September 30, 2021 compared to 0.14%, which represents the one-month LIBOR rate as required under our Line of Credit, as of September 30, 2020. For further discussions regarding interest rates see “Note 5—Credit Facility”.

Income Taxes

The Company recorded an income tax expense of approximately $536,000 for the three months ended September 30, 2021 compared to income tax expense of approximately $92,000 for the three months ended September 30, 2020. The Company’s effective tax rate increased to 25.1% for the three months ended September 30, 2021 from 6.8% for the three months ended September 30, 2020.

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Six months ended September 30, 2021 compared to six months ended September 30, 2020

Interest Income and Loan Portfolio

Interest and fee income on finance receivables, decreased 10.8% to $25.2 million for the six months ended September 30, 2021 from $28.2 million for the six months ended September 30, 2020. The decrease was primarily due to 13.5% decrease in average finance receivables to $180.4 million for the six months ended September 30, 2021 when compared to $208.6 million for the corresponding period ended September 30, 2020. The decrease in average finance receivables was primarily the result of a reduction in the aggregate dollar amount and volume of Contracts purchased, as the Company continued implementing its renewed strategic focus of financing primary transportation to and from work for the subprime borrower. This shift in focus also allowed us to acquire Contracts at higher yields during the six months ended September 30, 2021 compared to acquisitions during the corresponding period ended September 30, 2020, although the increase in average yield could not entirely offset the reduction in the aggregate dollar amount of Contracts purchased.

The gross portfolio yield increased to 27.9% for the six months ended September 30, 2021, compared to 27.1% for the six months ended September 30, 2020. The net portfolio yield increased to 23.0% for the six months ended September 30, 2021 compared to 17.9% for the six months ended September 30, 2020, respectively. The net portfolio yield increased primarily due to a decrease in the provision for credit losses, as described under “Analysis of Credit Losses”.

Operating Expenses

Operating expenses increased to approximately $16.3 million for the six months ended September 30, 2021 from approximately $15.5 million for the six months ended September 30, 2020. Operating expenses as a percentage of average finance receivables increased to 18.0% for the six months ended September 30, 2021 from 14.8% for the six months ended September 30, 2020. These increased percentages were attributed to an increase in salaries and employee benefits expense and a decrease in the average finance receivables balances.

Provision Expense

The provision for credit losses decreased to $2.1 for the six months ended September 30, 2021 from $6.4 million for the six months ended September 30, 2020, largely due to a 13.5% decrease in the average finance receivables and a decrease in the net charge-off percentage to 4.2% for the six months ended September 30, 2021 from 5.8% for the six months ended September 30, 2020.

Interest Expense

Interest expense was $2.3 million for the six months ended September 30, 2021 and $3.2 million for the six months ended September 30, 2021. The following table summarizes the Company’s average cost of borrowed funds:

	Three months ended September 30,						Six months ended September 30,
	2021			2020			2021			2020
Variable interest under the Line of Credit facility		1.00	%		1.79	%		1.00	%		1.71	%
Credit spread under the Line of Credit facility		3.75	%		3.75	%		3.75	%		3.75	%
Average cost of borrowed funds		4.75	%		5.54	%		4.75	%		5.46	%

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Income Taxes

The Company recorded an income tax expense of approximately $1,135,000 for the six months ended September 30, 2021 compared to income tax expense of approximately $521,000 for the six months ended September 30, 2020. The Company’s effective tax rate increased to 25.4% for the six months ended September 30, 2021 from 16.2% for the six months ended September 30, 2020.

Contract Procurement

As of September 30, 2021, the Company purchases Contracts in the states listed in the table below. The Contracts purchased by the Company are predominantly for used vehicles; for the three-month periods ended September 30, 2021 and 2020, less than 1% were for new vehicles.

The following tables present selected information on Contracts purchased by the Company.

