Nicholas Financial, Inc.
2012 Annual Report
www.NicholasFinancial.com
A NASDAQ Traded Company
From the President ....................................................................... 1
Form 10-K Annual Report ..................................................... Insert
NFI Shareholder Information ............................ Inside Back Cover
Nicholas Financial, Inc. is a specialty finance company that provides direct consumer loans and
purchases installment sales contracts from automobile dealers in the Southeast and Midwest. The Company
conducts its automobile fi nance business through branch offi ces. Nicholas Financial also offers and fi nances
extended warranties, roadside assistance plans, and credit life, accident, and health insurance to its borrowers.
The Company’s stock has been publicly traded since 1987. It is listed on the NASDAQ-GS Global Select
Market under the symbol, NICK. The NASDAQ Global Select Market includes companies which have fi nancial
and liquidity requirements that are higher than those of any other market.
Quote:
“Nicholas Financial represents what it truly means to be a NASDAQ listed company. The visionaries,
the game changers, those who dream to do more... Dream and do are not just two words, they are one thought,
because we believe that when you know how to take a vision and turn it into reality theres nothing you can’t do...
You can dream of 25 years in business of like Nicholas Financial, or you can Dream It and Do It”
- Eric Bernbach, Vice President, NASDAQ OMX
The Story BEHIND THE COVER . . .
During the past year a long time Nicholas Financial
employee who races his own Porsche in regional car
rallys such as the “48 Hours of Sebring”(pictured left),
volunteered to carry the Nicholas colors on the track.
The Company provided the new graphics and now
Nicholas and the corporate logo can be seen on various
Florida tracks.
“Racing To The Top”
F R O M T H E P R E S I D E N T
This year marked our 27th year in business and our
25th year as a publicly traded company. Virtually every
aspect of our business was working smoothly and
we are extremely proud of the performance that our
employees delivered during the past fiscal year.
Today, Nicholas Financial has grown to 63 branch
offices in 15 states. As of March 31, 2012 we had
$388,988,000
in gross
receivables outstanding.
In each
successive quarter during
the year,
we reported increased revenues and increased profits
when compared to comparable quarters in the previous
year. Year over year our common stock share price
rose slightly from $12.20 to $13.19. By virtually every
measure we had an excellent year. We reported this
very same thing last year and we hope to repeat these
same results next year. We are disappointed that our
stock price has not matched the financial performance
of our company.
Our Company
achieved outstanding
financial
results by recording its 21st consecutive year of
record revenues. Net income for the fiscal year
ended March 31, 2012 increased 32% to $22,230,000
as compared to $16,805,000 for the year ended
March 31, 2011. Earnings per share increased 31% to
$1.85 as compared
to $1.41. Revenue
increased
9% to $68,167,000. Shareholder’s equity grew 18% to
$135,939,000 from $115,213,000.
In August of 2011 our board of directors approved
the issuance of a cash dividend equal to $.10 cents
per share. The company issued a dividend each
quarter since then and expects to continue to do so,
provided that the Company meets or exceeds financial
measurements imposed by its consortium of lenders.
Page 1
Peter L. Vosotas
Chairman, CEO & President
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Ten Year Revenue History
(in $ Millions)
F R O M T H E P R E S I D E N T
Our board will review and determine how much
business. We remain convinced that providing auto
return they believe the company can pay-out
and light truck financing for Americans who for any
to its shareholders without impeding our growth
numbers of reasons, find themselves with poor
objectives. We are pleased to report that we returned
credit, will be a strong business for years to come
over $3 million in the form of cash dividends to
as long as cars and trucks remain the main form of
our shareholders. Additionally we paid down our
transportation.
credit line by $6 million dollars.
During the past year we have noticed a huge
In the past year we added four new locations
increase in competition. Like most companies
to our branch office network. We will continue
that face new and very aggressive competition our
to evaluate additional markets for future branch
sales people have been challenged by this change
locations, and subject to market conditions,
in the competitive landscape. Some of our most
we may open several new branch locations
aggressive competitors are divisions of the very
during the year.
Our plan is to open branch locations in large
metro areas in states that we believe are favorable
to our specialty vehicle and consumer finance
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Ten Year Net Income History
(in $ Millions)
same U.S. banks that the American taxpayer
had to bail out when they ran out of money back
in late 2008. Now these banks are undercutting
our tried and true lending guidelines, which in our
business
vernacular, means
bidding more
aggressively in their underwriting. In our point
of view these banks are biting the hand that
has fed them.
Another issue that we and our used car dealers
experienced during the year was the lack of used
car trades. The dealers could not get product.
Americans are holding onto their cars and trucks
longer causing a shortage in used car inventories.
This in turn created higher prices for the used
cars that our dealer clients sell. The resulting
consequence was that used cars and trucks were
commanding a premium price that was out of
balance with
the customer’s ability
to pay.
Conversely, our company benefited from the higher
Page 2
F R O M T H E P R E S I D E N T
resale prices at the auto auctions which reduced our
“Our potential market is over $250 billion
net losses from repossessions considerably.
dollars a year and growing”, should be excited
For many years I have made the same statement
regarding our accomplishments: “Our consistent
financial performance hasn’t happened by
accident. It is the result of many people working
very hard over a long period of time. The auto-
mobiles of our employees are usually the first to
arrive
in
the parking
lot each morning and
invariably the last to drive away at night.” To the
about its business prospects. Our intention is to
continue our strategy of controlled growth
by
increasing our existing branch
loan
portfolio and building new branch offices.
We intend to continue growing our company
organically. However, we will stay alert to possible
acquisition opportunities that may come to
our attention.
credit of our employees, this statement rings as
On a sad note, I would
like
to mention
true today as when it was first written. We, like
the passing of one of our most dedicated
all companies, have a challenge to find good,
investors, Marvin Mahan. Marvin passed away
hardworking, and qualified people. When we do,
last year leaving his wife Ingrid and a large
we try our best to keep those who work hard and
produce results.
We
reward
our
employees with
decent
benefits,
including performance-based bonuses
and excellent career opportunities. Our ability
to mold and retain a veteran team is one of the
primary reasons for our success. Several of
our
senior managers, accounting
staff and
data processing
staff have been with
the
Company since its inception in the late 1980’s.
We
are
however
extremely
concerned
with
the
ever
increasing
cost of health
insurance that has risen by 10 to 20 percent a year
for several years.
We
look
forward with
optimism
toward
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the coming year. Any company that can say,
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Earnings Per Share History
Page 3
F R O M T H E P R E S I D E N T
family behind. Marvin
loved our business,
our company and our staff. He visited with us
often over the many years since he made his
original investment in our company in 1992.
Initially his cash
infusion and support of
our stock help us
immensely. He was my
public company mentor and a key business
advisor. His main advice to me was, “Keep
doing what you do and don’t try to impress anyone.
You know your business and if you stay the course
you will do fine.” Stephen Bragin, one of our
board members, said when describing Marvin,
“He was an uncommon man.” We will really miss
this special friend of Nicholas Financial.
The
independent members
of
our Board
of Directors have always diligently embraced
their fiduciary responsibilities. They take their
responsibilities
to heart. We are
fortunate
to have been able
to attract
these
talented
individuals. Charlie Neal, Scott Fink and Stephen
Bragin are terrific board members. They have taken
the time to know our business and to give us excellent
business guidance.
We are very proud of all our employees whose
dedication, talent and loyalty have made Nicholas
an important force in automobile financing. We are
grateful for the support of our customers, bankers,
vendors and shareholders. We remain determined
to increase the value of our publicly traded stock.
We are convinced that our shareholders will be
rewarded if we continue to build the net worth of
our Company each year as we have done for the
past 22 consecutive years.
To all of you who have invested in Nicholas,
we wish to thank you for having continued
faith in our Company. On behalf of our Board
of Directors and our employees, we thank you
for the confidence that you have entrusted
in us.
Peter L. Vosotas
President & Chief Executive Officer
June, 2012
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Ten Year Net Worth History
(in $ Millions)
Page 4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(cid:95)(cid:3)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended March 31, 2012
(cid:133)(cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 0-26680
NICHOLAS FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
British Columbia, Canada
(State or Other Jurisdiction of
Incorporation or Organization)
8736-3354
(I.R.S. Employer
Identification No.)
2454 McMullen Booth Road, Building C
Clearwater, Florida 33759
(Address of Principal Executive Offices, Including Zip Code)
(727) 726-0763
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: Common Stock, no par value
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:95)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. (cid:133)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (cid:95) No (cid:133)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes (cid:95) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133)(cid:3)
Accelerated filer
(cid:95)(cid:3)
Non-accelerated filer (cid:133)(cid:3)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:95)
As of June 1, 2012, 12,005,280 shares of the Registrant’s Common Stock, no par value, were outstanding.
At September 30, 2011, the aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was approximately
$86,094,000.
Smaller reporting company (cid:133)(cid:3)
Portions of the Registrant’s definitive Proxy Statement and Information Circular for the 2012 Annual General Meeting of Shareholders currently
scheduled to be held on August 7, 2012, expected to be filed with the Commission pursuant to Regulation 14A on or about July 6, 2012, are
incorporated by reference in Part III, Items 10 through 14, of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE:
THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
NICHOLAS FINANCIAL, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business ........................................................................................................................................................
Risk Factors ...................................................................................................................................................
Unresolved Staff Comments .........................................................................................................................
Properties ......................................................................................................................................................
Legal Proceedings .........................................................................................................................................
Mine Safety Disclosures ................................................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ..................................................................................................................................................
Selected Financial Data .................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................
Quantitative and Qualitative Disclosures About Market Risk ......................................................................
Financial Statements and Supplementary Data .............................................................................................
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure .......................
Controls and Procedures................................................................................................................................
Other Information ..........................................................................................................................................
Directors, Executive Officers and Corporate Governance ............................................................................
Executive Compensation ...............................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......
Certain Relationships and Related Transactions, and Director Independence ..............................................
Principal Accountant Fees and Services .......................................................................................................
Exhibits and Financial Statement Schedules ................................................................................................
Page No.
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14
15
15
16
18
20
28
28
48
48
50
50
50
50
50
50
51
Forward-Looking Information
This Annual Report on Form 10-K (“Report”) contains various forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on management’s beliefs
and assumptions, as well as information currently available to management. When used in this document, the words “anticipate,”
“estimate,” “expect,” and similar expressions are intended to identify forward-looking statements. Although Nicholas Financial, Inc.,
including its subsidiaries (collectively the “Company”), believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks,
uncertainties and assumptions, including but not limited to the risk factors discussed herein under “Item 1A – Risk Factors.” Should
one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or expected. Among the key factors that may cause actual results to differ materially from
those projected in forward-looking statements include fluctuations in the economy, the degree and nature of competition, fluctuations
in interest rates, the availability of capital at acceptable rates and terms, demand for consumer financing in the markets served by the
Company, the Company’s products and services, increases in the default rates experienced on retail installment sales contracts
(“Contracts”), regulatory changes in the Company’s existing and future markets, and the Company’s ability to expand its business,
including its ability to identify and complete acquisitions and integrate the operations of acquired businesses, to recruit and retain
qualified employees, to expand into new markets and to maintain profit margins in the face of increased pricing competition. All
forward-looking statements included in this Report are based on information available to the Company as of the date of filing of this
Report, and the Company assumes no obligation to update any such forward-looking statement. Prospective investors should also
consult the risk factors described from time to time in the Company’s filings made with the US Securities and Exchange Commission
(“SEC”), including its reports on Forms 10-Q, 8-K and 10-K and annual reports to shareholders.
1
Item 1. Business
General
PART I
Nicholas Financial, Inc. (“Nicholas Financial-Canada”) is a Canadian holding company incorporated under the laws of British
Columbia in 1986. The business activities of Nicholas Financial-Canada are conducted through its two wholly-owned subsidiaries
formed pursuant to the laws of the State of Florida, Nicholas Financial, Inc. (“Nicholas Financial”) and Nicholas Data Services, Inc.
(“NDS”). Nicholas Financial is a specialized consumer finance company engaged primarily in acquiring and servicing Contracts for
purchases of new and used automobiles and light trucks. To a lesser extent, Nicholas Financial also makes direct loans and sells
consumer-finance related products. NDS is engaged in supporting and updating industry-specific computer application software for
small businesses located primarily in the Southeast United States. Nicholas Financial’s financing activities accounted for more than
99% of the Company’s consolidated revenues for each of the fiscal years ended March 31, 2012, 2011 and 2010. NDS’s activities
accounted for less than 1% of consolidated revenues during the same periods.
Nicholas Financial-Canada, Nicholas Financial and NDS are hereafter collectively referred to as the “Company”. All financial
information herein is designated in United States dollars.
The Company’s principal executive offices are located at 2454 McMullen Booth Road, Building C, Clearwater, Florida 33759, and its
telephone number is (727) 726-0763.
Available Information
The Company’s filings with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, definitive proxy
statements on Schedule 14A, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, are made available free of charge through the Investor Relations section of the Company’s
Internet website at http://www.nicholasfinancial.com as soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the SEC. Copies of any materials the Company files with the SEC can also be obtained free of charge
through the SEC’s website at http://www.sec.gov, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549, or by calling the SEC’s Office of Investor Education and Assistance at 1-800-732-0330.
Growth Strategy
The Company’s principal goals are to increase its profitability and its long-term shareholder value through greater penetration in its
current markets and controlled geographic expansion into new markets. The Company seeks to expand its automobile financing
program in fifteen states — Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan, Missouri, North Carolina,
Ohio, South Carolina, Tennessee, Virginia, Kansas — in which it currently operates by increasing the business generated at its
existing branch locations and by targeting certain geographic locations within these states where it believes there is a sufficient market
for its automobile financing program. The Company’s strategy is to monitor these markets and ultimately decide if and where it will
open additional branch locations. During fiscal 2012, the Company opened four new branches. Within the first quarter of fiscal 2013,
the Company will be opening three additional branches. The Company did not close any branches during the same period. The
Company will continue to evaluate any branch locations that do not meet its minimum profitability targets and may elect to close one
or more of these branches in the future. As of the date of this Report, the Company has no plans to close any branches within the fiscal
year ending March 31, 2013, although no assurances can be given that it will not do so. The Company also continues to analyze other
markets in states in which it does not currently operate for expansion opportunities. Although the Company has not made any bulk
purchases of Contracts in well over a decade, if the opportunity arises, the Company may consider possible acquisitions of portfolios
of seasoned Contracts from dealers in bulk transactions as a means of further penetrating its existing markets or expanding its presence
in targeted geographic locations. The Company cannot provide any assurances, however, that it will be able to further expand in either
its current markets or any targeted new markets.
The Company is currently licensed to provide direct consumer loans in Florida and North Carolina. In addition, the Company is
currently analyzing the direct loan market in Ohio for possible future expansion into such market. The Company does not have any
current plans to expand its strategy of soliciting current customers and expects total direct loans to remain approximately 2% of its
total portfolio.
2
Automobile Finance Business – Contracts
The Company is engaged in the business of providing financing programs, primarily on behalf of purchasers of new and used cars and
light trucks who meet the Company’s credit standards, but who do not meet the credit standards of traditional lenders, such as banks
and credit unions, because of the age of the vehicle being financed or the customer’s job instability or credit history. Unlike traditional
lenders, which look primarily to the credit history of the borrower in making lending decisions and typically finance new automobiles,
the Company is willing to purchase Contracts for purchases made by borrowers who do not have a good credit history and for older
model and high mileage automobiles. In making decisions regarding the purchase of a particular Contract the Company considers the
following factors related to the borrower: place and length of residence; current and prior job status; history in making installment
payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts
purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the
purchase price and the term of the Contract.
