NICHOLAS FINANCIAL INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Form 10-Q)


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
almost entirely 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 December 31, 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 December 31, 2021, the average monthly number
of deferments was 297, which would represent approximately 1.14% of total
Contracts and Direct Loans as of December 31, 2021. For the nine months ended
December 31, 2021, the average monthly number of deferments was 232, which would
represent approximately 0.89% of total Contracts and Direct Loans as of December
31, 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 that the number of one-month principal payment 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

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

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installment loans that involve a payment authorization and an Annual Percentage
Rate over 36% ("payment requirements"). The Company does not believe that it
will have a material impact on the Company's existing lending procedures,
because the Company currently does not make short-term consumer loans or
longer-term consumer installment loans with balloon payments that would subject
the Company to the Rule's ability to repay requirements. The Company also
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. However, implementation of
the Rule's payment requirements may require changes to the Company's practices
and procedures for such loans, which could affect the Company's ability to make
such loans, the cost of making such loans, the Company's ability to, or
frequency with which it could, refinance any such loans, and the profitability
of such loans.

Further, on June 6, 2019, the CFPB amended the Rule to delay the August 19, 2019
compliance date for part of the Rule's provisions, including the ability to
repay requirements. In addition, on February 6, 2019, the CFPB issued a notice
of proposed rulemaking proposing to rescind provisions of the Rule governing the
ability to repay requirements. There were also lawsuits filed challenging
various provisions of these Rules, as well as the constitutionality of the
CFPB's structure, and the court stayed the compliance date of the Rule while the
litigation was pending. The Supreme Court handed down its decision on the
constitutional challenge in June 2020, and in July 2020, the CFPB issued a final
Rule, which revoked the underwriting provisions of the prior Rule. However,
additional lawsuits were filed challenging the payment provisions of the Rule
issued in 2020. In August 2021, the court found for the CFPB and dismissed the
remaining challenges. As a result, the compliance date for the payments
provisions of the Rule is now June 13, 2022 Unless rescinded or otherwise
amended, the Company will have to comply with the Rule's payment requirements if
it continues to allow consumers to set up future recurring payments online for
certain covered loans such that it meets the definition of having a "leveraged
payment mechanism" under the Rule. If the payment provisions of the Rule apply,
the Company will have to modify its loan payment procedures to comply with the
required notices and 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 Estimate

A critical accounting estimate is an estimate that:

is made in accordance with generally accepted accounting principles
•
involves a significant level of estimation uncertainty, and
•
has had or is reasonably likely to have a material impact on the Company's
financial condition or results of operation

The Company's critical accounting estimate 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.

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

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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 December 31, 2021, the net dilutive loss per share
increased to $0.09 as compared to net dilutive earnings per share of $0.49 for
the three months ended December 31, 2020. Net loss was $0.7 million for the
three months ended December 31, 2021 as compared to a net income of $3.8 million
for the three months ended December 31, 2020. Revenue decreased 15.4% to $12.2
million for the three months ended December 31, 2021, as compared to $14.5
million for the three months ended December 31, 2020, due to realized and
unrealized gains of $1.3 million on equity investments in the prior year quarter
and a 6.6% decrease in finance receivables.

For the nine months ended December 31, 2021, the net dilutive earnings per share
increased to $0.34 as compared to net dilutive earnings per share of $0.85 for
the nine months ended December 31, 2020. Net income was $2.6 million inclusive
of $1.9 million
of interest expense related to the unamortized debt issuance costs on the
extinguishment of the prior credit facility for the nine months ended December
31, 2021 as compared to a net income of $6.5 million which included realized and
unrealized gains of $1.3 million on equity investments for the nine months ended
December 31, 2020. Total revenue decreased 12.5% to $37.4 million for the nine
months ended December 31, 2021 as compared to $42.7 million for the nine months
ended December 31, 2020, due to a 12.1% decrease in average finance receivables,
compared to the prior year period.

The Company finances primary transportation to and from work for the subprime
borrower. The Company does not finance luxury cars, second units or recreational
vehicles, which are the first payments customers tend to skip in time of
economic insecurity. The Company finances 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

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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.