	As of September 30,		Three months ended September 30,				Six months ended September 30,
	2021		2021		2020		2021		2020
State	Number of branches		Net Purchases (In thousands)				Net Purchases (In thousands)
FL		11	$	2,798	$	4,099	$	6,232	$	9,024
OH		6		2,885		2,586		6,138		5,352
GA		5		2,403		2,571		5,417		5,886
KY		3		1,135		1,353		2,798		2,351
MO		2		1,332		1,044		2,785		2,104
NC		3		1,827		964		2,958		2,281
IN		2		1,071		865		2,079		1,520
SC		3		1,242		1,077		2,212		2,145
AL		2		964		479		1,783		1,232
MI		2		513		513		1,303		1,208
NV		1		656		270		1,194		604
TN		1		486		685		964		1,531
IL		1		307		267		746		390
PA		1		372		382		732		896
TX	-			328		-		663		-
WI		1		234		53		520		116
ID		1		203		87		374		87
UT		1		86		12		231		12
AZ	-			38		-		56		-
KS		-		-		-		-		226
Total		46	$	18,880	$	17,307	$	39,185	$	36,965

	Three months ended September 30, (Purchases in thousands)						Six months ended September 30, (Purchases in thousands)
Contracts	2021			2020			2021			2020
Purchases	$	18,880		$	17,307		$	39,185		$	36,965
Average APR		23.0	%		23.5	%		23.1	%		23.5	%
Average discount		6.7	%		6.8	%		6.9	%		7.4	%
Average term (months)		47			46			47			46
Average amount financed	$	11,061		$	10,127		$	10,745		$	10,045
Number of Contracts		1,707			1,709			3,654			3,395

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Direct Loan Origination

The following table presents selected information on Direct Loans originated by the Company.

Direct Loans	Three months ended September 30, (Originations in thousands)						Six months ended September 30, (Originations in thousands)
Originated	2021			2020			2021			2020
Purchases/Originations	$	7,040		$	3,832		$	12,777		$	6,259
Average APR		30.0	%		29.2	%		30.1	%		29.0	%
Average term (months)		26			25			26			26
Average amount financed	$	4,433		$	4,147		$	4,396		$	4,260
Number of loans		1,588			924			2,904			1,479

Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:

	Six months ended September 30, (In thousands)
	2021			2020
Cash provided by (used in):
Operating activities	$	1,300		$	7,644
Investing activities		6,896			15,656
Financing activities		(18,322	)		(14,815	)
Net (decrease) increase in cash	$	(10,126	)	$	8,485

The Company’s primary use of working capital for the quarter ended September 30, 2021 was funding the purchase of Contracts and bulk asset purchases, which are financed substantially through cash from principal and interest payments received, and the Company’s credit facility.

On March 29, 2019, NF Funding I, LLC (“NF Funding I”), a special purpose financing subsidiary of NFI, entered into a senior secured credit facility (the “Ares Credit Facility”) pursuant to a credit agreement with Ares Agent Services, L.P., as administrative agent and collateral agent, and the lenders that are party thereto (the “Ares Credit Agreement”).

Pursuant to the Ares Credit Agreement, the lenders agreed to extend to NF Funding I a line of credit of up to $175,000,000, which was used to purchase Contracts from NFI on a revolving basis pursuant to a related receivables purchase agreement between NF Funding I and NFI (the “Receivables Purchase Agreement”). Under the terms of the Receivables Purchase Agreement, NFI sold to NF Funding I the receivables under Contracts. NFI continued to service the Contracts transferred to NF Funding I pursuant to a related servicing agreement (the “Servicing Agreement”).

As of September 30, 2021, the total amount outstanding under the Ares Credit Facility was $71.5 million.

The availability of funds under the Ares Credit Facility was generally limited to 82.5% of the value of non-delinquent receivables, and outstanding advances under the Ares Credit Facility accrued interest at a rate of LIBOR plus a credit spread, which was 3.75% as of September 30, 2021. The commitment period for advances under the Ares Credit Facility was three years. At the end of the commitment period, the outstanding balance would have converted to a term loan and required monthly principal and interest payments over a four-year amortization period.

Under the Ares Credit Facility, the Company was required to maintain at least $3.5 million of unrestricted cash.

On November 5, 2021, NFI and its direct parent, Nicholas Data Services, Inc. (“NDS” and collectively with NFI, the “Borrowers”), entered into a senior secured credit facility (the “WF Credit Facility”) pursuant to a loan and security agreement by and among the Borrowers, Wells Fargo Bank, N.A., as agent, and the lenders that are party thereto (the “WF Credit Agreement”). The Ares Credit Facility was paid off in connection with entering into the WF Credit Facility.

Pursuant to the WF Credit Agreement, the lenders have agreed to extend to the Borrowers a line of credit of up to $175,000,000. The availability of funds under the WF Credit Facility is generally limited to an advance rate of between 80% and 85% of the value of eligible receivables, and outstanding advances under the WF Credit Facility will accrue interest at a rate equal to the Secured

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Overnight Financing Rate (SOFR) plus 2.25%. The commitment period for advances under the WF Credit Facility is three years (the expiration of that time period, the “Maturity Date”).