The Company’s automobile finance programs are currently conducted in fourteen states through a total of 60 branch offices,
consisting of nineteen in Florida, eight in Ohio, six in each of North Carolina and Georgia, three in each of Alabama, Kentucky and
Indiana, two in each of Tennessee, Michigan, Missouri, South Carolina and Virginia and one in each of Maryland, and Illinois. The
Company is developing markets in Kansas and plans to open its first branch location there in the first quarter of fiscal year ending
March 31, 2013. As of March 31, 2012 the Company had non-exclusive agreements with approximately 4,000 dealers, of which
approximately 1,700 are active, for the purchase of individual Contracts that meet the Company’s financing criteria. The Company
considers a dealer agreement to be active if the Company has purchased a Contract thereunder in the last six months. Each dealer
agreement requires the dealer to originate Contracts in accordance with the Company’s guidelines. Once a Contract is purchased by
the Company the dealer is no longer involved in the relationship between the Company and the borrower, other than through the
existence of limited representations and warranties of the dealer in favor of the Company.
A customer under a Contract typically makes a down payment, in the form of cash or trade-in, ranging from 5% to 35% of the sale
price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums for
extended service Contracts, accident and health insurance and/or credit life insurance, are generally financed over a period of 12 to 72
months. Accident and health insurance coverage enables the customer to make required payments under the Contract in the event the
borrower becomes unable to work because of illness or accident and credit life insurance pays the borrower’s obligations under the
Contract upon his or her death.
The Company purchases a Contract from an automobile dealer at a negotiated price that is less than the original principal amount
being financed (the discount) by the purchaser of the automobile. The amount of the discount depends upon factors such as the age
and value of the automobile and the creditworthiness of the customer. The Company will pay more (i.e., purchase the Contract at a
smaller discount from the original principal amount) for Contracts as the credit risk of the customer improves. In certain markets,
competition more significantly impacts the discount that the Company can charge. To date, the Contracts purchased by the Company
have been purchased at discounts that range from 1% to 15% of the original principal amount of each Contract. In addition to the
discount, the Company charges the dealer a processing fee of $75 per Contract purchased. As of March 31, 2012, the Company’s loan
portfolio consisted exclusively of Contracts purchased without recourse to the dealer. Although all of the Contracts in the Company’s
loan portfolio were acquired without recourse, each dealer remains potentially liable to the Company for breaches of certain
representations and warranties made by the dealer with respect to compliance with applicable federal and state laws and valid title to
the vehicle.
The Company’s policy is to only purchase a Contract after the dealer has provided the Company with the requisite proof that the
Company has a first priority lien on the financed vehicle (or the Company has, in fact, perfected such first priority lien), that the
customer has obtained the required collision insurance naming the Company as loss payee and that the Contract has been fully and
accurately completed and validly executed. Once the Company has received and approved all required documents, it pays the dealer
for the Contract and commences servicing the Contract.
The Company requires the owner of the vehicle to obtain and maintain collision insurance, naming the Company as the loss payee,
with a deductible of not more than $500. Both the Company and the dealers offer purchasers of vehicles certain other “add-on
products.” These products are offered by the dealer on behalf of the Company or on behalf of the dealership at the time of sale. They
consist of a roadside assistance plan, extended warranty protection, gap insurance, credit life insurance, credit accident and health
insurance. If the purchaser so desires, the cost of these products may be included in the amount financed under the Contract.
3
Contract Procurement
The Company currently purchases Contracts in the states listed in the table below. The Contracts purchased by the Company are
predominately for used vehicles; for the periods shown below, less than 1% were for new vehicles. The average model year
collateralizing the portfolio as of March 31, 2012 was a 2005 vehicle. The dollar amounts shown in the table below represent the
Company’s finance receivables, net of unearned interest on Contracts purchased:
State
Maximum
allowable
interest rate (1)
Fiscal year ended March 31,
2012
2011
2010
Alabama .................................................................
(2)
$ 6,783,484 $ 5,492,379 $
4,094,540
Florida .................................................................... 18-30% (3)
43,651,078 48,498,785
46,471,616
Georgia ................................................................... 18-30% (3)
16,614,136 16,122,285
13,439,117
Illinois ....................................................................
Indiana ....................................................................
Kansas ....................................................................
(2)
21%
(2)
3,397,116 901,154
—
9,476,794 9,402,834
6,731,647
524,647
—
—
Kentucky ................................................................ 18-25% (3)
8,548,743 9,817,729
8,238,952
Maryland ................................................................
Michigan ................................................................
Missouri ..................................................................
24%
25%
(2)
1,636,236 1,750,863
943,390
5,842,652 5,775,566
3,796,999
5,053,896 1,052,326
—
North Carolina ........................................................ 18-29% (3)
13,558,091 14,621,001
11,779,435
Ohio ........................................................................
25%
19,707,139 20,626,860
18,176,574
South Carolina ........................................................
Tennessee ...............................................................
Virginia ..................................................................
(2)
(2)
(2)
2,981,626 3,052,435
2,064,958
4,712,364 5,621,920
2,410,273
3,833,685 4,414,838
3,459,237
Total .......................................................................
$ 146,321,687 $ 147,150,975 $
121,606,738
(1) The maximum allowable interest rates by state are subject to change and are governed by the individual states the Company
conducts business in.
(2) None of these states currently imposes a maximum allowable interest rate with respect to the types and sizes of Contracts the
Company purchases. The maximum rate which the Company will typically charge any customer in each of these states is 30%
per annum.
(3) The maximum allowable interest rate in each of these states varies depending upon the model year of the vehicle being financed.
In addition, Georgia does not currently impose a maximum allowable interest rate with respect to Contracts over $5,000.
The following table presents selected information on Contracts purchased by the Company, net of unearned interest:
Fiscal year ended March 31,
Contracts
2012
2011
2010
$ 147,150,975 $
Purchases ................................................................... $ 146,321,687
23.82% 23.57%
Weighted APR ...........................................................
8.47% 8.78%
Average discount .......................................................
Weighted average term (months) ...............................
49
Average loan .............................................................. $ 9,873
Number of contracts ..................................................
14,820
49
$ 9,804 $
15,009
121,606,738
23.55%
9.11%
48
9,422
12,907
4
Direct Loans
The Company currently originates direct loans in Florida and North Carolina. Direct loans are loans originated directly between the
Company and the consumer. These loans are typically for amounts ranging from $1,000 to $9,000 and are generally secured by a lien
on an automobile, watercraft or other permissible tangible personal property. The average loan made to date by the Company had an
initial principal balance of approximately $3,000. The Company does not expect the average loan size to increase significantly within
the foreseeable future. The majority of direct loans are originated with current or former customers under the Company’s automobile
financing program. The typical direct loan represents a significantly better credit risk than our typical Contract due to the customer’s
historical payment history with the Company. The Company does not have a direct loan license in Alabama, Illinois, Indiana,
Kentucky, Maryland, Michigan, Missouri, Ohio, South Carolina, Tennessee, Kansas, or Virginia, and none is presently required in
Georgia (as long as the direct loan is greater than $3,000). The Company is currently not pursuing direct loans in Georgia. Typically,
the Company allows for a seasoning process to occur in a new market prior to determining whether to pursue a direct loan license
there. The Company is currently analyzing the direct loan market in Ohio and may pursue a direct loan license there. The Company
does not expect to pursue a direct loan license in any other state during the fiscal year ending March 31, 2013. The size of the loan and
maximum interest rate that can be charged vary from state to state. In deciding whether or not to make a loan, the Company considers
the individual’s credit history, job stability, income and impressions created during a personal interview with a Company loan officer.
Additionally, because most of the direct consumer loans made by the Company to date have been made to borrowers under Contracts
previously purchased by the Company, the payment history of the borrower under the Contract is a significant factor in making the
loan decision. The Company’s direct loan program was implemented in April 1995 and currently accounts for approximately 2% of
annual consolidated revenues for the Company. As of March 31, 2012, loans made by the Company pursuant to its direct loan
program constituted approximately 2% of the aggregate principal amount of the Company’s loan portfolio.
In connection with its direct loan program, the Company also offers health and accident insurance coverage and credit life insurance to
customers. Customers in approximately 75% of the 2,121 direct loan transactions outstanding as of March 31, 2012 had elected to
purchase insurance coverage offered by the Company. The cost of this insurance is included in the amount financed by the customer.
The following table presents selected information on direct loans originated by the Company, net of unearned interest:
Direct loan originations
2012
2011
2010
Fiscal year ended March 31,
$
Originations ....................................................................... $ 5,993,992
26.63% 26.52%
Weighted APR ...................................................................
Weighted average term (months) .......................................
25
Average loan ...................................................................... $ 2,961
Number of contracts ..........................................................
2,024
24
$ 2,856
1,654
$ 4,723,871
$
3,708,998
25.93%
26
2,705
1,371
Underwriting Guidelines
The Company’s typical customer has a credit history that fails to meet the lending standards of most banks and credit unions. Among
the credit problems experienced by the Company’s customers that resulted in a poor credit history are: unpaid revolving credit card
obligations; unpaid medical bills; unpaid student loans; prior bankruptcy; and evictions for nonpayment of rent. The Company
believes that its customer profile is similar to that of its direct competitors.
Prior to its approval of the purchase of a Contract, the Company is provided with a standardized credit application completed by the
consumer which contains information relating to the consumer’s background, employment, and credit history. The Company also
obtains credit reports from Equifax, Experian and/or TransUnion, which are independent credit reporting services. The Company
verifies the consumer’s employment history, income and residence. In most cases, consumers are interviewed by telephone by a
Company application processor. The Company also considers the customer’s prior payment history with the Company, if any, as well
as the collateral value of the vehicle being financed.
The Company has established internal buying guidelines to be used by its Branch Managers and internal underwriters when
purchasing Contracts. Any Contract that does not meet these guidelines must be approved by the senior management of the Company.
The Company currently has District Managers charged with managing the specific branches in a defined geographic area. In addition
to a variety of administrative duties, the District Managers are responsible for monitoring their assigned branches’ compliance with
the Company’s underwriting standards.
The Company uses essentially the same criteria in analyzing a direct loan as it does in analyzing the purchase of a Contract. Lending
decisions regarding direct loans are made based upon a review of the customer’s loan application, credit history, job stability, income,
in-person interviews with a Company loan officer and the value of the collateral offered by the borrower to secure the loan. To date,
5
since the majority of the Company’s direct loans have been made to individuals whose automobiles have been financed by the
Company, the customer’s payment history under his or her existing or past Contract is a significant factor in the lending decision.
After reviewing the information included in the Contract or direct loan application and taking the other factors into account, a
Company employee categorizes the customer using internally developed credit classifications of “1,” indicating higher
creditworthiness, through “6,” indicating lower creditworthiness. Contracts are financed for individuals who fall within all six
acceptable rating categories utilized, “1” through “6”. Usually a customer who falls within the two highest categories (i.e., “1” or “2”)
is purchasing a two to four-year old, low mileage used automobile from the inventory of a new car or franchise dealer, while a
customer in any of the three lowest categories (i.e., “4”, “5”, or “6”) is purchasing an older, high mileage automobile from an
independent used automobile dealer.
The Company utilizes its Loss Prevention and Recovery Department (the “LPR”) to perform on-site audits of branch compliance with
Company underwriting guidelines. LPR audits Company branches on a schedule that is variable depending on the size of the branch,
length of time a branch has been open, current tenure of the Branch Manager, previous branch audit score and current and historical
branch profitability. LPR reports directly to the Accounting and Administrative Management of the Company. The Company believes
that an independent review and audit of its branches that is not tied to the sales function of the Company is imperative in order to
assure the information obtained is impartial.
Monitoring and Enforcement of Contracts
The Company requires each customer under a Contract to obtain and maintain collision insurance covering damage to the vehicle.
Failure to maintain such insurance constitutes a default under the Contract, and the Company may, at its discretion, repossess the
vehicle. To reduce potential loss due to insurance lapse, the Company has the contractual right to force place its own collateral
protection insurance policy, which covers loss due to physical damage to a vehicle not covered by any insurance policy of the
customer.
The Company’s Management Information Services personnel maintain a number of reports to monitor compliance by customers with
their obligations under Contracts and direct loans made by the Company. These reports may be accessed on a real-time basis
throughout the Company by management personnel, including Branch Managers and staff, at computer terminals located in the main
office and each branch office. These reports include delinquency aging reports, customer promises reports, vehicle information
reports, purchase reports, dealer analysis reports, static pool reports, and repossession reports.
A delinquency report is an aging report that provides basic information regarding each account and indicates accounts that are past
due. The report includes information such as the account number, address of the customer, home and work phone numbers of the
customer, original term of the Contract, number of remaining payments, outstanding balance, due dates, date of last payment, number
of days past due, scheduled payment amount, amount of last payment, total past due, and special payment arrangements or
agreements.
Any account that is less than 120 days old is included on the delinquency report on the first day that the Contract is contractually past
due. Once an account becomes 30 days past due, repossession proceedings are implemented unless the customer provides the
Company with an acceptable explanation for the delinquency and displays a willingness and the ability to make the payment, and
commits to a plan to return the account to current status. When an account is 60 days past due, the Company ceases recognition of
income on the Contract and repossession proceedings are initiated. At 120 days delinquent, if the vehicle has not yet been repossessed,
the account is written off. Once a vehicle has been repossessed, the related loan balance no longer appears on the delinquency report.
Instead, the vehicle appears on the Company’s repossession report and is sold, either at auction or to an automobile dealer.
When an account becomes delinquent, the Company immediately contacts the customer to determine the reason for the delinquency
and to determine if appropriate arrangements for payment can be made. If payment arrangements acceptable to the Company can be
made, the information is entered in its database and is used to generate a “Promises Report,” which is utilized by the Company’s
collection staff for account follow up.
The Company prepares a repossession report that provides information regarding repossessed vehicles and aids the Company in
disposing of repossessed vehicles. In addition to information regarding the customer, this report provides information regarding the
date of repossession, date the vehicle was sold, number of days it was held in inventory prior to sale, year, make and model of the
vehicle, mileage, payoff amount on the Contract, NADA book value, Black Book value, suggested sale price, location of the vehicle,
original dealer and condition of the vehicle, as well as notes other information that may be helpful to the Company.
The Company also prepares a dealer analysis report that provides information regarding each dealer from which it purchases
Contracts. This report allows the Company to analyze the volume of business done with each dealer and the terms on which it has
purchased Contracts from such dealer.
6
The Company’s policy is to aggressively pursue legal remedies to collect deficiencies from customers. Oral requests for payment are
made beginning when an account becomes 11 days delinquent. When an account becomes 30 days delinquent and the customer has
not made payment arrangements acceptable to the Company or has failed to respond to the requests for payment, a repossession
request form is prepared by the responsible branch office employee for approval by the Branch Manager for the vicinity in which the
borrower lives. Once the repossession request has been approved, first by the Branch Manager and second by the applicable District
Manager, it must then be approved by the Director of Loss Recovery. The repossessor delivers the vehicle to a secure location
specified by the Company. The Company maintains relationships with several licensed repossession firms that repossess vehicles for
fees that range from $250 to $500 for each vehicle repossessed. As required by Alabama, Florida, Georgia, Illinois, Indiana,
Kentucky, Maryland, Michigan, Missouri, North Carolina, Ohio, South Carolina, Tennessee, Kansas and Virginia law, the customer is
notified by certified letter that the vehicle has been repossessed and what the customer needs to do in order to regain their vehicle.