                                             Three months ended            Nine months ended
                                                December 31,                 December 31,
                                               (In thousands)               (In thousands)
                                            2021           2020           2021          2020
Portfolio Summary
Average finance receivables (1)           $ 176,949      $ 192,966      $ 179,333     $ 203,996
Average indebtedness (2)                  $  64,824      $ 101,522      $  72,002     $ 112,476
Interest and fee income on finance
receivables                               $  12,240      $  13,180      $  37,406     $  41,395
Interest expense                              2,613          1,442          4,923         4,660
Net interest and fee income on finance
receivables                               $   9,627      $  11,738      $  32,483     $  36,735
Gross portfolio yield (3)                     27.67 %        27.32 %        27.81 %       27.06 %
Interest expense as a percentage of
average finance receivables                    5.91 %         2.99 %         3.66 %        3.05 %
Provision for credit losses as a
percentage of average finance
  receivables                                  3.79 %         1.35 %         2.83 %        4.58 %
Net portfolio yield (3)                       17.97 %        22.98 %        21.32 %       19.43 %
Operating expenses as a percentage of
average finance receivables                   20.04 %        15.35 %        18.68 %       14.96 %
Pre-tax yield as a percentage of
average finance receivables (4)               (2.07 )%        7.63 %         2.64 %        4.47 %
Net charge-off percentage (5)                  5.67 %         6.30 %         4.70 %        5.94 %
Finance receivables                                                     $ 176,173     $ 188,626
Allowance percentage (6)                                                     2.06 %        4.81 %
Total reserves percentage (7)                                                6.00 %        8.76 %



Note: All three-month and nine-month revenue performance indicators expressed as percentages have been annualized.

(one)

Average finance receivables represent the average of the month-end finance
receivables throughout the period.
(2)
Average indebtedness represents the average outstanding borrowings at day-end
under the Credit Facility throughout the period. Average indebtedness does not
include the PPP loan.
(3)
Gross 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.
(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.
(5)
Net charge-off percentage represents net charge-offs (charge-offs less
recoveries) divided by average finance receivables outstanding during the
period.
(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:

maintain our commitment to the local branch model;

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expanding the local branch model into new states;
•
identifying additional ancillary products to enhance profitability and asset
performance;
•
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 December 31, 2021, the Company operated brick and mortar branch
locations in 18 states - Alabama, Florida, Georgia, Idaho, Illinois, Indiana,
Kentucky, Michigan, Missouri, North Carolina, Nevada, Ohio, Pennsylvania, South
Carolina, Tennessee, Texas, Utah and Wisconsin. The Company also originated
business in its expansion states of Kansas 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 15% 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 $77,000 and $118,000 for these accounts as of December 31, 2021
and December 31, 2020, respectively.

The provision for credit losses increased to $1.7 million for the three months
ended December 31, 2021 as compared to $0.7 million for the three months ended
December 31, 2020. A smaller provision for credit losses taken during the three
months ended December 31, 2020 was attributable to an alignment of total loss
reserves with the declining trend of 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 4.70% for the fiscal year ended December 31, 2021
from 5.94% for the fiscal year ended December 31, 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 December 31, 2021 was 10.28%, a decrease from 11.49% as of
December 31, 2020. The delinquency percentage for Direct Loans more than
twenty-nine days past due, excluding Chapter 13 bankruptcy accounts, as of
December 31, 2021 was 4.28%, a decrease from 5.23% as of December 31, 2020. The
changes in delinquency percentage for both Contracts and Direct Loans was driven
primarily by the Company's continued focus on local

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branch-based service. Based on these actions, improved service and stricter underwriting policies, management has seen improvements in 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.

three months ended December 31, 2021 compared to the three months ended December 31, 2020

Income from interest and commissions on financial accounts receivable

Interest and fee income on finance receivables, which consist predominantly of
finance charge income, decreased 7.6% to $12.2 million for the three months
ended December 31, 2021, from $13.2 million for the three months ended December
31, 2020. The decrease was primarily due to a 8.3% decrease in average finance
receivables to $176.9 million for the three months ended December 31, 2021, when
compared to $193.0 million for the corresponding period ended December 31, 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 December
31, 2021, compared to the corresponding period ended December 31, 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 27.67% for the three months ended
December 31, 2021, compared to 27.32% for the three months ended December 31,
2020. The net portfolio yield decreased to 17.97% for the three months ended
December 31, 2021, compared to 22.98% for the three months ended December 31,
2020. The net portfolio yield decreased primarily due to the increase in the
provision for credit losses, as described under "Analysis of Credit Losses".

operating expenses

Operating expenses increased to $8.9 million for the three months ended December
31, 2021 compared to $7.4 million for the three months ended December 31, 2020.
The increase in operating expenses was primarily attributed to administrative,
salaries and employee benefits expenses. Operating expenses as a percentage of
average finance receivables, increased to 20.04% for the three months ended
December 31, 2021 from 15.35% for the three months ended December 31, 2020 due
to a proportionally greater decline in finance receivables.

