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Summary of Significant Accounting Policies
 12 Months Ended
Mar. 31, 2012
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of Nicholas Financial – Canada and its wholly owned subsidiaries, NDS and NFI, collectively referred to as (the “Company”). All intercompany transactions and balances have been eliminated.

Dividend

During fiscal year 2012, three quarterly dividends were declared. On August 30, 2011, the Company’s Board of Directors announced a quarterly cash dividend of $0.10 per share of common stock paid on September 20, 2011. On October 27, 2011, the Company’s Board of Directors announced a quarterly cash dividend of $0.10 per share of common stock paid on December 20, 2011. On January 31, 2012, the Company’s Board of Directors declared another quarterly dividend equal to $0.10 per common share, to be paid on March 20, 2012 to shareholders of record as of March 13, 2012. Subsequent to March 31, 2012, one quarterly dividend was declared. On May 2, 2012 the Board of Directors announced a quarterly cash dividend equal to $0.10 per common share, to be paid on June 6th to shareholders of record as of May 30th.

On November 10, 2009 the Boards of Directors declared a 10% stock dividend on December 7, 2009 to shareholders of record on November 20, 2009. As a result of this stock dividend, an entry of approximately $6.5 million was made to reflect the re-capitalization of shareholders’ equity from retained earnings to common stock. This amount was derived from the quoted market value of the shares at the date of declaration ($6.10) times the number of shares issued as a result of the 10% stock dividend. All references in the consolidated financial statements and notes to the number of shares outstanding, per share amounts, and share awards of the Company’s common shares have been restated to reflect the effect of the stock dividend for all periods presented.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on finance receivables and the net realizable value of assets held for resale.

Finance Receivables

Finance receivables are recorded at cost, net of unearned interest and the allowance for credit losses. The amount of unearned interest, discounts and allowance for credit losses as of March 31, 2012 and March 31, 2011 are approximately $146,640,000 and $142,786,000, respectively.

Allowance for Credit Losses

The allowance for credit losses is increased by charges against earnings and decreased by charge-offs (net of recoveries). In addition to the charges against earnings, the reserve for credit losses has been established using dealer discounts to absorb credit losses. A dealer discount represents the difference between the finance receivable, net of unearned interest, of a Contract, and the amount of money the Company actually pays for the Contract. The entire amount of the discount is related to credit quality and is considered to be part of the credit loss reserve. The Company aggregates Contracts into static pools consisting of Contracts purchased during a three-month period for each branch location. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. As conditions change, the Company’s level of provisioning and/or allowance may change as well.

 

 

Assets Held for Resale

Assets held for resale are stated at net realizable value and consist primarily of automobiles that have been repossessed by the Company and are awaiting final disposition. Costs associated with repossession, transport and auction preparation expenses are reported under operating expenses in the period in which they are incurred.

Property and Equipment

Property and equipment are recorded at cost, net of accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Automobiles

    3 years

Equipment

    5 years

Furniture and fixtures

    7 years

Leasehold improvements

    Lesser of lease term or useful life (generally 6 - 7 years)

Drafts Payable

Drafts payable represent checks disbursed for loan purchases which have not yet been funded. Amounts generally clear within two business days of period end and then increase the line of credit or reduce cash.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases along with operating loss and tax credit carryforwards, if any. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.

The Company recognizes tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from any such position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. It is the Company’s policy to recognize interest and penalties accrued on any uncertain tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor has the Company recognized any related interest or penalties during the three years ended March 31, 2012.

The Company files income tax returns in the U.S. Federal jurisdiction and various State jurisdictions. The Company is no longer subject to U.S. Federal tax examinations for years before 2011. State jurisdictions that remain subject to examination range from 2007 to 2011. The Company does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Revenue Recognition

Interest income on finance receivables is recognized using the effective interest method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 60 days or more or the collateral is repossessed, whichever is earlier. As of March 31, 2012, 2011 and 2010 the amount of gross finance receivables not accruing interest was approximately $2,572,000, $2,035,000 and $2,580,000, respectively.

The amount of future unearned income is computed as the product of the Contract rate, the Contract term, and the Contract amount.

Deferred revenues consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit life insurance and forced placed automobile insurance. These commissions are amortized over the life of the contract using the interest method.

The Company’s net fees charged for processing a loan are recognized as an adjustment to the yield and are amortized over the life of the loan using the interest method.

The Company attributes its entire dealer discount to a reserve for credit losses. After the analysis of purchase date accounting is complete, any remaining potentially uncollectable amounts would be contemplated in estimating the allowance for loan losses.

 

 

Sales relate principally to telephone support agreements and the sale of business forms to the Company’s customer base. The aforementioned sales of NDS represent less than 1% of the Company’s consolidated revenues.