The minimum requirement for return of the vehicle is payment of all past due amounts under the Contract and all expenses associated
with the repossession incurred by the Company. If satisfactory arrangements for return of the vehicle are not made within the statutory
period, the Company then sends title to the vehicle to the applicable state title transfer department, which then registers the vehicle in
the name of the Company. The Company then either sells the vehicle to a dealer or has it transported to an automobile auction for sale.
On average, approximately 30 days lapse between the time the Company takes possession of a vehicle and the time it is sold to a
dealer or at auction. When the Company determines that there is a reasonable likelihood of recovering part or all of any deficiency
against the customer under the Contract, it pursues legal remedies available to it, including lawsuits, judgment liens and wage
garnishments. Historically, the Company has recovered approximately 10-17% of deficiencies from such customers. Proceeds from
the disposition of the vehicles are not included in calculating the foregoing percentage range.
Marketing and Advertising
The Company’s Contract marketing efforts currently are directed exclusively toward automobile dealers. The Company attempts to
meet dealers’ needs by offering highly-responsive, cost-competitive and service-oriented financing programs. The Company relies on
its District and Branch Managers to solicit agreements for the purchase of Contracts with automobile dealers located within a 25-mile
radius of each branch office. The Branch Manager provides dealers with information regarding the Company and the general terms
upon which the Company is willing to purchase Contracts. The Company presently has no plans to implement any other forms of
advertising, such as radio or newspaper advertisements, for the purchase of Contracts
The Company solicits customers under its direct loan program primarily through direct mailings, followed by telephone calls, to
individuals who have a good credit history with the Company in connection with Contracts purchased by the Company.
Computerized Information System
The Company utilizes integrated computer systems developed by NDS to assist in responding to customer inquiries and to monitor the
performance of its Contract and direct loan portfolio and the performance of individual customers under Contracts. All Company
personnel are provided with real-time access to information from a single shared database. The Company has created specialized
programs to automate the tracking of Contracts and direct loans from inception. The Company’s computer network encompasses both
its corporate headquarters and its branch office locations. See “Monitoring and Enforcement of Contracts” above for a summary of the
different reports prepared by the Company.
Competition
The consumer finance industry is highly fragmented and highly competitive. There are numerous financial service companies that
provide consumer credit in the markets served by the Company, including banks, other consumer finance companies, and captive
finance companies owned by automobile manufacturers and retailers. Many of these companies have significantly greater resources
than the Company. The Company does not believe that increased competition for the purchase of Contracts will cause a material
reduction in the interest rate payable by an individual purchaser of an automobile for the foreseeable future. However, increased
competition for the purchase of Contracts will enable automobile dealers to shop for the best price, thereby giving rise to an erosion in
the discount from the initial principal amounts at which the Company would be willing to purchase Contracts.
The Company’s target market consists of persons who are generally unable to obtain traditional used car financing because of their
credit history or the vehicle’s mileage or age. The Company has been able to expand its automobile finance business in the non-prime
credit market by offering to purchase Contracts on terms that are competitive with those of other companies which purchase
automobile receivables in that market segment. Because of the daily contact that many of its employees have with automobile dealers
located throughout the market areas served by it, the Company is generally aware of the terms upon which its competitors are offering
to purchase Contracts. The Company’s policy is to modify its terms, if necessary, to remain competitive. However, the Company will
not sacrifice credit quality, its purchasing criteria or prudent business practices in order to meet the competition.
The Company’s ability to compete effectively with other companies, offering similar financing arrangements, depends upon
maintaining close business relationships with dealers of new and used vehicles. No single dealer out of the approximately 1,700
7
dealers that the Company currently has active Contractual relationships with accounted for over 1% of its business volume for any of
the fiscal years ended March 31, 2012, 2011 or 2010.
Regulation
The Company’s financing operations are subject to regulation, supervision and licensing under various federal, state and local statutes
and ordinances. Additionally, the procedures that the Company must follow in connection with the repossession of vehicles securing
Contracts are regulated by each of the states in which the Company does business. To date, the Company’s operations have been
conducted exclusively in the states of Alabama, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland, Michigan, Missouri,
North Carolina, Ohio, South Carolina, Tennessee and Virginia. Accordingly, the laws of such states, as well as applicable federal law,
govern the Company’s operations. Compliance with existing laws and regulations has not had a material adverse effect on the
Company’s operations to date. The Company’s management believes that the Company maintains all requisite licenses and permits
and is in material compliance with all applicable local, state and federal laws and regulations. The Company periodically reviews its
branch office practices in an effort to ensure such compliance. The following constitute certain of the existing federal, state and local
statutes and ordinances with which the Company must comply:
•
•
•
•
•
•
•
•
•
State consumer regulatory agency requirements. Pursuant to state regulations, on-site audits are conducted of each of the
Company’s branches located within Florida, Alabama, Illinois, Indiana, Michigan and Missouri to monitor compliance
with applicable regulations. These regulations include, but are not limited to: licensure requirements, requirements for
maintenance of proper records, payment of required fees, maximum interest rates that may be charged on loans to finance
used vehicles and proper disclosure to customers regarding financing terms. Pursuant to North Carolina law, the
Company’s direct loan activities in that state are subject to similar periodic on-site audits by the North Carolina Office of
the Commissioner of Banks.
State licensing requirements. The Company maintains a Sales Finance Company License with the Florida Department of
Banking and Finance, as well as consumer loan licenses in Florida and North Carolina. In addition, each of the dealers
that the Company does business with is required to maintain a Retail Installment Seller’s License with each state in which
it operates.
Fair Debt Collection Practices Act. The Fair Debt Collection Practices Act (“FDCPA”) and applicable state law
counterparts prohibit the Company from contacting customers during certain times and at certain places, from using
certain threatening practices and from making false implications when attempting to collect a debt.
Truth in Lending Act. The Truth in Lending Act (“TILA”) requires the Company and the dealers it does business with to
make certain disclosures to customers, including the terms of repayment, the total finance charge and the annual
percentage rate charged on each Contract or direct loan.
Equal Credit Opportunity Act. The Equal Credit Opportunity Act (“ECOA”) prohibits creditors from discriminating
against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated under
the ECOA, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose
credit applications are not approved of the reasons for the rejection.
Fair Credit Reporting Act. The Fair Credit Reporting Act (“FCRA”) requires the Company to provide certain information
to consumers whose credit applications are not approved on the basis of a report obtained from a consumer-reporting
agency.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (“GLBA”) requires the Company to maintain privacy with
respect to certain consumer data in its possession and to periodically communicate with consumers on privacy matters.
Soldiers’ and Sailors’ Civil Relief Act. The Soldiers’ and Sailors’ Civil Relief Act requires the Company to reduce the
interest rate charged on each loan to customers who have subsequently joined, enlisted, been inducted or called to active
military duty.
Electronic Funds Transfer Act. The Electronic Funds Transfer Act (“EFTA”) prohibits the Company from requiring its
customers to repay a loan or other credit by electronic funds transfer (“EFT”), except in limited situations which do not
apply to the Company. The Company is also required to provide certain documentation to its customers when an EFT is
initiated and to provide certain notifications to its customers with regard to preauthorized payments.
8
•
•
•
Telephone Consumer Protection Act. The Telephone Consumer Protection Act prohibits telephone solicitation calls to a
customer’s home before 8 a.m. or after 9 p.m. In addition, if the Company makes a telephone solicitation call to a
customer’s home, the representative making the call must provide his or her name, the Company’s name, and a telephone
number or address at which the Company’s representative may be contacted. The Telephone Consumer Protection Act
also requires that the Company maintain a record of any requests by customers not to receive future telephone
solicitations, which must be maintained for five years.
Bankruptcy. Federal bankruptcy and related state laws may interfere with or affect the Company’s ability to recover
collateral or enforce a deficiency judgment.
Dodd-Frank Wall Street Reform and Consumer Protection Act 0f 2010 (“Dodd-Frank Act”). Title X of the Dodd-Frank
Act created the Consumer Financial Protection Bureau (“CFPB”), which, effective as of July 21, 2011, has the authority to
issue and enforce regulations under the federal “enumerated consumer laws,” including (subject to certain statutory
limitations) FDCPA, TILA, ECOA, FCRA, GLBA and EFTA.
Employees
The Company’s management and various support functions are centralized at the Company’s Corporate Headquarters in Clearwater,
Florida. As of March 31, 2012 the Company employed a total of 297 persons, 3 of whom work for NDS and 294 of whom work for
Nicholas Financial. None of the Company’s employees are subject to a collective bargaining agreement, and the Company considers
its relations with its employees generally to be good.
Item 1A. Risk Factors
The following factors, as well as other factors not set forth below, may adversely affect the business, operations, financial
condition or results of operations of the Company (sometimes referred to in this section as “we” “us” or “our”).
We operate in a competitive market.
The non-prime consumer-finance industry is highly competitive. There are numerous financial service companies that provide
consumer credit in the markets served by us, including banks, credit unions, other consumer finance companies and captive finance
companies owned by automobile manufacturers and retailers. Many of these competitors have substantially greater financial resources
than us. In addition, our competitors often provide financing on terms more favorable to automobile purchasers or dealers than we
offer. Many of these competitors also have long-standing relationships with automobile dealerships and may offer dealerships or their
customers other forms of financing, including dealer floor-plan financing and leasing, which are not provided by us. Providers of non-
prime consumer financing have traditionally competed primarily on the basis of:
•
•
•
•
interest rates charged;
the quality of credit accepted;
the flexibility of loan terms offered; and
the quality of service provided.
Our ability to compete effectively with other companies offering similar financing arrangements depends on maintaining close
relationships with dealers of new and used vehicles. We may not be able to compete successfully in this market or against these
competitors.
We have focused on a segment of the market composed of consumers who typically do not meet the more stringent credit
requirements of traditional consumer financing sources and whose needs, as a result, have not been addressed consistently by such
financing sources. When new and/or existing providers of consumer financing undertake significantly greater efforts to penetrate our
targeted market segment, we may have to reduce our interest rates and fees in order to maintain our market share. Any reduction in
our interest rates or fees could have a material adverse impact on our profitability or financial condition.
Our profitability and future growth depend on our continued access to bank financing.
The profitability and growth of our business currently depend on our ability to access bank debt at competitive rates. We currently
depend on a $150.0 million line of credit facility with a financial institution to finance our purchases of Contracts and fund our direct
loans. This line of credit currently has a maturity date of November 30, 2013 and is secured by substantially all our assets. At March
31, 2012, we had approximately $112.0 million outstanding under the line of credit and approximately $38.0 million available for
additional borrowing.
The availability of our credit facility depends, in part, on factors outside of our control, including regulatory capital treatment for
unfunded bank lines of credit and the availability of bank loans in general. Therefore, we cannot guarantee that this credit facility will
continue to be available beyond the current maturity date on reasonable terms or at all. If we are unable to renew or replace our credit
9
facility or find alternative financing at reasonable rates, we may be forced to liquidate. We will continue to depend on the availability
of our line of credit, together with cash from operations, to finance our future operations.
The terms of our indebtedness impose significant restrictions on us.
Our existing outstanding indebtedness restricts our ability to, among other things:
•
•
•
sell or transfer assets;
incur additional debt;
repay other debt;
• make certain investments or acquisitions;
•
•
•
repurchase or redeem capital stock;
engage in mergers or consolidations; and
engage in certain transactions with subsidiaries and affiliates.
In addition, our line of credit facility requires us to comply with certain financial ratios and covenants and to satisfy specified financial
tests, including maintenance of asset quality and portfolio performance tests. The need to comply with such covenants and other
provisions could impact our ability to pay dividends to our shareholders. Moreover, our ability to continue to meet those financial
ratios and tests could be affected by events beyond our control. Failure to meet any of these covenants, financial ratios or financial
tests could result in an event of default under our line of credit facility. If an event of default occurs under this credit facility, our
lenders may take one or more of the following actions:
•
increase our borrowing costs;
•
•
•
restrict our ability to obtain additional borrowings under the facility;
accelerate all amounts outstanding under the facility; or
enforce their interest against collateral pledged under the facility.
If our lender accelerates our debt payments, our assets may not be sufficient to fully repay the debt.
We will require a significant amount of cash to service our indebtedness and meet our other liquidity needs.
Our ability to make payments on or to refinance our indebtedness and to fund our operations and planned capital expenditures depends
on our future operating performance. Our primary cash requirements include the funding of:
• Contract purchases and direct loans;
•
•
•
•
•
interest payments under our line of credit facility and other indebtedness;
capital expenditures for technology and facilities;
ongoing operating expenses;
planned expansions by opening additional branch offices; and
any required income tax payments.
In addition, because we expect to continue to require substantial amounts of cash for the foreseeable future, we may seek additional
debt or equity financing. The type, timing and terms of the financing we select will be dependent upon our cash needs, the availability
of other financing sources and the prevailing conditions in the financial markets. There is no assurance that any of these sources will
be available to us at any given time or that the terms on which these sources may be available will be favorable. Our inability to obtain
such additional financing on reasonable terms could adversely impact our ability to grow.
Our high level of indebtedness could have important consequences for our business. For example,
• we may be unable to satisfy our obligations under our outstanding indebtedness;
• we may find it more difficult to fund future working capital, capital expenditures, acquisitions, and general corporate
needs;
• we may have to dedicate a substantial portion of our cash resources to the payments on our outstanding indebtedness,
thereby reducing the funds available for operations and future business opportunities; and
• we may be more vulnerable to adverse general economic and industry conditions.
10
Our ability to make payments on, or to refinance, our indebtedness will depend on our future operating performance, including our
ability to access additional debt and equity financing, which, to a certain extent, is subject to economic, financial, competitive and
other factors beyond our control. If new debt is added to our current levels, the risks described above could intensify.
We may experience high delinquency rates in our loan portfolios, which could reduce our profitability.
Our profitability depends, to a material extent, on the performance of Contracts that we purchase. Historically, we have experienced
higher delinquency rates than traditional financial institutions because a large portion of our loans are to non-prime borrowers, who
are unable to obtain financing from traditional sources due to their credit history. Although we attempt to mitigate these high credit
risks with our underwriting standards and collection procedures, these standards and procedures may not offer adequate protection
against the risk of default, especially in periods of economic uncertainty and high unemployment such as have existed over much of
the past several years. In the event of a default, the collateral value of the financed vehicle usually does not cover the outstanding loan
balance and costs of recovery. Higher than anticipated delinquencies and defaults on our Contracts would reduce our profitability.
In addition, in the event we were to make any bulk purchases of seasoned Contracts, we may experience higher than normal
delinquency rates with respect to these loan portfolios due to our inability to apply our underwriting standards to each loan comprising
the acquired portfolios. We would similarly attempt to mitigate the high credit risks associated with these loans, although no
assurances can be given that we would be able to do so.
We depend upon our relationships with our dealers.
Our business depends in large part upon our ability to establish and maintain relationships with reputable dealers who originate the
Contracts we purchase. Although we believe we have been successful in developing and maintaining such relationships, such
relationships are not exclusive, and many of them are not longstanding. There can be no assurances that we will be successful in
maintaining such relationships or increasing the number of dealers with whom we do business, especially in light of higher than
normal dealership closures as a result of the recent economic downturn, or that our existing dealer base will continue to generate a
volume of Contracts comparable to the volume of such Contracts historically generated by such dealers.
Our success depends upon our ability to implement our business strategy.
Our financial position depends on management’s ability to execute our business strategy. Key factors involved in the execution of our
business strategy include achievement of the desired Contract purchase volume, the use of effective risk management techniques and
collection methods, continued investment in technology to support operating efficiency, and continued access to significant funding
and liquidity sources. Our failure or inability to execute any element of our business strategy could materially adversely affect our
business and financial condition.
