Auto lender Clearwater to lay off 137 people after credit default

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Clearwater’s 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 to documents filed with the U.S. Securities and Exchange Commission on Nov. 3 and 4.

As part of its downsizing, Nicholas Financial will reduce its focus from acquiring and servicing loans for new and used cars and other consumer products, to offering finance for cars and trucks light. The company will outsource its loan management operations to Los Angeles-based Westlake Portfolio Management.

“I looked at the last two months just to see what we needed to do to become profitable at this point,” CEO Mike Rost said. “Outsourcing is obviously where I could do a lot of work on operational expenses and become more efficient.”

The announcements came two weeks after Wells Fargo informed Nicholas that it had instituted an interest rate default on the company after it failed to meet loan obligations on its $175 million credit facility. dollars. This triggered an additional $130,000 in interest payments for the three months ending September 30, and an additional $118,000 per month while the default rate is in effect.

Rost blamed Wells Fargo’s default on a “struggling” branch model, but also in part on the loss of federal COVID-19 relief that had allowed customers to continue repaying their loans in a down economy.

The company itself has had issues with COVID-19 relief. In 2020, Nicholas received a loan from the U.S. Small Business Administration’s Paycheck Protection Program worth over $3.2 million. In December, the agency refused to cancel the loan; Nicholas lost his appeal of that ruling in May and had to repay the loan plus $64,518 in interest. Rost could not immediately say why the loan was not canceled.

The Westlake deal, Rost said, should lead to annual savings allowing the company to pay off its Wells Fargo debt. The deal is expected to close 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 as of March 31, up from $22 million a year earlier.

The company said the restructuring would require it to cut about 82% of its workforce by Jan. 31. This follows the announcement in July of 11 more branch closures, affecting 44 employees. And that followed a May letter to shareholders in which Nicholas Financial’s board called “expansion…a crucial part of our long-term growth.”

Rost – who was named CEO of Nicholas Financial in August, three months after former CEO Douglas Marohn resigned – said the company would downsize its Clearwater office, which previously handled accounting, compliance and other departments , “to maybe only 8 or 10 people.” The company will maintain a financial base of operations in Charlotte and another office in Columbus, Ohio.

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Related: CEO resigns from auto lender Clearwater Nicholas Financial

“We’re still looking to keep a lot of our footprint,” Rost said. “We’re going to move away from several markets that just haven’t been profitable, which we’re probably going to exit completely, like we did previously with Texas. So there will be markets that we will simply leave. But our core business, where we’ve always done well — along the East Coast, Southeast, all the way into the Midwest — we’re going to try to keep our footprint there and rebuild it the right way with less. operating expenses. We’re looking to go all-digital on the road. It’s really the profitability things that we need to do to keep rolling. »

On November 4, the company announced a net loss of $3.2 million for the quarter and more than $4.9 million for the six months ending September 30. Rost attributed the losses to an increased number of customers defaulting on their own loans.

Rost said the company had not considered bankruptcy options. It will continue to market and underwrite loans, even though Westlake serves its 25,000 customers.

“We’re just going to cut back a bit and rebuild in a good way, and that’s what we think we can do,” he said. “It should absolutely put us back where we needed to be.”

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