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Sunday, August 26, 2007

Nicholas Financial (NICK) closer look

NICK (sec) is still looking good. Quick check of latest financials:

10-Q for the period ending June 30, 2007. Balance sheet looks about the same as it always does. $73 million in equity against $105 million in total liabilities.

Revenues up a bit. Operating income is down somewhat from 2006, mostly due to increased interest expense, increased provision for losses (a good thing), and salaries. Net income per diluted share is 27 cents vs 29 cents for 2006.

Cash flow from operations is way higher than net income due to provision and taxes to be paid. This is actually similar to 2006. They invested a net $4 million in finance contracts vs around $5 million last year. Not much happened in financing. Last year they borrowed $1.6 million.

Assume about a million future stock options in addition to the 10 million shares outstanding on July 31. So 11 million totally diluted shares. Net income is about 25 cents if you assume 11 million shares.

But the real question is in the ratios. For years I've believed that NICK was very well run and would weather a credit meltdown very well.

Finance receivables increased by around 13%.
About 20% finance revenue to receivables ratio (down from 22%)
Provision for losses as a percentage of finance receivables: 2.57% (vs 1.96%)
About 50% debt to receivables ratio (unchanged)
Average interest rate charged: 24.17% (up slightly)
Average cost of borrowed funds: 6.76%
Operating expenses as a percentage of finance receivables: 10.4% (down slightly)
Write-offs as a percentage of liquidation: 7.2% (up from 5.04%)
Net charge-offs: 6.6% (up from 4.7%)

Recoveries are down to 14% from 19%. This is probably part of a longer trend as NICK expands into areas farther away, making recovery more difficult. They expect this number to continue to decline.

I don't see any significant changes in the loan contracts purchased or the contracts originated.
The provision for credit losses increased from approximately $810,000 for the three-month period ended June 30, 2006, to $1,197,000 for the three-month period ended June 30, 2007. The Company’s losses as a percentage of liquidation increased from 5.04% for the three months ended June 30, 2006, to 7.20% for the three months ended June 30, 2007. The Company anticipates losses as a percentage of liquidation will be in the 6-10% range during the remainder of the current fiscal year.
Here's what they say about the economic conditions that everyone is worried about:
The Company believes there is a correlation between the unemployment rate and future portfolio performance. The Company believes the down turn in the housing sector is affecting its customer’s employment status and does not foresee any recovery during the current fiscal year. The number of bankruptcy filings by customers during the three months ended June 30, 2007 was consistent with the three months ended June 30, 2006.
I have to think that the really bad mortgage financing tricks have a lot to do with it. People's mortgages are ratcheting up and housing prices have dropped.

Delinquencies as a percentage of contracts outstanding:
Purchased contracts:
30-59 days: 2.00% (up from 1.51%)
60-89 days: 0.74% (up from 0.55%)
90+ days: 0.25% (up from 0.16%)
Direct loans:
30-59 days: 0.96% (up from 0.80%)
60-89 days: 0.64% (up from 0.35%)
90+ days: 0.40% (up from 0.11%)

43% of NICK's borrowings are subject to interest rate swaps to match floating vs fixed rate assets.

There are now 47 branch locations, with 19 in Florida (land of scary housing). Each office can handle up to 1,000 loans, $7.5 million in receivables. Only 6 branches have reached capacity.

NICK plans to continue expansion.

I think NICK is currently selling at perhaps a 50% discount. The current stock price is $8.56. Like I said in prior posts, I believed NICK would probably not reach full value until after a credit market disaster proves that they're not doing anything stupid.

I'm thinking of buying NICK at this point.

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