Our business is highly dependent upon general economic conditions.
We are subject to changes in general economic conditions that are beyond our control. During periods of economic slowdown or high
unemployment, such as has existed for much of the past several years, delinquencies, defaults, repossessions and losses generally
increase, absent offsetting factors, such as decreased competition. These periods also may be accompanied by decreased consumer
demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral coverage on our
loans and increases the amount of a loss we would experience in the event of default. Because we focus on non-prime borrowers, the
actual rates of delinquencies, defaults, repossessions and losses on these loans are higher than those experienced in the general
automobile finance industry and could be more dramatically affected by a general economic downturn. In addition, during an
economic slowdown or recession, our servicing costs may increase without a corresponding increase in our servicing income. While
we seek to manage the higher risk inherent in loans made to non-prime borrowers through our underwriting criteria and collection
methods, no assurances can be given that these criteria or methods will afford adequate protection against these risks. Any sustained
period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could adversely affect our business
and financial condition.
Recent economic developments may adversely affect our business and financial condition.
Over the past several years, the United States has experienced a period of economic uncertainty and high unemployment that may
adversely affect our business and financial condition. High unemployment and a continued lack of available credit could result in
higher delinquencies and losses than we would otherwise experience.
Additionally, fluctuating gasoline prices, unstable real estate values, resets of adjustable rate mortgages and other factors have
adversely impacted consumer confidence and disposable income. These conditions have increased loss frequency, decreased consumer
demand for automobiles and could possibly weaken collateral values on certain types of vehicles. Because we focus predominately on
sub-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on Contracts are higher than those
experienced in the general automobile finance industry and have been materially affected by the recent economic downturn. If
economic and credit conditions do not continue to improve, our business and financial condition could be adversely affected.
11
The auction proceeds we receive from the sale of repossessed vehicles and other recoveries are subject to fluctuation due to
economic and other factors beyond our control.
If we repossess a vehicle securing a Contract, we typically have it transported to an automobile auction for sale. Auction proceeds
from the sale of repossessed vehicles and other recoveries are usually not sufficient to cover the outstanding balance of the Contract,
and the resulting deficiency is charged off. In addition, there is, on average, approximately a 30-day lapse between the time we
repossess a vehicle and the time it is sold by a dealer or at auction. The proceeds we receive from such sales depend upon various
factors, including the supply of, and demand for, used vehicles at the time of sale. Such supply and demand are dependent on many
factors. For example, the Consumer Assistance to Recycle and Save Act of 2009, which provided incentives to replace older vehicles
with new, fuel-efficient vehicles in the second half of 2009, resulted in a temporary reduction in the supply of used vehicles, thus
temporarily bolstering used automobile prices. At the same time, during periods of economic slowdown or recession, the demand for
used cars may soften, resulting in decreased auction proceeds to us from the sale of repossessed automobiles. Furthermore, depressed
wholesale prices for used automobiles may result from significant liquidations of rental or fleet inventories, and from increased
volume of trade-ins due to promotional financing programs offered by new vehicle manufacturers. Decreased auction proceeds to us
resulting from sales of used automobiles at depressed prices will result in losses and, in turn, reduced profitability.
An increase in market interest rates may reduce our profitability.
Our long-term profitability may be directly affected by the level of and fluctuations in interest rates. Sustained, significant increases in
interest rates may adversely affect our liquidity and profitability by reducing the interest rate spread between the rate of interest we
receive on our Contracts and interest rates that we pay under our outstanding line of credit facility. As interest rates increase, our gross
interest rate spread on new originations will generally decline since the rates charged on the Contracts originated or purchased from
dealers generally are limited by statutory maximums, restricting our opportunity to pass on increased interest costs. We monitor the
interest rate environment and previously had interest rate swap agreements relating to a portion of our outstanding debt. Each of these
agreements effectively converted a portion of our floating-rate debt to a fixed-rate, thus reducing the impact of interest rate changes on
our interest expense. During the fiscal year ending March 31, 2012, we had no interest rate swap agreements in place. On June 4,
2012, the Company entered into an interest rate swap transaction to convert a portion of the floating rate debt to a fixed rate, more
closely matching the interest rate characteristics of finance receivables. The transaction sets forth the terms of a five-year interest rate
swap in which the Company would pay a fixed rate of 1% and receives payments from the counterparty on the 1-month LIBOR rate.
The swap has an effective date of June 13, 2012 and a notional amount of $25 million. The changes in the fair value of the interest
rate swap (unrealized gains and losses) will be recorded in earnings. We will continue evaluating interest rate swap pricing and we
may or may not enter into additional interest rate swap agreements in the future.
Our growth depends upon our ability to retain and attract a sufficient number of qualified employees.
To a large extent, our growth strategy depends on the opening of new offices that focus primarily on purchasing Contracts and making
direct loans in markets we have not previously served. Future expansion of our office network depends, in part, upon our ability to
attract and retain qualified and experienced office managers and the ability of such managers to develop relationships with dealers that
serve those markets. We generally do not open a new office until we have located and hired a qualified and experienced individual to
manage the office. Typically, this individual will be familiar with local market conditions and have existing relationships with dealers
in the area to be served. Although we believe that we can attract and retain qualified and experienced personnel as we proceed with
planned expansion into new markets, no assurance can be given that we will be successful in doing so. Competition to hire personnel
possessing the skills and experience required by us could contribute to an increase in our employee turnover rate. High turnover or an
inability to attract and retain qualified personnel could have an adverse effect on our origination, delinquency, default and net loss
rates and, ultimately, our business and financial condition.
The loss of one of our key executives could have a material adverse effect on our business.
Our growth and development to date have been largely dependent upon the services of Peter L. Vosotas, our Chairman of the Board,
President and Chief Executive Officer, Ralph T. Finkenbrink, our Chief Financial Officer and Senior Vice President-Finance, and
Kevin Bates, our Vice President-Marketing. We do not maintain key-man life insurance policies on these executives. Although we
believe that we have sufficient additional experienced management personnel to accommodate the loss of any key executive, the loss
of services of one or more of these executives could have a material adverse effect on our business and financial condition.
12
We are subject to risks associated with litigation.
As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties,
based upon, among other things:
•
•
usury laws;
disclosure inaccuracies;
• wrongful repossession;
•
•
•
•
•
violations of bankruptcy stay provisions;
certificate of title disputes;
fraud;
breach of contract; and
discriminatory treatment of credit applicants.
Some litigation against us could take the form of class action complaints by consumers. As the assignee of Contracts originated by
dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The damages and
penalties claimed by consumers in these types of actions can be substantial. The relief requested by the plaintiffs varies but may
include requests for compensatory, statutory and punitive damages. No assurances can be given that we will not experience material
financial losses in the future as a result of litigation or other legal proceedings.
The Dodd-Frank Act authorizes the newly created CFPB to adopt rules that could potentially have a material adverse effect
on our operations and financial performance.
Title X of the Dodd-Frank Act established the CFPB, which became operational on July 21, 2011. Under the Dodd-Frank Act, the
CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products, such as Contracts and the
direct loans that we offer, including explicit supervisory authority to examine and require registration of installment lenders such as
ourselves. Included among the powers afforded to the CFPB is the authority to adopt rules describing specified acts and practices as
being “unfair,” “deceptive” or “abusive,” and hence unlawful. Although the Dodd-Frank Act expressly provides that the CFPB has no
authority to establish usury limits, some consumer advocacy groups have suggested that certain forms of alternative consumer finance
products, such as installment loans, should be a regulatory priority and it is possible that at some time in the future the CFPB could
propose and adopt rules making such lending or other products that we may offer materially less profitable or impractical. Further, the
CFPB may target specific features of loans by rulemaking that could cause us to cease offering certain products. Any such rules could
have a material adverse effect on our business, results of operation and financial condition. The CFPB could also adopt rules imposing
new and potentially burdensome requirements and limitations with respect to any of our current or future lines of business, which
could have a material adverse effect on our operations and financial performance.
In addition to the Dodd-Frank Act’s grant of regulatory powers to the CFPB, the Dodd-Frank Act gives the CFPB authority to pursue
administrative proceedings or litigation for violations of federal consumer financial laws. In these proceedings, the CFPB can obtain
cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief)
and monetary penalties ranging from $5,000 per day for minor violations of federal consumer financial laws (including the CFPB’s
own rules) to $25,000 per day for reckless violations and $1 million per day for knowing violations. If we are subject to such
administrative proceedings, litigation, orders or monetary penalties in the future, this could have a material adverse effect on our
operations and financial performance. Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations under
Title X, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions for the kind of cease and
desist orders available to the CFPB (but not for civil penalties). If the CFPB or one or more state officials believe we have violated the
foregoing laws, they could exercise their enforcement powers in ways that would have a material adverse effect on us.
We are subject to many laws and governmental regulations, and any material violations of or changes in these laws or
regulations could have a material adverse effect on our financial condition and business operations.
Our financing operations are subject to regulation, supervision and licensing under various federal, state and local statutes and
ordinances. Additionally, the procedures that we must follow in connection with the repossession of vehicles securing Contracts are
regulated by each of the states in which we do business. The various federal, state and local statutes, regulations, and ordinances
applicable to our business govern, among other things:
•
•
•
licensing requirements;
requirements for maintenance of proper records;
payment of required fees to certain states;
13
• maximum interest rates that may be charged on loans to finance new and used vehicles;
•
•
•
•
•
•
debt collection practices;
proper disclosure to customers regarding financing terms;
privacy regarding certain customer data;
interest rates on loans to customers;
telephone solicitation of direct loan customers; and
collection of debts from loan customers who have filed bankruptcy.
We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance
with all applicable local, state and federal regulations. Our failure, or failure by dealers who originate the Contracts we purchase, to
maintain all requisite licenses and permits, and to comply with other regulatory requirements, could result in consumers having rights
of rescission and other remedies that could have a material adverse effect on our financial condition. Furthermore, any changes in
applicable laws, rules and regulations, such as the passage of the Dodd-Frank Act and the creation of the CFPB, may make our
compliance therewith more difficult or expensive or otherwise adversely affect our business and financial condition.
Our Chief Executive Officer holds a significant percentage of our common stock and may take actions adverse to your
interests.
Peter L. Vosotas, our Chairman of the Board, President and Chief Executive Officer, owned approximately 14% of our common stock
as of June 1, 2012. As a result, he may be able to influence matters requiring shareholder approval, including the election and removal
of directors and approval of significant corporate transactions, such as mergers, consolidations and sales of assets. This concentration
of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation,
takeover or other business combination, which could cause the market price of our common stock to fall or prevent you from receiving
a premium in such transaction.
Our stock is lightly traded, which may limit your ability to resell your shares.
The average daily trading volume of our shares on the NASDAQ Global Select Market for the fiscal year ended March 31, 2012 was
approximately 31,660 shares. Thus, our common stock is thinly traded. Thinly traded stock can be more volatile than stock trading in
an active public market. Factors such as our financial results, the introduction of new products and services by us or our competitors,
and various factors affecting the consumer-finance industry generally may have a significant impact on the market price of our
common stock. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the
stocks of many companies, including ours, have experienced wide price fluctuations that have not necessarily been related to their
operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they
desire.
We may experience problems with our integrated computer systems or be unable to keep pace with developments in
technology.
We use various technologies in our business, including telecommunication, data processing, and integrated computer systems.
Technology changes rapidly. Our ability to compete successfully with other financing companies may depend on our ability to
efficiently and cost-effectively implement technological changes. Moreover, to keep pace with our competitors, we may be required to
invest in technological changes that do not necessarily improve our profitability.
We utilize integrated computer systems to respond to customer inquiries and to monitor the performance of our Contract and direct
loan portfolios and the performance of individual customers under our Contracts and direct loans. Problems with our systems’
operations could adversely impact our ability to monitor our portfolios or collect amounts due under our Contracts and direct loans,
which could have a material adverse effect on our financial condition and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company leases its Corporate Headquarters and branch office facilities. The Company’s Headquarters, located at 2454 McMullen
Booth Road, Building C, in Clearwater, Florida, consist of approximately 15,000 square feet of office space at an annual rate of
approximately $20.00 per square foot. The current lease relating to this space expires in March 2013.
14
Each of the Company’s 60 branch offices located in Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan,
Missouri, North Carolina, Ohio, South Carolina, Tennessee, and Virginia consists of approximately 1,200 square feet of office space.
These offices are located in office parks, shopping centers or strip malls and are occupied pursuant to leases with an initial term of one
to five years at annual rates ranging from approximately $10.00 to $35.00 per square foot. The Company believes that these facilities
and additional or alternate space available to it are adequate to meet its needs for the foreseeable future.
Item 3. Legal Proceedings
The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business,
none of which, if decided adversely to the Company, would, in the opinion of management, have a material adverse affect on the
Company’s financial condition or results of operations.
Item 4. Mine Safety Disclosures
Not Applicable.
15
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “NICK.”
The following table sets forth the high and low sales prices of the Company’s common stock for the fiscal years ended March 31,
2012 and 2011, respectively.
Fiscal year ended March 31, 2012
First Quarter ................................................................................................ $ 13.61 $ 11.40
Second Quarter ........................................................................................... $ 12.60 $ 9.26
Third Quarter .............................................................................................. $ 12.92 $ 9.08
Fourth Quarter ............................................................................................ $ 14.41 $ 12.17
High
Low
Fiscal year ended March 31, 2011
First Quarter ................................................................................................ $ 9.20 $ 7.40
Second Quarter ........................................................................................... $ 9.60 $ 7.90
Third Quarter .............................................................................................. $ 10.60 $ 8.54
Fourth Quarter ............................................................................................ $ 12.98 $ 10.01
High
Low
As of June 1, 2012, there were approximately 2,000 holders of record of the Company’s common stock.
The Company paid three quarterly cash dividends during the fiscal years ended March 31, 2012: a cash dividend of $0.10 per share of
Common Stock on September 20, 2011; a cash dividend of $0.10 per share of Common Stock on October 20, 2011; and a cash
dividend of $0.10 per share of Common Stock on March 20, 2012. Subsequent to the end of fiscal 2012, the Company’s Board of
Directors declared a quarterly cash dividend of $0.10 per share of Common Stock payable on June 6, 2012. Any payments of future
cash dividends and the amounts thereof will be dependent upon the Company’s earnings, financial measurements as described in its
current line of credit facility, and other factors deemed relevant by the Board of Directors.
There are no Canadian foreign exchange controls or laws that would affect the remittance of dividends or other payments to the
Company’s non-Canadian resident shareholders. There are no Canadian laws that restrict the export or import of capital, other than the
Investment Canada Act (Canada), which requires the notification or review of certain investments by non-Canadians to establish or
acquire control of a Canadian business. The Company is not a Canadian business as defined under the Investment Canada Act because
it has no place of business in Canada, has no individuals employed in Canada in connection with its business, and has no assets in
Canada used in carrying on its business.
Canada and the United States of America are signatories to the Canada-United States Tax Convention Act, 1984 (the “Tax Treaty”).
The Tax Treaty contains provisions governing the tax treatment of interest, dividends, gains and royalties paid to or received by a
person residing in the United States. The Tax Treaty also contains provisions to prevent the occurrence of double taxation, essentially
by permitting the taxpayer to claim a tax credit for taxes paid in the foreign jurisdiction.
Dividends paid to the Company from its U.S. subsidiaries’ current and accumulated earnings and profits will be subject to a U.S.
withholding tax of 5%. The gross dividends (i.e., before payment of the withholding tax) must be included in the Company’s net
income. However, under certain circumstances, the Company may be allowed to deduct the dividends in the calculation of its
Canadian taxable income. If the Company has no other foreign (i.e., non-Canadian) non-business income, no relief is available in that
case to recover the withholding taxes previously paid.