Provision Expense

The provision for credit losses increased to $1.7 million for the three months
ended December 31, 2021 from $0.7 million for the three months ended December
31, 2020. A smaller provision for credit losses taken during the three months
ended December 31, 2020 was attributable to an alignment of total loss reserves
with the rapidly declining trend of net charge-off percentage.

Interest expenses

Interest expense was $2.6 million for the three months ended December 31, 2021,
of which the Company recognized approximately $1.9 million of interest expense
related to previously incurred but unamortized debt issuance costs on the
extinguishment of the Ares credit facility, and $1.4 million for the three
months ended December 31, 2020. The following table summarizes the Company's
average cost of borrowed funds, exclusive of debt origination costs:



                                                        Three months ended
                                                           December 31,
                                                        2021           2020

Variable interest under credit line 0.41% 1.93% Credit spread under credit line

            2.82 %        3.75 %
Average cost of borrowed funds                             3.23 %        5.68 %




SOFR rates have decreased to 0.05%, which represents the one-month SOFR rate as
required under our Wells Fargo Credit Facility, as of December 31, 2021 compared
to 0.14%, which represents the one-month LIBOR rate as required under our Line
of Credit, as of December 31, 2020. For further discussions regarding interest
rates see "Note 5-Credit Facility".

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Income Taxes

The Company recorded an income tax benefit of approximately $209,000 for the three months ended December 31, 2021 compared to income tax expense of approximately $1,190,000 for the three months ended December 31, 2020. The Company’s effective tax rate decreased to 22.9% for the three months ended
December 31, 2021 of 23.9% for the three months ended December 31, 2020.

Nine months done December 31, 2021 compared to nine months ended December 31, 2020

Interest Income and Loan Portfolio

Interest and fee income on finance receivables, decreased 9.6% to $37.4 million
for the nine months ended December 31, 2021 from $41.4 million for the nine
months ended December 31, 2020. The decrease was primarily due to 12.1% decrease
in average finance receivables to $179.3 million for the nine months ended
December 31, 2021 when compared to $204.0 million for the corresponding period
ended December 31, 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 nine months ended December 31, 2021 compared to acquisitions
during the corresponding period ended December 31, 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 27.81% for the nine months ended December
31, 2021, compared to 27.06% for the nine months ended December 31, 2020. The
net portfolio yield increased to 21.32% for the nine months ended December 31,
2021 compared to 19.43% for the nine months ended December 31, 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 $25.1 million for the nine months
ended December 31, 2021 from approximately $22.9 million for the nine months
ended December 31, 2020. Operating expenses as a percentage of average finance
receivables increased to 18.7% for the nine months ended December 31, 2021 from
15.0% for the nine months ended December 31, 2020. These increased percentages
were attributed to an increase in administrative, and salaries and employee
benefits expense as well as a decrease in the average finance receivables
balances.

Provision Expense

The provision for credit losses decreased to $3.8 million for the nine months
ended December 31, 2021 from $7.0 million for the nine months ended December 31,
2020, largely due to a 12.1% decrease in the average finance receivables and a
decrease in the net charge-off percentage to 4.7% for the nine months ended
December 31, 2021 from 5.9% for the nine months ended December 31, 2020.

