Collections agents for Nicholas Financial Inc. sifted through the garbage for clues and tracked down the man's father, who disclosed when his son was due back in Florida.

"We staked out his dad's place, and when he arrived with the car, we got him," said Ralph Finkenbrink, vice president of the Clearwater company. A recovery company that works under contract with Nicholas grabbed the car. Nicholas took the man to small claims court and now collects $100 a month toward the $1,000 he still owes on the loan.

Although not every repossession turns out so well, Nicholas shines at the risky business of lending money at high rates to car buyers with bad credit. The company is posting record profits when some of its biggest competitors are collapsing into bankruptcy.

However, Nicholas has found it a lot easier to collect from deadbeat debtors than to win respect on Wall Street. From a national perspective, Nicholas is just another small player in a big industry known for disastrous underwriting and suspect accounting.

Nicholas has succeeded partly by turning down borrowers with truly lousy credit that other companies have been willing to finance. That slowed growth for a couple of years because dozens of competitors flush with cash were willing to finance almost anyone. However, reckless underwriting led to massive defaults. The casualties included Mercury Finance Co. of Lake Forest, Ill., and Keller Financial Services of Clearwater, both of which lost millions of dollars for investors.

Even among borrowers with flawed credit, there are different degrees of risk, and Nicholas has prospered on its ability to make those distinctions.

"We saw someone who had 13 repossessions on his record," president Peter L. Vosotas said. "We turned down the deal, but somebody will finance this guy."

Vosotas said approving the right loans is just the first step. The real key to Nicholas' success is its ability to track loan performance.

At the finance companies that got into trouble, rapid growth typically obscured developing problems because defaults represented only a small percentage of the overall portfolio. The companies didn't realize they were in trouble until defaults suddenly started growing faster than the portfolio. Nicholas has avoided unpleasant surprises by sorting loans into small groups, tracking each group separately and adjusting loss reserves frequently. The tracking also reveals which of its 14 branches from Fort Lauderdale to Marietta, Ga., are making the best and worst loans.

"Our systems send up warning signals," said Stephen Bragin, a fund-raiser for the University of South Florida and a longtime Nicholas investor. "You can get a photograph of what the company's doing at almost any given moment."

The internally developed tracking system is a legacy of Nicholas' origins as an accounting software company.

Finance companies like Nicholas make a profit by borrowing money at lower rates and lending it at higher rates. It's the same thing banks do, only the rates are a lot higher. Last year, Nicholas borrowed money for just under 10 percent, while earning an average of 22 percent on its loans before expenses. Rates vary with the age of the car being used as collateral; on the oldest, the rates are about 30 percent.

Some finance companies also sell cars, but Nicholas just finances them, mostly buying the loans from car dealers at a discount from their face value. Nicholas also lends money directly to car buyers.

"To a lot of people, this looks like an easy way to make money," Vosotas said. "You can charge great returns in a market with incredible needs to people who are vulnerable."

However, those big returns materialize only if enough borrowers make their payments. Although most Nicholas borrowers pay on time, one in every five defaults, Vosotas said. That is not an unusual figure for what's known as "subprime" lending. However, accurate industry numbers on defaults are tough to come by.

Keller Financial, once a major Nicholas rival, was reporting repossessions of 4 percent two years ago. More recently the company told investors it had lost more than $100-million on $400-million in lending over the past six years. Keller is currently in bankruptcy reorganization and no longer makes loans.

Some of the biggest companies in the industry made a bad problem worse by selling their loan portfolios -- and booking the profits -- based on overly optimistic projections of defaults. When those assumptions proved wrong, the profits evaporated.

Vosotas said Nicholas tries to avoid defaults by counseling borrowers who are behind on their payments or by suggesting where they can find a job if unemployment is the problem. Borrowers voluntarily relinquish about 25 percent to 30 percent of the cars Nicholas repossesses, sometimes even dropping the cars off at one of the company's branches. If the borrower is not cooperative, Nicholas pays a recovery company about $175 to $200 to handle the dirty work of rounding up the vehicle.