16
A 15% Canadian withholding tax applies to dividends paid by the Company to a U.S. shareholder that is an individual. The U.S.
shareholder must include the gross amount of the dividends in his net income to be taxed at the regular rates In general, a U.S.
shareholder can obtain a foreign tax credit for U.S. federal income tax purposes with respect to the Canadian withholding tax on such
dividends, but the amount of such credit is subject to a limitation that depends, in part, on the amount of the shareholder’s income and
losses from other sources. A U.S. shareholder that is an individual also can elect to claim a deduction (rather than a foreign tax credit)
for all non-U.S. income taxes paid by the shareholder during the particular year. U.S. shareholders are urged to consult their own tax
advisors regarding the U.S. federal income tax treatment of any Canadian withholding tax imposed on dividends from the Company.
Dividends paid to a corporate U.S. shareholder that owns less than 10% of the Company’s voting shares are also subject to a Canadian
withholding tax of 15%.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information, as of March 31, 2012, with respect to compensation plans under which equity
securities of the Company were authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
Plan Category
Equity Compensation Plans Approved by
Security Holders .................................
Equity Compensation Plans Not Approved
by Security Holders ............................
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted – Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(a)
(b)
(c)
501,880
$6.36
313,335
None
Not Applicable
None
TOTAL ..........................................
501,880
$6.36
313,335
17
Performance Graph
Set forth below is a graph comparing the cumulative total return on the Company’s Common shares for the five-year period ended
March 31, 2012, with that of an overall stock market (NASDAQ Composite) and the Company’s peer group index (Dow Jones US
General Financial Index). The stock performance graph assumes that the value of the investment in each of the Company’s Common
shares, the NASDAQ Composite Index and the Dow Jones US General Financial Index was $100 on April 1, 2007 and that all
dividends were reinvested.
The graph displayed below is presented in accordance with SEC requirements. Shareholders are cautioned against drawing any
conclusions from the data contained therein, as past results are not necessarily indicative of future performance. This graph in no way
reflects the Company’s forecast of future financial performance.
Total Return Performance
Nicholas Financial, Inc.
NASDAQ Composite
Dow Jones US General Financial Index
200
150
100
50
0
e
u
l
a
V
x
e
d
n
I
3/31/2007
3/31/2008
3/31/2009
3/31/2010
3/31/2011
3/31/2012
03/31/2007
03/31/2008
03/31/2009
03/31/2010
03/31/2011
03/31/2012
Nicholas Financial, Inc. ............................................ $
NASDAQ Composite ...............................................
Dow Jones US General Financial Index ...................
100.00 $
100.00
100.00
Item 6. Selected Financial Data
23.48 $
55.29 $
94.11
69.13
63.12
32.04
74.62 $
99.02
50.66
120.25 $ 132.97
127.66
114.84
53.35
52.52
The following tables present selected consolidated financial data of the Company as of and for the fiscal years ended March 31, 2012,
2011, 2010, 2009 and 2008. The selected consolidated financial data have been derived from our consolidated financial statements.
All historical share and per share amounts have been restated for all periods presented to reflect a 10% stock dividend paid on
December 7, 2009 to shareholders of record as of the close of business on November 20, 2009.
You should read the selected consolidated financial data below in conjunction with “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our audited consolidated financial statements and notes thereto that are
included elsewhere in this Report.
18
2012
2011
2010
2009
2008
Fiscal Year ended March 31,
Statement of Operations Data
Interest income on finance receivables ...... $ 68,122,532
Sales ......................................................
44,070
68,166,602
Interest expense .....................................
Provision for credit losses .....................
Salaries and employee benefits..............
Change in fair value of interest rate
swaps ................................................
Other expenses ......................................
4,891,854
5,319
17,582,967
$ 62,719,904
53,622
62,773,526
5,599,951
4,610,221
16,430,763
—
9,524,361
32,004,501
(495,136)
9,280,923
35,426,722
Operating income before income taxes .....
Income tax expense ...............................
36,162,101
13,931,809
27,346,804
10,541,620
Net income ............................................ $ 22,230,292
$ 16,805,184
Earnings per share – basic: .................... $ 1.89
$ 1.45
Weighted average shares
$
$
$
56,403,536
68,117
56,471,653
5,169,736
11,321,849
14,380,695
(1,034,869)
8,984,047
38,821,458
17,650,195
6,785,634
10,864,561
0.95
$
$
53,032,438
69,933
53,102,371
5,384,532
16,386,070
13,349,523
1,530,005
8,900,260
45,550,390
7,551,981
2,834,418
50,007,510
75,287
50,082,797
6,310,465
7,730,805
12,572,039
—
7,903,660
34,516,969
15,565,828
5,893,652
$
$
4,717,563
0.42
$
$
9,672,176
0.88
outstanding ............................
11,747,160
11,607,341
11,470,318
11,273,811
11,002,756
Earnings per share – diluted: ................. $ 1.85
$ 1.41
$
0.93
$
0.41
$
0.85
Weighted average shares
outstanding ............................
12,033,131
11,893,518
11,689,123
11,440,313
11,328,547
2012
2011
2010
2009
2008
As of and for the Fiscal Year ended March 31,
Balance Sheet Data
Total assets ............................................ $ 257,236,034
Finance receivables, net ........................
242,348,521
Line of credit .........................................
112,000,000
Shareholders’ equity ..............................
135,939,051
Operating Data
Return on average assets ....................... 8.87%
Return on average equity ....................... 17.70%
Gross portfolio yield (1) ........................ 24.96%
Pre-tax yield (1) ..................................... 13.32%
Total delinquencies over 30 days ............... 3.01%
Write-off to liquidation (1) .................... 5.66%
Net charge-off percentage (1) ................ 4.59%
Automobile Finance Data & Direct
Loan Origination
Contracts purchased/direct loans
$ 243,643,125
230,163,854
118,000,000
115,213,468
$ 214,136,073
202,439,754
107,274,971
97,437,283
$
$
197,782,175
186,694,369
102,030,195
85,017,713
189,837,825
179,043,344
99,937,198
78,576,439
7.34 %
15.81 %
24.99%
10.77%
2.21%
6.17%
4.65%
5.28 %
11.91 %
25.23 %
7.51 %
3.16 %
9.87 %
7.37 %
2.43%
5.77%
25.57%
4.50%
4.20%
12.39%
9.93%
5.33 %
13.04 %
26.18 %
8.22 %
3.45 %
9.08 %
8.24 %
originated ......................................... $ 152,315,679
$ 151,874,846
$
Average discount ................................... 8.47% 8.78%
Weighted average contractual rate (1) ... 23.93% 23.66%
Number of branch locations .................. 60
56
125,315,736
$
9.11 %
23.62 %
52
117,653,858
$
9.14%
24.17%
48
126,661,703
8.32 %
24.32 %
47
(1)
Discussion and Analysis of Financial Condition and Results of Operations—Overview.”
See the definitions set forth in the notes to the Portfolio Summary table on pages 20 and 21under “Item 7. Management’s
19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Nicholas Financial-Canada is a Canadian holding company incorporated under the laws of British Columbia in 1986. Nicholas
Financial-Canada conducts its business activities through two wholly-owned Florida corporations: Nicholas Financial, which
purchases and services Contracts, makes direct loans and sells consumer-finance related products; and NDS, which supports and
updates certain computer application software. Nicholas Financial accounted for more than 99% of the Company’s consolidated
revenue for each of the fiscal years ended March 31, 2012, 2011, and 2010. Nicholas Financial-Canada, Nicholas Financial and
Nicholas Data Services are collectively referred to herein as the “Company”.
The Company’s consolidated revenues increased for the fiscal year ended March 31, 2012 to $68.2 million as compared to $62.8 million
and $56.5 million for the fiscal years ended March 31, 2011 and 2010, respectively. The Company’s consolidated net income increased
for the fiscal year ended March 31, 2012 to $22.2 million as compared to $16.8 million and $10.9 million for the fiscal years ended
March 31, 2011 and 2010, respectively. The Company’s earnings were positively impacted by a decrease in the net charge-off percentage
to 4.59% for the fiscal year ended March 31, 2012 as compared to 4.65% for the fiscal year ended March 31, 2011. The Company
believes the decrease in the charge-off percentage was primarily attributable to the following factors: a temporary reduction in
competition, the increased market value of auctioned cars, the continued application of stricter underwriting guidelines, and the continued
allocation of additional resources focused on collections. The Consumer Assistance to Recycle and Save Act of 2009 (“CARS”)
established a voluntary vehicle trade-in and purchase program pursuant to which owners of vehicles were eligible to receive a credit of
either $3,500 or $4,500 in connection with the purchase of a new vehicle from a participating dealer, depending upon how the trade-in
and acquired vehicles fit within the program criteria, including the amount of improved fuel efficiency. The program reduced the supply
of used cars in the market, resulting in increases in the market value of used cars in subsequent years, especially for older used cars such
as those financed by Contracts held by the Company. The Company’s underwriting guidelines were changed in 2009 to increase the
minimum income required by any applicant before loan approval can even be contemplated. The Company also reduced the maximum
advance to any dealer, raised the minimum ENH beacon score, and reduced the maximum amount that can be financed.
During the latter part of fiscal year 2012 the Company began experiencing increased competition which has continued into the first
quarter of fiscal 2013. Historically, when competition has increased, the Company has experienced higher losses, decreased contract
origination and as a result reduced profits. While it is difficult to predict the level of competition long-term, the Company believes the
current competitive environment will be prevalent throughout fiscal 2013.
Portfolio Summary
Fiscal Year ended March 31,
2012
2011
2010
Average finance receivables, net of unearned interest (1) ........
$ 272,979,496
$ 250,962,519
Average indebtedness (2) .........................................................
$ 115,688,980
$ 113,833,641
Interest and fee income on finance receivables (3) ...................
Interest expense ........................................................................
$ 68,122,532
$ 62,719,904
$ 4,891,854
$ 5,599,951
Net interest and fee income on finance receivables ..................
$ 63,230,678
$ 57,119,953
$
$
$
$
$
223,547,537
106,985,830
56,403,536
5,169,736
51,223,800
23.62%
4.83%
25.23%
Weighted average contractual rate (4) ......................................
23.93% 23.66%
Average cost of borrowed funds (2) .........................................
4.23% 4.92%
Gross portfolio yield (5) ...........................................................
Interest expense as a percentage of average finance receivables,
net of unearned interest .........................................................
Provision for credit losses as a percentage of average finance
receivables, net of unearned interest ....................................
Net portfolio yield (5) ...............................................................
Marketing, salaries, employee benefits, depreciation and
administrative expenses as a percentage of average finance
receivables, net of unearned interest (6) ..............................
Pre-tax yield as a percentage of average finance receivables,
24.96% 24.99%
1.79% 2.23%
2.31%
0.00% 1.84%
23.17% 20.92%
5.06%
17.86%
9.85%
10.15%
10.35%
net of unearned interest (7) ..................................................
13.32% 10.77%
Write-off to liquidation (8) .......................................................
5.66% 6.17%
Net charge-off percentage (9) ...................................................
4.59% 4.65%
7.51%
9.87%
7.37%
20
(1) Average finance receivables, net of unearned interest, represents the average of gross finance receivables, less unearned interest
throughout the period.
(2) Average indebtedness represents the average outstanding borrowings under the Company's line of credit facility. Average cost
of borrowed funds represents interest expense as a percentage of average indebtedness.
Interest and fee income on finance receivables does not include revenue generated by NDS.
(3)
(4) Weighted average contractual rate represents the weighted average annual percentage rate (“APR”) of all Contracts purchased
and direct loans originated during the period.
(5) Gross portfolio yield represents interest and fee income on finance receivables as a percentage of average finance receivables,
net of unearned interest. Net portfolio yield represents interest and fee income on finance receivables minus (a) interest expense
and (b) the provision for credit losses as a percentage of average finance receivables, net of unearned interest.
(6) Administrative expenses included in this calculation are net of administrative expenses associated with NDS which
approximated $220,000, $216,000, and $213,000 during the fiscal years ended 2012, 2011 and 2010, respectively.
(7) Pre-tax yield represents net portfolio yield minus operating expenses as a percentage of average finance receivables, net of
unearned interest.
(8) Write-off to liquidation percentage is defined as net charge-offs divided by liquidation. Liquidation is defined as beginning
receivable balance plus current period purchases minus voids and refinances minus ending receivable balance.
(9) Net charge-off percentage represents net charge-offs divided by average finance receivables, net of unearned interest,
outstanding during the period.
Critical Accounting Policy
The Company’s critical accounting policy relates to the allowance for credit losses. It is based on management’s opinion of an amount
that is adequate to absorb losses in the existing portfolio. The allowance for credit losses is established through allocations of dealer
discounts and a provision for loss based on management’s evaluation of the risk inherent in the loan portfolio, the composition of the
portfolio, specific impaired loans and current economic conditions. Such evaluation considers, among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s
estimate of probable credit losses and other factors that warrant recognition in providing for an adequate credit loss allowance.
Because of the nature of the customers under the Company’s Contracts and its direct loan program, the Company considers the
establishment of adequate reserves for credit losses to be imperative. The Company segregates its Contracts into static pools for
purposes of establishing reserves for losses. All Contracts purchased by a branch during a fiscal quarter comprise a static pool. The
Company pools Contracts according to branch location because the branches purchase Contracts in different geographic markets. This
method of pooling by branch and quarter allows the Company to evaluate the different markets where the branches operate. The pools
also allow the Company to evaluate the different levels of customer income, stability and credit history, and the types of vehicles
purchased in each market. Each such static pool consists of the Contracts purchased by a branch office during a fiscal quarter.
Contracts are purchased from many different dealers and are all purchased on an individual Contract by Contract basis. Individual
Contract pricing is determined by the automobile dealerships and is generally the lesser of the applicable state maximum interest rate,
if any, or the maximum interest rate which the customer will accept. In certain markets, competitive forces will drive down Contract
rates from the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company only
buys Contracts on an individual basis and never purchases Contracts in batches, although the Company may consider portfolio
acquisitions as part of its growth strategy. See “Item 1. Business – Growth Strategy.”
The Company has detailed underwriting guidelines it utilizes to determine which Contracts to purchase. These guidelines are specific
and are designed to cause all of the Contracts that the Company purchases to have common risk characteristics. The Company utilizes
its District Managers to evaluate their respective branch locations for adherence to these underwriting guidelines. The Company also
utilizes an internal audit department to assure adherence to its underwriting guidelines. The Company utilizes the branch model, which
allows for Contract purchasing to be done on the branch level. Each Branch Manager may interpret the guidelines differently, and as a
result, the common risk characteristics tend to be the same on an individual branch level but not necessarily compared to another
branch.
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 discount negotiated by the Company is a function of the credit quality of the
customer, the wholesale value of the vehicle, and competition in any given market. The automotive dealer accepts these terms by
executing a dealer agreement with the Company. The entire amount of discount is related to credit quality and is considered to be part
of the allowance for credit losses. The Company utilizes a static pool approach to track portfolio performance. A static pool retains an
amount equal to 100% of the discount as an allowance for credit losses.
21
Subsequent to the purchase, if the reserve for credit losses is determined to be inadequate for a static pool which is not fully liquidated,
then an additional charge to income through the provision is used to reestablish adequate reserves. If a static pool is fully liquidated
and has any remaining reserves, the excess discounts are immediately recognized into income and the excess provision is immediately
reversed during the period. For static pools not fully liquidated that are determined to have excess discounts, such excess amounts are
accreted into income over the remaining life of the static pool. For static pools not fully liquidated that are deemed to have excess
reserves, such excess amounts are reversed against provision for credit losses during the period.
