2017 Annual Report

  From The President

Ralph T. Finkenbrink, Chairman, CEO & President
The fiscal year ended March 31, 2017 marks our 32nd year in business and our 30th as a publicly traded company. The past year proved to be one of the most difficult in the Company’s history. The market for subprime vehicle finance remains highly competitive and as such, yields on new contract acquisitions continue to face downward pressure. To combat this downward pressure on yields, we must continue to increase operational efficiencies through better allocation of our human capital and greater utilization of technology. At the same time, we must capitalize on our local community presence, to not only reduce losses, but also to benefit from individual branch market relationships.

Throughout this past year, we continued to experience intense competition from existing market participants and saw additional new entrants into the market, which included: credit unions; independent finance companies; several large banking institutions; and, captive finance companies. We recently observed some large lenders tighten their underwriting guidelines, only to see other lenders immediately pick up that additional business through aggressive pricing. These ongoing market conditions require us to gain momentum regarding our ability to adapt to a competitive cycle that, for the foreseeable future, gives no indication of subsiding. For us, that involves further evaluation of our current business structure, as well as, our overall operating strategy. We will not expand the number of contracts purchased by incurring risk that is not priced appropriately and not conducive to providing long-term sustainable value.

During this past year, we sought to decrease losses by dedicating corporate resources to identifying and eliminating fraud found throughout the installment contract buying process. We recently implemented a more robust due diligence and evaluation process when assessing whether to enter into a business relationship with new independent dealers. This due diligence and evaluation process aims to eliminate those independent dealers who are simply looking to exploit the current irrational buying climate and recognize those dealers seeking lenders for viable contracts.

We have also seen an increase in fraudulent applications to varying degrees. The most prevalent instances of false information provided on loan applications were related to income and job status. In response, we implemented additional field training to help employees identify and circumvent these types of fraudulent activities. However, by the fourth quarter of this past year, we had determined that additional training by itself was not proving effective. In April of 2017, we created a Centralized Funding Department (CFD) as an additional measure to identify and eliminate fraud. The primary function of the CFD is to verify every customer’s proof of income and make sure the information meets our requirements, and to ensure that every customer’s employment and residence verifications support the information that was used to evaluate the contract purchase. We are pleased to report that in the first three months of a fully operational CFD department, we are experiencing immediate benefits. There have been expenses associated with establishing the CFD, primarily relating to compensation costs. However, based on our preliminary results, the benefit derived from preventing the losses associated with fraud has materially outweighed the costs associated with maintaining an on-going CFD department.

In March of 2017, we took the meaningful step of increasing our utilization of data mining and information analytics to identify the probability of risk within the contracts we purchase. We engaged Clarity Services, a leading service provider in the field of alternative data. The value of alternative data is based on a wealth of associated information typically not reported to the three dominant credit bureaus. This associated data may better indicate the ability and willingness of an individual debtor, as well as the likelihood of repayment for any specific contract. There are many different types of lenders who utilize the various services offered by alternative data providers such as Clarity Services. For our analysis, we commissioned a retro study performed by Clarity with respect to a material number of contracts we had acquired in the past. Through our research with Clarity we introduced an alternative data score, which has been incorporated into our existing guidelines. The Clarity score we are utilizing indicates two valuable pieces of information; it identifies applicants where the risk of fraud is higher than average and which segments of analyzed historical contract acquisitions show the highest losses based on traditional credit scoring. Taking it one step further, the Clarity scores were cross referenced against all accounts within the retro study. As a result of our analysis we can now better identify which segments need additional risk based pricing. We believe by incorporating this strategic analysis into our operational model we will see positive results that will manifest itself in reduced losses on contracts acquired.

As previously announced, I have elected to resign my position as President & Chief Executive Officer, effective September 30, 2017. This was a difficult decision for me after spending the last 29 years helping to build Nicholas Financial’s auto loan portfolio. I leave behind many wonderful people who will carry on and I’m confident they will be a big part in determining what best operating strategy to utilize going forward. I want to personally thank the employees, shareholders and other affiliates who supported me over the years and wish nothing but the very best for the Company. We remain committed to achieving long-term sustainable value for our shareholders.

Ralph T. Finkenbrink
Chairman, CEO & President
July 2017

   For Information Contact:  Katie MacGillivary at katie.macgillivary@nicfn.com