Clearwater subprime auto loan company Nicholas Financial will close 34 of its 36 branches and lay off 137 employees after defaulting on its credit and undergoing a major financial restructuring.
The company disclosed the changes in filings with the U.S. Securities and Exchange Commission on Nov. 3 and 4.
As part of its downsizing, Nicholas Financial will narrow its focus from acquiring and servicing loans for new and used cars and other consumer products, to offering financing for cars and light trucks. The company will outsource its loan servicing operations to Los Angeles firm Westlake Portfolio Management.
“I’ve been looking the past couple of months just to see what would we have to do to become profitable at this point,” CEO Mike Rost said. “The outsourcing, this is obviously where I could do a lot of work on the operating expenses and become more efficient.”
The announcements came two weeks after Wells Fargo notified Nicholas that it had instituted a default rate of interest on the company after it failed to fulfill the loan obligations of its $175 million credit facility. That triggered in an additional $130,000 in interest payments for the three months ending Sept. 30, and another $118,000 per month while the default rate is in effect.
Rost blamed the Wells Fargo default on a “struggling” branch model, but also partly on the loss of federal COVID-19 relief that had allowed customers to keep paying off loans in a down economy.
The company itself has had problems with COVID-19 relief. In 2020, Nicholas received a U.S. Small Business Administration Paycheck Protection Program loan worth more than $3.2 million. In December, the agency declined to forgive the loan; Nicholas lost its appeal of that decision in May, and was required to repay the loan plus $64,518 in interest. Rost couldn’t immediately say why the loan was not forgiven.
The Westlake deal, Rost said, should lead to annual savings allowing the company to pay down its Wells Fargo debt. The agreement is expected to be finalized in December, and cost the company between $11.1 million and $12.4 million over the next five years. The company had $4.8 million in cash on hand as of March 31, down from $22 million the year before.
The company said the restructuring would require it to cut approximately 82 percent of its workforce by Jan. 31. This follows the July announcement of 11 additional branch closures, affecting 44 employees. And that followed a May letter to shareholders in which Nicholas Financial’s board called “expansion … a crucial piece to our long-term growth.”
Rost — who was named Nicholas Financial’s CEO in August, three months after the resignation of previous CEO Douglas Marohn — said the company will scale back its Clearwater office, which previously handled accounting, compliance and other departments, “to maybe just 8 or 10 people.” The firm will maintain a financial base of operations in Charlotte and another office in Columbus, Ohio.
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“We’re still looking at keeping a lot of our footprint,” Rost said. “We’re going to get away from several markets that just have not been profitable, that we’ll probably just exit altogether, like we did previously with Texas. So there will be some markets that we just exit. But our core business where we’ve always done well — up and down the east coast, southeast, up into the midwest — we’re going to try to keep our footprint there and build it back up the right way with less operating expenses. We’re looking to go all digital down the road. Those are really the cost efficiency things that we have to do in order to keep it rolling.”
The company on Nov. 4 announced a net loss of $3.2 million for the quarter and more than $4.9 million for the six months ending Sept. 30. Rost attributed the losses to an increased number of customers defaulting on their own loans.
Rost said the company hadn’t been looking at bankruptcy options. It will continue marketing and underwriting loans, even as Westlake services its 25,000 clients.
“We’ll just scale back a little bit and rebuild the right way, and that’s what we feel we can do,” he said. “It should absolutely put us back where we needed to be.”
Economic Development Reporter
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