In analyzing a static pool, the Company considers the performance of prior static pools originated by the branch office, the
performance of prior Contracts purchased from the dealers whose Contracts are included in the current static pool, the credit rating of
the customers under the Contracts in the static pool, and current market and economic conditions. Each static pool is analyzed monthly
to determine if the loss reserves are adequate, and adjustments are made if they are determined to be necessary.
Fiscal 2012 Compared to Fiscal 2011
Interest and Fee Income on Finance Receivables
Interest income on finance receivables, predominantly finance charge income, increased 9% to $68.1 million in fiscal 2012 from $62.7
million in fiscal 2011. The average finance receivables, net of unearned interest, totaled $273.0 million for the fiscal year ended March
31, 2012, an increase of 9% from $251.0 million for the fiscal year ended March 31, 2011. The primary reason average finance
receivables, net of unearned interest, increased was the development of new markets in Missouri, South Carolina, Ohio, and Alabama.
The gross finance receivable balance increased 4% to $389.0 million at March 31, 2012 from $373.0 million at March 31, 2011. The
primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased to
24.96% for the fiscal year ended March 31, 2012 from 24.99% for the fiscal year ended March 31, 2011. The net portfolio yield
increased to 23.17% for the fiscal year ended March 31, 2012 from 20.92% for the fiscal year ended March 31, 2011. The gross
portfolio yield remained relatively flat primarily due to an unchanged weighted APR earned on finance receivables. The net portfolio
yield increased primarily due to the decrease in provisions for credit losses. The Company has experienced favorable variances
between projected write-offs and actual write-offs on certain pools which has resulted in an increase in expected future cash flows.
Accordingly, the amount of additional provision necessary to maintain an adequate allowance to absorb losses in the existing portfolio
was less than the provision in fiscal 2011. As a result, the provision for credit losses was less than write offs during the current
periods. More specifically, during the 4th quarter of fiscal 2012 actual losses were considerably lower than expected along with
auction prices of repossessed vehicles at historically high levels.
Marketing, Salaries, Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries, employee benefits, depreciation, and administrative expenses increased to $27.1 million for the fiscal year ended
March 31, 2012 from $25.7 million for the fiscal year ended March 31, 2011. This increase of 5% was primarily attributable to
additional staffing at existing branches. The Company opened additional branches and increased average headcount to 293 for the
fiscal year ended March 31, 2012 from 276 for the fiscal year ended March 31, 2011. Marketing, salaries, employee benefits,
depreciation, and administrative expenses as a percentage of average finance receivables, net of unearned interest, decreased to 9.85%
for the fiscal year ended March 31, 2012 from 10.15% for the fiscal year ended March 31, 2011.
Interest Expense
Interest expense decreased to $4.9 million for the fiscal year ended March 31, 2012 as compared to $5.6 million for the fiscal year
ended March 31, 2011. The following table summarizes the Company’s average cost of borrowed funds for the fiscal years ended
March 31:
Variable interest under the line of credit facility .................................................
Settlements under interest rate swap agreements ................................................
Credit spread under the line of credit facility ......................................................
0.48%
0.00%
3.75%
0.53%
0.70%
3.69%
Average cost of borrowed funds .........................................................................
4.23%
4.92%
2012
2011
The primary reason that the Company’s average cost of funds decreased for the fiscal year ended March 31, 2012 as compared to the
preceding fiscal year was the absence of costs associated with settlements under interest rate swap agreements during, such period,
which costs were incurred during fiscal year ended March 31, 2011.
On January 12, 2010, the Company executed a new line of credit facility, or Line. Under the new Line, the Company's credit facility
pricing changed from 162.5 basis points above 30-day LIBOR to 300 basis points above 30-day LIBOR, with a 1% floor on LIBOR.
The average cost of borrowings in future periods will continue to be impacted by such pricing increases. Effective September 1, 2011,
the size of the Line was increased to $150.0 million from $140.0 million and the maturity date was extended to November 30, 2013.
22
For a further discussion regarding the Company’s line of credit, see “— Liquidity and Capital Resources” below and note 5 (“Line of
Credit”) to our audited consolidated financial statements included elsewhere in this Report.
The weighted average notional amount of interest rate swaps was $23.3 million at a weighted average fixed rate of 3.80% during the
fiscal year ended March 31, 2011. For a further discussion regarding the effect of our interest rate swap agreements, see note 6
(“Interest Rate Swap Agreements”) to our audited consolidated financial statements included elsewhere in this Report.
Analysis of Credit Losses
As of March 31, 2012, the Company had 1,249 active static pools. The average pool upon inception consisted of 65 Contracts with
aggregate finance receivables, net of unearned interest, of approximately $640,000.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts for the fiscal years ended
March 31:
2012
2011
Balance at beginning of year ....................................................... $ 35,895,449
Discounts acquired on new volume .............................................
12,415,896
Current year provision .................................................................
(176,745)
Losses absorbed ..........................................................................
(14,971,422)
Recoveries ...................................................................................
2,405,750
Discounts accreted ......................................................................
(73,244)
$ 30,408,578
12,919,492
4,484,284
(14,036,888)
2,255,683
(135,700)
Balance at end of year ................................................................. $ 35,495,684
$ 35,895,449
The following table sets forth a reconciliation of the changes in the allowance for credit losses on direct loans for the fiscal years
ended March 31:
Balance at beginning of year .................................................................. $ 378,418
Current year provision ............................................................................
182,062
Losses absorbed .....................................................................................
(93,041)
Recoveries ..............................................................................................
24,745
$ 382,869
125,937
(173,970)
43,582
Balance at end of year ............................................................................ $ 492,184
$ 378,418
2012
2011
The average dealer discount associated with new volume for the fiscal years ended March 31, 2012 and 2011 was 8.47% and 8.78%,
respectively.
The provision for credit losses decreased to $5,000 for the fiscal year ended March 31, 2012 from $4.6 million for the fiscal year
ended March 31, 2011, largely due to the fact that net charge offs during fiscal 2012 were less than the expected charge-offs
previously contemplated in the allowance for loan losses. Accordingly, the amount of additional provision necessary to maintain an
adequate allowance to absorb losses in the existing portfolio was less than the provision for prior periods.
The Company’s losses as a percentage of liquidation decreased to 5.66% for the fiscal year ended March 31, 2012 as compared to
6.17% for the fiscal year ended March 31, 2011. The Company experienced improvements in the quality of its Contracts in fiscal 2012
as compared to fiscal 2011 due to an increase in auction prices, and an increased focus on collections. Increased auction proceeds from
repossessed vehicles reduced the amount of the write-off which, in turn, lowered the write-off to liquidation percentage. During the fiscal
years ended March 31, 2012, 2011, and 2010, auction proceeds from the sale of repossessed vehicles averaged approximately 57%, 52%,
and 45%, respectively, of the related principal balance.
Recoveries as a percentage of charge-offs were approximately 16.80% and 17.90% for the fiscal years ended March 31, 2012 and
2011, respectively. Historically, recoveries as a percentage of charge-offs have fluctuated from period to period, and the Company
does not attribute this decrease to any particular change in operational strategy or economic event.
The delinquency percentage for Contracts more than thirty days past due as of March 31, 2012 increased to 3.01% from 2.21% as of
March 31, 2011. The delinquency percentage for direct loans more than thirty days past due as of March 31, 2012 decreased to 1.09%
from 1.13% as of March 31, 2011. The delinquency percentage increases reflect portfolio weakness that generally manifests itself in
23
increased future losses. The Company utilizes a static pool approach to analyzing portfolio performance and looks at specific static
pool performance and recent trends as leading indicators of the future performance of its portfolio.
The Company considers the following factors to assist in determining the appropriate loss reserve levels: unemployment rates;
competition; the number of bankruptcy filings; the results of internal branch audits; consumer sentiment; consumer spending;
economic growth (i.e., changes in GDP); the condition of the housing sector; and other leading economic indicators. The Company
continues to evaluate reserve levels on a pool-by-pool basis during each reporting period. While unemployment rates have stabilized,
somewhat, they remain elevated, which will make it difficult for additional improvement in loss rates. The longer term outlook for
portfolio performance will depend on overall economic conditions, the unemployment rate, the rationale or irrational behavior of the
Company’s competitors, and the Company’s ability to monitor, manage and implement its underwriting philosophy in additional
geographic areas as it strives to continue its expansion.
Income Taxes
The provision for income taxes increased to approximately $13.9 million in fiscal year 2012 from approximately $10.5 million in
fiscal year 2011 primarily as a result of higher pretax income. The Company’s effective tax rate decreased to 38.53% in fiscal 2012
from 38.54% in fiscal 2011. The primary reason for this increase was an increase in the amount of taxable income subject to higher
graduated federal income tax rates.
Fiscal 2011 Compared to Fiscal 2010
Interest and Fee Income on Finance Receivables
Interest income on finance receivables, predominantly finance charge income, increased 11% to $62.7 million in fiscal 2011 from
$56.4 million in fiscal 2010. The average finance receivables, net of unearned interest, totaled $251.0 million for the fiscal year ended
March 31, 2011, an increase of 12% from $223.5 million for the fiscal year ended March 31, 2010. The primary reason average
finance receivables, net of unearned interest increased was the increase in the receivable base of several existing branches and the
development of new markets in Georgia, Indiana, Illinois and Missouri. The gross finance receivable balance increased 15% to $373.0
million at March 31, 2011 from $325.4 million at March 31, 2010. The primary reason interest income increased was the increase in
the outstanding loan portfolio. The gross portfolio yield decreased to 24.99% for the fiscal year ended March 31, 2011 from 25.23%
for the fiscal year ended March 31, 2010. The net portfolio yield increased to 20.92% for the fiscal year ended March 31, 2011 from
17.86% for the fiscal year ended March 31, 2010. The gross portfolio yield decreased due to a lower weighted APR on contracts
purchased during fiscal year 2011. The net portfolio yield increased primarily due to the fiscal year over fiscal year decrease in
provisions for credit losses.
Marketing, Salaries, Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries, employee benefits, depreciation, and administrative expenses increased to $25.7 million for the fiscal year ended
March 31, 2011 from $23.3 million for the fiscal year ended March 31, 2010. This increase of 10% was primarily attributable to
additional staffing at existing branches. Marketing, salaries, employee benefits, depreciation, and administrative expenses as a
percentage of average finance receivables, net of unearned interest, decreased to 10.15% for the fiscal year ended March 31, 2011
from 10.35% for the fiscal year ended March 31, 2010.
Interest Expense
Interest expense increased to $5.6 million for the fiscal year ended March 31, 2011 as compared to $5.2 million for the fiscal year
ended March 31, 2010. The following table summarizes the Company’s average cost of borrowed funds for the fiscal years ended
March 31:
Variable interest under the line of credit facility .................................................
Settlements under interest rate swap agreements ................................................
Credit spread under the line of credit facility ......................................................
0.53%
0.70%
3.69%
0.41%
2.32%
2.10%
Average cost of borrowed funds .........................................................................
4.92%
4.83%
2011
2010
The primary reason that the Company’s average cost of funds increased was an increase in pricing under its line of credit facility,
mainly offset by the effects of the Company’s interest rate swap agreements.
On January 12, 2010, the Company executed a new Line. Under the new Line, the Company's credit facility pricing changed from
162.5 basis points above 30-day LIBOR to 300 basis points above 30-day LIBOR, with a 1% floor on LIBOR. The average cost of
borrowings in future periods will continue to be impacted by such pricing increases. For a further discussion regarding the Company’s
24
line of credit, see “— Liquidity and Capital Resources” below and note 5 (“Line of Credit”) to our audited consolidated financial
statements included elsewhere in this Report.
The weighted average notional amount of interest rate swaps was $23.3 million at a weighted average fixed rate of 3.80% during the
fiscal year ended March 31, 2011 as compared to $67.8 million at 3.95% for the fiscal year ended March 31, 2010. For a further
discussion regarding the effect of our interest rate swap agreements, see note 6 (“Interest Rate Swap Agreements”) to our audited
consolidated financial statements included elsewhere in this Report.
Analysis of Credit Losses
As of March 31, 2011, the Company had 1,147 active static pools. The average pool upon inception consisted of 63 Contracts with
aggregate finance receivables, net of unearned interest, of approximately $610,000.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts for the fiscal years ended
March 31:
2011
2010
Balance at beginning of year ....................................................... $ 30,408,578
Discounts acquired on new volume .............................................
12,919,492
Current year provision .................................................................
4,484,284
Losses absorbed ..........................................................................
(14,036,888)
Recoveries ...................................................................................
2,255,683
Discounts accreted ......................................................................
(135,700)
$
24,926,076
11,087,231
11,189,432
(18,404,659)
1,962,496
(351,998)
Balance at end of year ................................................................. $ 35,895,449
$
30,408,578
The following table sets forth a reconciliation of the changes in the allowance for credit losses on direct loans for the fiscal years
ended March 31:
Balance at beginning of year .................................................................. $ 382,869
Current year provision ............................................................................
125,937
Losses absorbed .....................................................................................
(173,970)
Recoveries ..............................................................................................
43,582
$
513,067
132,417
(324,521)
61,906
Balance at end of year ............................................................................ $ 378,418
$
382,869
2011
2010
The average dealer discount associated with new volume for the fiscal years ended March 31, 2011 and 2010 was 8.78% and 9.11%,
respectively.
The provision for credit losses decreased to $4.6 million for the fiscal year ended March 31, 2011 from $11.3 million for the fiscal
year ended March 31, 2010, largely due to a decrease in the net charge-off rate to 4.65% for the fiscal year ended March 31, 2011 as
compared to 7.37% for the fiscal year ended March 31, 2010.
The Company’s losses as a percentage of liquidation decreased to 6.17% for the fiscal year ended March 31, 2011 as compared to
9.87% for the fiscal year ended March 31, 2010. The Company experienced improvements in the quality of its Contracts due to an
increase in auction prices, reduced competition, and an increased focus on collections. Increased auction proceeds from repossessed
vehicles reduce the amount of the write-off, which, in turn, lowered the write-off to liquidation percentage. During the fiscal years ended
March 31, 2011, 2010, and 2009, auction proceeds from the sale of repossessed vehicles averaged approximately 52%, 45%, and 40%,
respectively, of the related principal balance.
Recoveries as a percentage of charge-offs were approximately 17.90% and 12.02% for the fiscal years ended March 31, 2011 and
2010, respectively. Historically, recoveries as a percentage of charge-offs have fluctuated from period to period, and the Company
does not attribute this increase to any particular change in operational strategy or economic event.
The delinquency percentage for Contracts more than thirty days past due as of March 31, 2011 decreased to 2.21% from 3.16% as of
March 31, 2010. The delinquency percentage for direct loans more than thirty days past due as of March 31, 2011 decreased to 1.13%
from 3.06% as of March 31, 2010. The delinquency percentage decreases were attributable to the continued allocation of additional
resources focused on collections, and the continued application of stricter underwriting guidelines. The Company utilizes a static pool
25
approach to analyzing portfolio performance and looks at specific static pool performance and recent trends as leading indicators of
the future performance of its portfolio.