Earnings Per Share

Basic earnings per share is calculated by dividing the reported net income for the period by the weighted average number of shares of common stock outstanding. Diluted earnings per share includes the effect of dilutive options and other share awards. Basic and diluted earnings per share have been computed as follows:

 

     Fiscal Year ended March 31,  
     2012      2011      2010  

Numerator for earnings per share – net income

    $ 22,230,292       $ 16,805,184       $ 10,864,561   
  

 

 

     

 

 

     

 

 

  

Denominator:

         

Denominator for basic earnings per share – weighted average shares

      11,747,160         11,607,341         11,470,318   

Effect of dilutive securities:

         

Stock options and other share awards

      285,971         286,177         218,805   
  

 

 

     

 

 

     

 

 

  

Denominator for diluted earnings per share

      12,033,131         11,893,518         11,689,123   
  

 

 

     

 

 

     

 

 

  

Earnings per share – basic

    $ 1.89       $ 1.45       $ 0.95   
  

 

 

     

 

 

     

 

 

  

Earnings per share – diluted

    $ 1.85       $ 1.41       $ 0.93   
  

 

 

     

 

 

     

 

 

  

Diluted earnings per share does not include the effect of certain stock options as their impact would be anti-dilutive. Approximately 53,500, 28,500 and 331,650 stock options were not included in the computation of diluted earnings per share for the years ended March 31, 2012, 2011 and 2010 respectively, because their effect would have been anti-dilutive.

Share-Based Payments

The grant date fair value of share awards is recognized in earnings over the requisite service period (presumptively the vesting period). The Company estimates the fair value of option awards using the Black-Scholes option pricing model. The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected term of the options. Expected volatility is based upon the historical volatility for the previous period equal to the expected term of the options. The expected term is based upon the average life of previously issued options. The expected dividend yield is based upon the current yield on date of grant. The fair value of non-vested restricted and performance shares is measured at the market price of a share on a grant date.

The pool of excess tax benefits available to absorb future tax deficiencies is based on increases to shareholders’ equity related to tax benefits from share-based compensation, combined with the tax on the cumulative incremental compensation costs previously included in pro forma net income disclosures as if the Company had applied the fair-value method to all awards.

Fair Value Measurements

The Company measures specific assets and liabilities at fair value, which is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When applicable, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability under a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Financial Instruments and Concentrations

The Company’s financial instruments consist of cash, finance receivables, accrued interest, line of credit, interest rate swap agreements and accounts payable. Financial instruments that are exposed to concentrations of credit risk are primarily finance receivables and cash.

The Company operates in fifteen states through its sixty branch locations. Florida represents 33% of the finance receivables total as of March 31, 2012. Ohio represents 14%, Georgia represents 11% and North Carolina represents 10% of the finance receivables total as of March 31, 2012. Of the remaining eleven states, no one state represents more than 7% of the total finance receivables. The Company provides credit during the normal course of business and performs ongoing credit evaluations of its customers.

 

 

The Company maintains reserves for potential credit losses which, when realized, have been within the range of management’s expectations. The Company perfects a primary security interest in all vehicles financed as a form of collateral.

The combined account balances the Company maintains at financial institutions typically exceed federally insured limits, and there is a concentration of credit risk related to accounts on deposit in excess of federally insured limits. The company has not experienced any losses in such accounts and believes this risk of loss is not significant.

Interest Rate Swaps

Interest rate swaps were not in place during fiscal year ending March 31, 2012. Interest rate swap agreements were reported as either assets or liabilities in the consolidated balance sheet at fair value. For interest rate swap agreements previously designated and qualifying as cash flow hedges, gains or losses on the effective portion of the hedge were initially included as a component of other comprehensive income and are subsequently reclassified into earnings when interest on the related debt was paid. For interest rate swap agreements which were not designated and qualifying as cash flow hedges, the changes in the fair value are recorded in earnings. The Company does not use interest rate swaps for speculative purposes. See note 6 – “Interest Rate Swap Agreements”.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is composed entirely of previous mark-to-market adjustments of designated and qualifying cash flow hedges, net of the related tax effect.

Statements of Cash Flows

Cash paid for income taxes for the years ended March 31, 2012, 2011 and 2010 was approximately $13,764,000, $12,068,000 and $7,516,000, respectively. Cash paid for interest for the years ended March 31, 2012, 2011 and 2010 was approximately $4,878,000, $5,720,000 and $5,056,000, respectively.

Recent Accounting Pronouncements

During the year, the Company early adopted recent accounting guidance regarding financial statement presentation of comprehensive income. As a result, the Company included consolidated statements of comprehensive income. Other than financial statement display, the update had no impact on the reported amounts in the Company’s consolidated financial statements.

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRSs. ASU 2011-04 does not extend the use of fair value accounting, but provides clarification of existing guidance and additional disclosures. The amendments in are to be applied prospectively and are effective during interim and annual reporting periods beginning on or after December 15, 2011. As this standard impacts disclosure only, the adoption is not expected to have an impact on the Company’s financial condition, results of operations and cash flows.

Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC, did not have a material impact on the Company’s present or future consolidated financial statements.