Interest expenses

Interest expense was $4.9 million for the nine months ended December 31, 2021,
of which the Company recognized approximately $1.9 million of interest expense
related to previously incurred but unamortized debt issuance costs on the
extinguishment of the Ares credit facility, and $4.7 million for the nine months
ended December 31, 2021. The following table summarizes the Company's average
cost of borrowed funds, exclusive of debt origination costs:



                                                        Nine months ended
                                                           December 31,
                                                        2021           2020

Variable interest under credit line 0.80% 1.77% Credit spread under credit line

            3.44 %       3.75 %
Average cost of borrowed funds                             4.24 %       5.52 %




                                       22
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Income Taxes

The Company recorded an income tax expense of approximately $926,000 for the nine months ended December 31, 2021 compared to income tax expense of approximately $1,711,000 for the nine months ended December 31, 2020. The Company’s effective tax rate increased to 26.0% for the nine months ended
December 31, 2021 20.9% for the nine months ended December 31, 2020.

Procurement of contracts

As of December 31, 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 December 31, 2021 and 2020,
less than 1% were for new vehicles.

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



                                  Three months ended          Nine months ended
        As of December 31,           December 31,                December 31,
               2021                2021          2020         2021          2020
             Number of               Net Purchases              Net Purchases
State        branches               (In thousands)              (In thousands)
FL                       11     $    3,388     $  3,549     $   9,621     $ 11,585
OH                        6          2,539        2,466         8,677        7,517
GA                        5          2,247        2,126         7,664        7,590
KY                        3          1,003        1,023         3,802        3,225
MO                        2          1,135        1,022         3,920        3,264
NC                        3          1,752          862         4,710        3,138
IN                        2          1,071          547         3,150        2,149
SC                        3          1,376          611         3,587        2,812
AL                        2            911          728         2,695        1,702
MI                        2            800          510         2,103        1,506
NV                        1            557          378         1,751          978
TN                        1            486          636         1,449        1,954
IL                        1            356          267         1,102          681
PA                        1            622          272         1,354          819
TX                        1            516            -         1,178            -
WI                        1            312           88           832          155
ID                        1            186          169           560          256
UT                        1             69           17           300           43
AZ                        -            154            -           210            -
KS                        -              -           14             -           14
Total                    47     $   19,480     $ 15,285     $  58,665     $ 49,388




                                Three months ended                   Nine months ended
                                   December 31,                        December 31,
                             (Purchases in thousands)            (Purchases in thousands)
       Contracts              2021               2020             2021               2020
Purchases                 $     19,480       $     15,285     $     58,665       $     49,388
Average APR                       23.1 %             23.4 %           23.1 %             23.5 %
Average discount                   6.8 %              7.5 %            6.8 %              7.4 %
Average term (months)               47                 46               47                 46
Average amount financed   $     11,228       $     10,307     $     10,906       $     10,132
Number of Contracts              1,735              1,483            5,389              4,878




                                       23
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Direct Loan Origination

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



                                                  Three months ended                      Nine months ended
                                                     December 31,                           December 31,
              Direct Loans                    (Originations in thousands)            (Originations in thousands)
               Originated                      2021                2020               2021                 2020
Purchases/Originations                     $       8,505       $       4,605     $       21,282       $       10,864
Average APR                                         31.8 %              30.9 %             30.6 %               29.6 %
Average term (months)                                 24                  22                 25                   24
Average amount financed                    $       3,661       $       3,641     $        4,173       $        4,054
Number of loans                                    2,282               1,265              5,186                2,744



Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:


                                     Nine months ended
                                       December 31,
                                      (In thousands)
                                    2021          2020
Cash provided by (used in):
Operating activities              $   1,824     $   8,266
Investing activities                  6,835        26,845
Financing activities                (35,106 )     (30,534 )

Net increase (decrease) in cash $(26,447) $4,577

The Company’s primary use of working capital for the quarter ended December 31, 2021 was, and for the foreseeable future will continue to be, financing the purchase of Contracts, which are financed substantially through cash from principal and interest payments received, and the Company’s line of credit.



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 "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"). The Ares Credit
Facility was paid off in connection with entering into the 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 NFI 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.

                                       24

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The Company will continue to depend on the availability the Credit Facility,
together with cash from operations, to finance future operations. The
availability of funds under the Credit Facility generally depends on
availability calculations as defined in the 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. On December 27, 2021 SBA informed the Company that forgiveness in the
amount of $0.00 is appropriate. The Company filed an appeal with SBA on January
5, 2022. The Company cannot predict whether the appeal will be successful. While
the Company awaits the SBA response to the appeal, the loan payments are
deferred.



Unless the Company is successful on appeal, 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 Arrangements

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

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