The Company considers the following factors to assist in determining the appropriate loss reserve levels: unemployment rates;
competition; the number of bankruptcy filings; the results of internal branch audits; consumer sentiment; consumer spending;
economic growth (i.e., changes in GDP); the condition of the housing sector; and other leading economic indicators. The Company
continues to evaluate reserve levels on a pool-by-pool basis during each reporting period. While unemployment rates have stabilized,
they remain elevated, which will make it difficult for additional improvement in loss rates. The longer term outlook for portfolio
performance will depend on overall economic conditions, the unemployment rate, the rationale or irrational behavior of the
Company’s competitors, and the Company’s ability to monitor, manage and implement its underwriting philosophy in additional
geographic areas as it strives to continue its expansion.
Income Taxes
The provision for income taxes increased to approximately $10.5 million in fiscal year 2011 from approximately $6.8 million in fiscal
year 2010 primarily as a result of higher pretax income. The Company’s effective tax rate increased to 38.54% in fiscal 2011 from
38.45% in fiscal 2010. The primary reason for this increase was an increase in the amount of taxable income subject to higher
graduated federal income tax rates.
26
Liquidity and Capital Resources
The Company’s cash flows are summarized as follows:
Fiscal Year ended March 31,
2012
2011
2010
Cash provided by (used in):
Operations ........................................................... $ 21,874,879
Investing activities -
(primarily purchases of Contracts) ......................
Financing activities .............................................
(12,756,214)
(8,333,151)
$ 21,357,624
$
21,325,918
(32,670,442)
11,796,464
(27,277,523 )
5,752,924
Net (decrease) increase in cash ..................................... $ 785,514
$ 483,646
$
(198,681 )
The Company’s primary use of working capital during the fiscal year ended March 31, 2012 was the funding of purchases of
Contracts which purchases are financed substantially through borrowings under the Company’s Line. On September 1, 2011, the
Company increased the size of the Line and extended the maturity date to November 30, 2013. The Line is secured by all of the assets
of the Company. The Company may borrow up to $150.0 million under the Line. Borrowings under the Line may be made under
various LIBOR pricing options (but typically 30-day LIBOR) plus 300 basis points with a 1% floor on LIBOR. As of March 31, 2012,
the amount outstanding under the Line was approximately $112.0 million and the amount available under the Line was approximately
$38.0 million.
The Company will continue to depend on the availability of the Line, together with cash from operations, to finance future operations.
Amounts outstanding under the Line decreased by $6.0 million as of March 31, 2012 as compared to March 31, 2011 and increased
by approximately $10.7 million as of March 31, 2011 as compared to March 31, 2010. The decrease in borrowings under the Line as
of the end of fiscal 2012 resulted primarily from the fact that cash received from operations exceeded cash needed to fund new
Contracts. The amount of debt the Company incurs from time to time under these financing mechanisms depends on the Company’s
need for cash and ability to borrow under the terms of the Line. The Company believes that borrowings available under the Line as
well as cash flow from operations will be sufficient to meet its short-term funding needs.
The Line requires compliance with certain debt covenants including financial ratios, asset quality and other performance tests. The
Company is currently in compliance with all of its debt covenants but, during the current economic slowdown, a breach of one or
more of these covenants could occur prior to the maturity date of the Line, which is November 30, 2013. The Company’s consortium
of lenders could place the Company in default if certain covenants were breached and take one or more of the following actions:
increase the Company’s borrowing costs; restrict the Company’s ability to obtain additional borrowings under the Line; accelerate all
amounts outstanding under the Line; or enforce its interests against collateral securing the Line. Although the Company believes that
its lenders would continue to allow it to operate in the event of a condition of default, no assurances can be given in this regard.
During the fiscal year ended March 31, 2012, three quarterly dividends were declared and paid. On August 30, 2011, the Company's
Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock payable on September 20, 2011. On
October 27, 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock payable
on December 20, 2011. On January 31, 2012, the Company's Board of Directors declared a quarterly cash dividend of $0.10 per share
of common stock payable on March 20, 2012. Subsequent to the end of fiscal 2012, the Board of Directors declared a quarterly cash
dividend of $0.10 per share of common stock payable on June 6, 2012. The Company intends to continue to pay quarterly cash
dividends for the foreseeable future, provided its future earnings meet expectations. Any payment of future cash dividends and the
amounts thereof will be dependent upon the Company's earnings, financial and other covenants under the Line, and other factors
deemed relevant by the Company's Board of Directors.
Impact of Inflation
The Company is affected by inflation primarily through increased operating costs and expenses including increases in interest rates.
Inflationary pressures on operating costs and expenses historically have been largely offset by the Company’s continued emphasis on
stringent operating and cost controls, although no assurances can be given regarding the Company's ability to offset the effects of
inflation in the future.
27
Contractual Obligations
The following table summarizes the Company’s material obligations as of March 31, 2012.
Payments Due by Period
Total
Less than
1 year
1 to 3
years
3 to 5
years
More than
5 years
Operating leases ............................................................. $
Line of credit1 ................................................................
Interest on line of credit1 ...............................................
3,154,144 $ 1,701,149 $
112,000,000
— 112,000,000
7,896,000 4,737,600 3,158,400
1,401,725 $ 51,270 $
—
—
Total ............................................................................... $ 123,050,144 $ 6,438,749 $ 116,560,125 $ 51,270 $
—
—
—
—
The Company's current Line matures on November 30, 2013. Interest on outstanding borrowings under the Line as of March
1
31, 2012 is based on an effective interest rate of 4.23%. The effective interest rate used in the above table does not contemplate the
possibility of entering into interest rate swap agreements in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Company’s operations result primarily from changes in interest rates. The Company does not engage in
speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes.
Interest Rate Risk
Management seeks to minimize the Company's cost of borrowing and may do so through an appropriate mix of fixed and floating rate
debt. Derivative financial instruments, such as interest rate swap agreements, historically were used, and may be used again in the
future, for the purpose of managing fluctuating interest rate exposures that exist from ongoing business operations. The Company has
not used, and will not use, interest rate swaps for speculative purposes. A hypothetical 1% change in the interest rate applicable to the
borrowings outstanding at fiscal year end 2012 would result in an increase or decrease in interest expense of $1,110,000 per year
before income taxes, assuming the same level of borrowings.
Item 8. Financial Statements and Supplementary Data
The following financial statements are filed as part of this Report (see pages 29-47)
Report of Independent Registered Public Accounting Firm ...........................................................................................
29
Audited Consolidated Financial Statements
Consolidated Balance Sheets ..........................................................................................................................................
Consolidated Statements of Income ...............................................................................................................................
Consolidated Statements of Comprehensive Income .....................................................................................................
Consolidated Statements of Shareholders’ Equity .........................................................................................................
Consolidated Statements of Cash Flows ........................................................................................................................
Notes to Consolidated Financial Statements ..................................................................................................................
30
31
32
33
34
35
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Nicholas Financial, Inc.
We have audited the accompanying consolidated balance sheets of Nicholas Financial, Inc. and subsidiaries (the “Company”) as of
March 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash
flows for each of the years in the three-year period ended March 31, 2012. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of March 31, 2012 and 2011 and the results of its operations and its cash flows for each of the years in the three-year
period ended March 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of March 31, 2012, based on criteria established in the Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June
14, 2012 expressed an unqualified opinion.
/s/ Dixon Hughes Goodman LLP
Atlanta, Georgia
June 14, 2012
29
Nicholas Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31,
2012
2011
Assets
Cash .................................................................................................................................................. $ 2,803,054
Finance receivables, net ....................................................................................................................
242,348,521
Assets held for resale ........................................................................................................................
1,373,001
Prepaid expenses and other assets ....................................................................................................
751,040
Income taxes receivable ........................................................................................................... ........
497,535
Property and equipment, net .............................................................................................................
758,784
Deferred income taxes ......................................................................................................................
8,704,099
$ 2,017,540
230,163,854
1,055,140
680,615
-
771,311
8,954,665
Total assets ....................................................................................................................................... $ 257,236,034
$ 243,643,125
Liabilities and shareholders’ equity
Line of credit .................................................................................................................................... $ 112,000,000
Drafts payable ...................................................................................................................................
1,602,079
Accounts payable and accrued expenses ..........................................................................................
6,612,429
Income taxes payable........................................................................................................................
-
Deferred revenues .............................................................................................................................
1,082,475
$ 118,000,000
1,878,609
7,209,387
233,754
1,107,907
Total liabilities ..................................................................................................................................
121,296,983
128,429,657
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par: 5,000,000 shares authorized; none issued .........................................
Common stock, no par: 50,000,000 shares authorized; 11,960,975 and 11,806,660 shares
issued, respectively .............................................................................................................
Retained earnings ....................................................................................................................
-
-
28,426,043
107,513,008
26,337,731
88,875,737
Total shareholders’ equity ................................................................................................................
135,939,051
115,213,468
Total liabilities and shareholders’ equity .......................................................................................... $ 257,236,034
$ 243,643,125
See accompanying notes.
30
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Income
Fiscal Year ended March 31,
2012
2011
2010
Revenue:
Interest and fee income on finance receivables ................................................... $ 68,122,532 $ 62,719,904 $ 56,403,536
68,117
Sales ....................................................................................................................
53,622
44,070
68,166,602
62,773,526
56,471,653
Expenses:
Cost of sales ........................................................................................................
Marketing ............................................................................................................
Salaries and employee benefits ...........................................................................
Administrative .....................................................................................................
Provision for credit losses ...................................................................................
Depreciation ........................................................................................................
Interest expense ...................................................................................................
Change in fair value of interest rate swaps ..........................................................
12,177
1,252,854
17,582,967
7,971,491
5,319
287,839
4,891,854
-
12,866
1,224,484
16,430,763
7,776,887
4,610,221
266,686
5,599,951
(495,136)
18,288
1,205,596
14,380,695
7,438,113
11,321,849
322,050
5,169,736
(1,034,869)
32,004,501
35,426,722
38,821,458
Operating income before income taxes .........................................................................
Income tax expense .......................................................................................................
36,162,101
13,931,809
27,346,804
10,541,620
17,650,195
6,785,634
Net income .................................................................................................................... $ 22,230,292 $ 16,805,184
$ 10,864,561
Earnings per share:
Basic .................................................................................................................... $ 1.89 $ 1.45
Diluted ................................................................................................................. $ 1.85 $ 1.41
Dividends declared per share ....................................................................................... $ 0.30 $ 0.00
$
$
$
0.95
0.93
0.00
See accompanying notes.
31
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Fiscal Year ended March 31,
2012
2011
2010
Net income .........................................................................................................
$ 22,230,292
$ 16,805,184
$ 10,864,561
Other comprehensive income, net of tax
Reclassification adjustment for loss on interest rate swaps, net of tax
of $110,452 and $358,384 for 2011 and 2010, respectively
-
178,090
577,829
Comprehensive income ......................................................................................
$ 22,230,292
$ 16,983,274
$ 11,442,390
32
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Common Stock
Shares
Amount
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Shareholders’
Equity
Balance at March 31, 2009 .............................
11,411,145
$ 18,073,622 $
(755,919) $ 67,700,010 $ 85,017,713
Net income .....................................................
Other comprehensive income, net of tax as
-
-
-
10,864,561
10,864,561
applicable ...................................................
-
-
577,829
-
577,829
Issuance of common stock under stock
options .......................................................
Issuance of restricted share awards, net of
forfeitures ..................................................
Issuance of performance share awards ...........
Excess tax benefit on share awards, net .........
Share-based compensation .............................
Stock dividend ................................................
165,825
269,206
-
-
269,206
127,600
14,300
-
-
-
-
-
257,600
450,374
6,494,018
-
-
-
-
-
-
-
-
-
(6,494,018)
-
-
257,600
450,374
-
Balance at March 31, 2010 .............................
11,718,870
$ 25,544,820 $
(178,090) $ 72,070,553 $ 97,437,283
Net income .....................................................
Other comprehensive income, net of tax as
applicable ...................................................
Issuance of common stock under stock
options .......................................................
Issuance of restricted share awards, net of
forfeitures ..................................................
Issuance of performance share awards ...........
Excess tax benefit on share awards, net .........
Share-based compensation .............................
-
-
-
16,805,184
16,805,184
-
-
178,090
-
178,090
26,090
55,610 -
-
55,610
54,000
7,700
-
-
-
-
-
-
76,973 -
660,328 -
-
-
-
-
-
-
76,973
660,328
Balance at March 31, 2011 .............................
11,806,660
$ 26,337,731 $ -
$ 88,875,737
$ 115,213,468
Net income .....................................................
Issuance of common stock under stock
options .......................................................
Issuance of restricted share awards, net of
forfeitures ..................................................
Issuance of performance share awards ...........
Excess tax benefit on share awards, net .........
Share-based compensation .............................
Cash dividend .................................................
-
-
-
22,230,292
22,230,292
174,715
830,277 -
-
830,277
(29,400)
9,000
-
-
-
-
-
-
-
706,123 -
551,912 -
-
-
-
-
-
-
(3,593,021)
-
-
706,123
551,912
(3,593,021)
Balance at March 31, 2012 .............................
11,960,975
$ 28,426,043 $ -
$ 107,513,008
$ 135,939,051
See accompanying notes.
33
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Fiscal Year ended March 31,
2012
2011
2010
Cash flows from operating activities:
Net income ................................................................................................................. $ 22,230,292
Adjustments to reconcile net income to net cash provided by operating activities:
$ 16,805,184
$
10,864,561
Depreciation .....................................................................................................
Gain on sale of property and equipment ..........................................................
Provision for credit losses ................................................................................
Deferred income taxes ......................................................................................
Share-based compensation ...............................................................................
Change in fair value of interest rate swaps .......................................................
Changes in operating assets and liabilities:
287,839
(26,945)
5,319
250,566
551,912
-
266,686
(25,792)
4,610,221
(1,417,788)
660,328
(495,136)
Prepaid expenses and other assets ..........................................................
Accounts payable and accrued expenses ................................................
Income taxes receivable/payable ............................................................
Deferred revenues ...................................................................................
(70,425)
(596,958)
(731,289)
(25,432)
101,807
1,068,422
(187,065)
(29,243)
322,050
(10,032)
11,321,849
(1,217,391)
450,374
(1,034,869)
(65,291)
587,285
214,368
(106,986)
Net cash provided by operating activities ..................................................................
21,874,879
21,357,624
21,325,918
Cash flows from investing activities:
Purchase and origination of finance contracts ...........................................................
Principal payments received ......................................................................................
(Increase) decrease in assets held for resale ..............................................................
Purchase of property and equipment..........................................................................
Proceeds from sale of property and equipment ..........................................................
(134,347,957)
122,157,971
(317,861)
(320,537)
72,170
(134,049,373)
101,715,052
14,991
(393,782)
42,670
(110,184,843)
83,117,609
(11,650)
(208,671)
10,032
Net cash used in investing activities ..........................................................................
(12,756,214)
(32,670,442)
(27,277,523)
Cash flows from financing activities:
Net (repayment of) proceeds from line of credit ........................................................
Payment of cash dividend ..........................................................................................
(Decrease) increase in drafts payable ........................................................................
Proceeds from exercise of stock options ....................................................................
Excess tax benefits from exercise of stock options, vesting of restricted share
(6,000,000)
(3,593,021)
(276,530)
830,277
10,725,029
-
937,402
55,610
5,244,776
-
(34,033)
269,206
awards and issuance of performance share awards ...............................................
706,123
78,423
Net cash (used in) provided by financing activities ...................................................
(8,333,151)
11,796,464
Net increase (decrease) in cash ..................................................................................
Cash, beginning of year .............................................................................................
785,514
2,017,540
483,646
1,533,894
272,975
5,752,924
(198,681)
1,732,575
Cash, end of year ....................................................................................................... $ 2,803,054
$ 2,017,540
$
1,533,894
Supplemental disclosure of noncash investing and financing activities:
Decrease in accumulated other comprehensive loss for change in fair value of
interest rate swaps ................................................................................................. $ -
$ 178,090
$
577,829
Shortfall of tax benefits from vesting of restricted share awards and issuance of
performance share awards ..................................................................................... $ -
$ (1,450) $
(15,375)
See accompanying notes.