Nicholas can count on losing an average of $1,500 when it sells a repossessed car at auction. Vosotas said many finance companies lose four times that much on a typical repossession, sometimes because they loaned more than the car was worth. He said Nicholas also has found that a few hundred dollars in fix-up costs generates a big return when the car is on the auction block.

Vosotas, 56, is the driving force behind Nicholas Financial, which he transformed from Nicholas Data Services, a software supplier. A former vice president of sales at Paradyne Corp. in Largo, he left the computer modem manufacturer in 1983 with about "a half-million" in the bank. He spent nearly all of it on various ventures -- an international trading company, an apartment complex and the software company -- before discovering high-risk lending eight years ago.

"When they explained it to me, I thought this is almost better than religion -- you just go out and collect money," Vosotas said. As of the end of March, Nicholas was collecting on $32-million of loans. Software sales are now just a small part of the company's business.

Vosotas, who peppers his conversation with words like "sleazy," "snowed" and "screwed," describes himself as "an average guy" and a "street fighter" who cares about the people who borrow money from the company.

"We report all our payments to all three credit services," Vosotas said. "You perform well for us and I'll bust my fanny to help you get a lower rate loan next time. I'll also lecture you on how you shouldn't be borrowing so much money."

He keeps a dog dish in his office for Frank, a mixed-breed who has his own business cards identifying him as "Francis D. Vosotas, vice president of human resources."

Samuel J. Beebe, who runs the Beebe Fund from his home in St. Petersburg, said Peter Vosotas is "a breath of fresh air compared to a lot of managements, who lay all this pie-in-the-sky BS on you." Beebe bought 10,000 Nicholas shares for his fund as a long-term investment. So far, however, he's the only money manager with a stake in the company.

In fact, only about 500 investors own shares. Vosotas, who yearned for years for a spot on the Nasdaq market, discovered even that isn't enough to make investors take notice.

The company started public life on the Vancouver Stock Exchange because a Canadian brokerage firm was the only one willing to handle an initial offering back in 1987. Interstate/Johnson Lane Corp. of Charlotte, N.C., underwrote an additional offering in 1996, but the firm's research analysts do not follow the stock. Nasdaq turned the company down twice for failing to meet requirements -- once because its stock price was too low.

"We said we're going to find a way to get on Nasdaq if it kills us," Vosotas said.

To get the share price up, the company went through a reverse stock split last year -- giving shareholders one share for every three they owned before. Nicholas also spent about $100,000 meeting Nasdaq requirements, mostly for lawyers' and accountants' fees.

Nicholas finally won a spot on the Nasdaq Small Cap Market in December, but not many people noticed. The stock price has fallen from $4.871/2 to UPDATE$3.121/2. Most days only a few thousand shares change hands, and some days there is no trading at all. The total market value of the company is a little less than $8-million.

From Wall Street's perspective, Nicholas has two strikes against it: Its trading volume is too low and it is in an industry that is currently out of favor.

"Analysts don't want to cover something that has an average daily trading volume of a few thousand shares," said Stephan Biggar, an analyst at Standard & Poor's Equity Group. Although he follows finance companies, he said he had never heard of Nicholas. "A rash of people moving in to buy a stock like that would push the stock up tremendously."

He says analysts also are skittish about recommending small consumer finance companies, partly because accounting standards permit so much discretion in the way they report their numbers.

"It's a fairly easy business to get into, which is why many of these companies have trouble," Biggar said. "If it's not one competitor, it's another. The ones that have been successful at it have basically done two things. . . . They've gotten funding costs a bit lower and they're very stringent in terms of their underwriting criteria."

Vosotas, who owns 40 percent of Nicholas' stock, expects to be one of the successful ones. He likes to tell the old story, one of Ronald Reagan's favorites, about a child who eagerly digs through a pile of manure convinced that a pony might be in there somewhere.

"We really think we are that pony," he said.

Re-printed from:
St. Petersburg Times
Business Times, Front Page
Monday, June 22, 1998