Pursuant to the WF Credit Agreement, the Borrowers granted a security interest in substantially all of their assets as collateral for their obligations under the WF Credit Facility. Furthermore, pursuant to a separate collateral pledge agreement, NDS pledged its equity interest in NFI as additional collateral.

The WF Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of assets. If an event of default occurs, the lenders could increase borrowing costs, restrict the Borrowers’ ability to obtain additional advances under the WF Credit Facility, accelerate all amounts outstanding under the WF Credit Facility, enforce their interest against collateral pledged under the WF Credit Facility or enforce such other rights and remedies as they have under the loan documents or applicable law as secured lenders.

If the lenders terminate the WF Credit Facility following the occurrence of an event of default under the loan documents, or the Borrowers prepay the loan and terminate the WF Credit Facility prior to the Maturity Date, then the Borrowers are obligated to pay a termination or prepayment fee in an amount equal to a percentage of $175,000,000, calculated as 2% if the termination or prepayment occurs during year one, 1% if the termination or repayment occurs during year two, and 0.5% if the termination or prepayment occurs thereafter.

The Company will continue to depend on the availability the WF Credit Facility, together with cash from operations, to finance future operations. The availability of funds under the WF Credit Facility generally depends on availability calculations as defined in the WF Credit Agreement. See also the disclosure in Note 5. Credit Facility in this Form 10-Q, which is incorporated herein by reference.

On May 27, 2020, the Company obtained a loan in the amount of $3,243,900 from a bank in connection with the U.S. Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company used the proceeds of the PPP Loan for payroll costs and other covered expenses and sought full forgiveness of the PPP Loan, but there can be no assurance that the Company will obtain any forgiveness of the PPP Loan. The Company submitted the forgiveness application to Fifth Third Bank, the lender, on December 7, 2020 and submitted supplemental documentation on January 16, 2021. Currently the application is pending SBA decision. Therefore, per the Paycheck Protection Flexibility Act of 2020, P.L. 116-142, all loan payments are deferred while the Company awaits the SBA’s decision on loan forgiveness. If the PPP Loan is not fully forgiven, the Company will remain liable for the full and punctual payment of the outstanding principal balance plus accrued and unpaid interest.

Unless forgiven, the outstanding principal balance plus accrued and unpaid interest (accruing at the rate of 1.00% per annum) is due on May 22, 2022. The PPP Loan is unsecured. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The related promissory note contains events of default and other provisions customary for a loan of this type.

Off-Balance Sheet Arrangements

The Company does not engage in any off-balance sheet financing arrangements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in internal control over financial reporting.

No change in the Company’s internal control over financial reporting occurred during the Company’s fiscal quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, that, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended March 31, 2021, which could materially affect our business, financial condition or future results. The risks described in the Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchase made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our shares of common stock during the three months ended September 30, 2021.

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
Period	(In thousands, except for average price paid per share)
July 1, 2021 to July 31, 2021		15	$	11.11		15	$	6,299
August 1, 2021 to August 31, 2021		60		11.72		60		5,596
September 1, 2021 to September 30, 2021		2		10.92		2		5,574
Total		77	$	11.25		77

In May 2019, the Company’s Board of Directors (“Board”) authorized a new stock repurchase program allowing for the repurchase of up to $8.0 million of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other structures in accordance with applicable federal securities laws. The authorization was effective immediately.

The timing and actual number of sharers will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

In August 2019, the Company’s Board authorized additional repurchase of up to $1.0 million of the Company’s outstanding shares.

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ITEM 6. EXHIBITS

Exhibit No.	Description
31.1	Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.11	Certification of the Principal Executive Officer Pursuant to 18 U.S.C. § 1350
32.21	Certification of the Principal Financial Officer Pursuant to 18 U.S.C. § 1350
101.INS	Inline XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

1 This certification accompanies the Quarterly Report on Form 10-Q and is not filed as part of it.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

NICHOLAS FINANCIAL, INC.

(Registrant)

Date: November 12, 2021	/s/ Douglas Marohn
	Douglas Marohn
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 12, 2021	/s/ Irina Nashtatik
	Irina Nashtatik
	Chief Financial Officer
	(Principal Financial Officer)

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