34
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization
Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorporated under the laws of British
Columbia with two wholly-owned United States subsidiaries, Nicholas Data Services, Inc. (“NDS”) and Nicholas Financial, Inc.
(“NFI”). NDS is engaged principally in the development, marketing and support of computer application software. NFI is a
specialized consumer finance company engaged primarily in acquiring and servicing automobile finance installment contracts
(“Contracts”) for purchases of new and used automobiles and light trucks. To a lesser extent, NFI also offers direct loans and sells
consumer-finance related products. Both NDS and NFI are based in Florida, U.S.A. The accompanying consolidated financial
statements are stated in U.S. dollars and are presented in accordance with accounting principles generally accepted in the United
States of America (“GAAP”).
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.
35
2. Summary of Significant Accounting Policies (continued)
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
Equipment
Furniture and fixtures
Leasehold improvements
Drafts Payable
3 years
5 years
7 years
Lesser of lease term or useful life (generally 6 - 7 years)
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.
36
2. Summary of Significant Accounting Policies (continued)
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 ...................
Denominator for diluted earnings per share ...................
285,971
12,033,131
286,177
11,893,518
218,805
11,689,123
Earnings per share – basic ....................................................... $ 1.89
$ 1.45
$
Earnings per share – diluted ..................................................... $ 1.85 $ 1.41 $
0.95
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.
37
2. Summary of Significant Accounting Policies (continued)
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.
3. Finance Receivables
Finance receivables consist of Contracts and direct consumer loans (“Direct Loans”), each of which comprise a portfolio segment.
Each portfolio segment consists of smaller balance homogeneous loans which are collectively evaluated for impairment.
The Company purchases individual Contracts from new and used automobile dealers in its markets. There is no relationship between
the Company and the dealer with respect to a given contract once the assignment of that contract is complete. The dealer has no vested
interest in the performance of any installment contract the Company purchases. The Company charges-off receivables when an
individual account has become more than 120 days contractually delinquent. In the event of repossession the charge-off will occur in
the month in which the vehicle was repossessed.
38
3. Finance Receivables (continued)
Contracts included in finance receivables are detailed as follows as of fiscal years ended March 31:
Indirect finance receivables, gross contract .............................. $ 382,766,667
Unearned interest ......................................................................
(109,456,018)
$ 368,099,418
(105,622,007)
$
320,579,222
(91,385,145)
Indirect finance receivables, net of unearned interest ...............
Allowance for credit losses ......................................................
273,310,649
(35,495,684)
262,477,411
(35,895,449)
229,194,077
(30,408,578)
Indirect finance receivables, net ............................................... $ 237,814,965
$ 226,581,962
$
198,785,499
2012
2011
2010
The terms of the Contracts range from 12 to 72 months and bear a weighted average effective interest rate of 23.58% and 23.49% as
of March 31, 2012 and 2011, respectively.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts for the fiscal years ended
March 31:
2012
2011
2010
Balance at beginning of year ........................................ $ 35,895,449
Discounts acquired on new volume ..............................
12,415,896
Provision for credit losses .............................................
(176,745)
Losses absorbed ............................................................
(14,971,422)
Recoveries ....................................................................
2,405,750
Discounts accreted ........................................................
(73,244)
$ 30,408,578
12,919,492
4,484,284
(14,036,888)
2,255,683
(135,700)
$
24,926,076
11,087,231
11,189,432
(18,404,659 )
1,962,496
(351,998 )
Balance at end of year ................................................... $ 35,495,684
$ 35,895,449
$
30,408,578
The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being
financed by the purchaser of the automobile. The Contracts are predominately for used vehicles. As of March 31, 2012, the average
model year of vehicles collateralizing the portfolio was 2005. The average loan to value ratio, which expresses the amount of the
Contract as a percentage of the value of the automobile, is approximately 90%. 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 discount negotiated by the Company is a function of the credit quality of the customer, the wholesale value of the vehicle, and
competition in any given market. In making decisions regarding the purchase of a particular Contract the Company considers the
following factors related to the borrower: place and length of residence; current and prior job status; history in making installment
payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts
purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the
purchase price and the term of the Contract. The entire amount of discount is related to credit quality and is considered to be part of
the allowance for credit losses. The Company utilizes a static pool approach to track portfolio performance. A static pool retains an
amount equal to 100% of the discount as an allowance for credit losses. Subsequent to the purchase, if the allowance for credit losses
is determined to be inadequate for a static pool, then an additional charge to income through the provision is used to maintain adequate
reserves based on management’s evaluation of the risk inherent in the loan portfolio, the composition of the portfolio, and current
economic conditions. Such evaluation, considers among other matters, the estimated net realizable value or the fair value of the
underlying collateral, economic conditions, historical loan loss experience, management’s estimate of probable credit losses and other
factors that warrant recognition in providing for an adequate allowance for credit losses.
The average dealer discount associated with new volume for fiscal years ended March 31, 2012 and 2011 was 8.47% and 8.78%,
respectively
39
3. Finance Receivables (continued)
Direct Loans are also included in finance receivables and are detailed as follows as of fiscal years ended March 31:
2012
2011
2010
Direct finance receivables, gross contract ...................... $ 6,221,688
Unearned interest ...........................................................
(1,195,948)
$ 4,850,865
(890,555)
$
Direct finance receivables, net of unearned interest ......
Allowance for credit losses ............................................
5,025,740
(492,184)
3,960,310
(378,418)
4,840,381
(803,257)
4,037,124
(382,869)
Direct finance receivables, net ....................................... $ 4,533,556
$ 3,581,892
$
3,654,255
The terms of the Direct Loans range from 6 to 48 months and bear a weighted average effective interest rate of 26.14% and 25.93% as
of March 31, 2012 and 2011, respectively.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Direct Loans for the fiscal years
ended March 31:
2012
2011
2010
Balance at beginning of year ................................... $ 378,418 $ 382,869 $
Provision for credit losses ........................................
Losses absorbed .......................................................
Recoveries ...............................................................
125,937
(173,970)
43,582
182,062
(93,041)
24,745
513,067
132,417
(324,521)
61,906
Balance at end of year .............................................. $ 492,184
$ 378,418 $
382,869
Direct Loans are loans originated directly between the Company and the consumer. These loans are typically for amounts ranging
from $1,000 to $9,000 and are generally secured by a lien on an automobile, watercraft or other permissible tangible personal
property. The majority of Direct Loans are originated with current or former customers under the Company’s automobile financing
program. The typical Direct Loan represents a significantly better credit risk than Contracts due to the customer’s historical payment
history with the Company. In deciding whether or not to make a loan, the Company considers the individual’s credit history, job
stability, income and impressions created during a personal interview with a Company loan officer. Additionally, because most of the
Direct Loans made by the Company to date have been made to borrowers under Contracts previously purchased by the Company, the
payment history of the borrower under the Contract is a significant factor in making the loan decision. As of March 31, 2012, loans
made by the Company pursuant to its direct loan program constituted approximately 2% of the aggregate principal amount of the
Company’s loan portfolio.
Changes in the allowance for credit losses for both Contracts and Direct Loans were driven by current economic conditions and credit
loss trends over several reporting periods which are useful in estimating future losses and overall portfolio performance.
The following table is an assessment of the credit quality by creditworthiness as of March 31. A performing account is defined as an
account that is less than 60 days past due. A non-performing account is defined as an account that is contractually delinquent for 60
days or more and the accrual of interest income is suspended. When an account is 120 days contractually delinquent, the account is
written off.
Non-bankrupt accounts ..................................
Bankrupt accounts ..........................................
Total ...............................................................
2012
2011
Contracts
$382,358,608
408,059
$382,766,667
Direct Loans
$6,221,688
-
$6,221,688
Contracts
$367,685,305
414,113
$368,099,418
Direct Loans
$4,844,683
6,182
$4,850,865
Performing accounts ......................................
Non-performing accounts ..............................
Total ...............................................................
$380,213,503
2,553,164
$382,766,667
$6,202,498
19,190
$6,221,688
$366,081,821
2,017,597
$368,099,418
$4,833,310
17,555
$4,850,865
40
3. Finance Receivables (continued)
The following tables present certain information regarding the delinquency rates experienced by the Company with respect to
Contracts and Direct Loans:
Contracts
Gross Balance
Outstanding
30 – 59 days
60 – 89 days
90 + days
Total
Delinquencies
March 31, 2012 ....................................... $ 382,766,667 $ 8,994,485
$ 1,889,643
2.35% 0.49% 0.17%
$ 663,521
March 31, 2011 ........................................ $ 368,099,418 $ 6,106,211
$ 1,468,079
1.66% 0.40% 0.15%
$ 549,518
$ 11,547,649
3.01%
$ 8,123,808
2.21%
March 31, 2010 ........................................ $ 320,579,222 $ 7,613,284
$ 1,752,638
$ 778,606
$ 10,144,528
2.37%
0.55%
0.24%
3.16%
Direct Loans
Gross Balance
Outstanding
30 – 59 days
60 – 89 days
90 + days
Total
March 31, 2012 ....................................... $ 6,221,688 $ 48,899 $ 14,257
$ 4,933
0.79% 0.23% 0.07%
March 31, 2011 ........................................ $ 4,850,865 $ 37,399 $ 5,636
$ 11,919
0.77% 0.11% 0.25%
$ 68,089
1.09%
$ 54,954
1.13%
March 31, 2010 ........................................ $
4,840,381 $
98,854
$
2.04%
34,864
$
0.72%
14,383
$
0.30%
148,101
3.06%
4. Property and Equipment
Property and equipment as of March 31, 2012 and 2011 is summarized as follows:
Cost
Accumulated
Depreciation
Net Book
Value
2012
Automobiles .................................................................................. $ 618,320 $ 462,551 $ 155,769
Equipment .....................................................................................
296,707
Furniture and fixtures ...................................................................
98,377
Leasehold improvements ..............................................................
207,931
1,008,023 711,316
535,595 437,218
1,058,362 850,431
$ 3,220,300 $ 2,461,516 $ 758,784
2011
Automobiles .................................................................................. $ 612,914 $ 470,253 $ 142,661
322,991
Equipment .....................................................................................
Furniture and fixtures ...................................................................
96,112
Leasehold improvements ..............................................................
209,547
930,151 607,160
498,325 402,213
987,729 778,182
$ 3,029,119 $ 2,257,808 $ 771,311
5. Line of Credit
Prior to September 1, 2011, the Company had a $140,000,000 line of credit facility expiring on November 30, 2011. On September 1,
2011, the Company executed a new agreement with its consortium of lenders that increased the size of the line of credit facility (the
“Line”) from $140,000,000 to $150,000,000. The pricing of the Line, which expires on November 30, 2013, is 300 basis points above
30-day LIBOR (4.00% at December 31, 2011 and March 31, 2011) with a 1% floor on LIBOR. Pledged as collateral for this credit
facility are all of the assets of the Company. The outstanding amount of the credit facility was approximately $112,000,000 and
$118,000,000 as of March 31, 2012 and March 31, 2011, respectively. The amount available under the line of credit was
approximately $38,000,000 and $22,000,000 as of March 31, 2012 and March 31, 2011, respectively.
41
5. Line of Credit (continued)
The facility requires compliance with certain financial ratios and covenants and satisfaction of specified financial tests, including
maintenance of asset quality and performance tests. Dividends do not require consent in writing by the agent and majority lenders
under the new facility as long as the Company is in compliance with a net income covenant. As of March 31, 2012, the Company was
in full compliance with all debt covenants.
6. Interest Rate Swap Agreements
As of March 31, 2012 and March 31, 2011, the Company did not have any outstanding interest rate swap agreements (see footnote 13
for subsequent event related to the Company entering into a interest rate swap agreement). The swap agreements, in effect, converted
a portion of the floating rate debt to a fixed rate, more closely matching the interest rate characteristics of finance receivables. The
following table summarizes the activity in the Company’s notional amounts of interest rate swap agreements for fiscal years ended
March 31:
Notional amounts at beginning of year ......................... $
New contracts ................................................................
Matured contracts ..........................................................
Notional amounts at end of year ................................... $
50,000,000 $
-
(50,000,000)
- $
80,000,000
-
(30,000,000)
50,000,000
2011
2010
These interest rate swaps were previously designated as cash flow hedges. Based on credit market events that transpired in October
2008, the Company made an economic decision to elect the prime rate pricing option available under the Line for the month of
October 2008. As a result, the critical terms of the interest rate swaps and hedged interest payments were no longer identical, and the
Company undesignated its interest rate swaps as cash flow hedges. Consequently, beginning in October 2008 changes in the fair value
of interest rate swaps (unrealized gains and losses) were recorded in earnings. Unrealized losses previously recorded in accumulated
other comprehensive loss were reclassified into earnings as interest payments on the Line affect earnings over the remaining term of
the respective swap agreements. The Company did not use interest rate swaps for speculative purposes and they were only intended
for use as economic hedges.
The locations and amounts of gains (losses) recognized in income are detailed as follows for the fiscal years ended March 31:
2011
2010
Periodic change in fair value of interest rate swaps ............. $ 783,678
Losses reclassified from accumulated other
$
1,971,082
comprehensive loss .........................................................
(288,542)
495,136
Periodic settlement differentials included in interest
expense ............................................................................
(801,048)
Loss recognized in income .................................................. $ (305,912) $
(936,213)
1,034,869
(2,485,232)
(1,450,363)
Before maturing, interest rate swap agreements were recorded at fair value, which was approximately $784,000 as of March 31, 2010.
Changes in the fair value of interest rate swaps were recorded in the change in fair value of interest rate swaps line item of the
consolidated statements of income.
Accumulated other comprehensive loss as of March 31, 2010 of approximately $178,000, represents the after-tax effect of the
derivative losses prior to October 2008 when the swaps were designated and qualifying as cash flow hedges. As of March 31, 2012
and 2011, no remaining accumulated other comprehensive loss exists to be reclassified and affect net earnings.
Net realized gains and losses from the swap agreements were recorded in the interest expense line item of the consolidated statement
of income.
42
6. Interest Rate Swap Agreements (continued)
The following table summarizes the average variable rates received and average fixed rates paid under the swap agreements as of
March 31:
Average variable rate received
Average fixed rate paid
2012
0.00%
0.00%
2011
0.29%
3.80%
7. Fair Value Disclosures
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a recurring basis. The
Company does not currently have any assets or liabilities measured at fair value on a recurring basis.
Financial Instruments Not Measured at Fair Value
The Company’s financial instruments consist of cash, finance receivables, accrued interest, the Line, and accounts payable. For each
of these financial instruments the carrying value approximates fair value. The carrying value of cash approximates the fair value due
to the nature of these accounts. Finance receivables, net approximates fair value based on the price paid to acquire indirect loans. The
price paid reflects competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic
environment. This market is highly liquid as the Company acquires individual loans on a daily basis from dealers. The initial terms of
the indirect finance receivables range from 12 to 72 months. The initial terms of the direct finance receivables range from 6 to 48
months. In addition, there have been minimal changes in interest rates and purchase discounts related to these types of loans. If
liquidated outside of the normal course of business, the amount received may not be the carrying value. The Line was amended within
the quarter ended September 30, 2011. Based on current market conditions, any new or renewed credit facility would contain pricing
that approximates the Company’s current Line. Based on these market conditions, the fair value of the Line as of March 31, 2012 was
estimated to be equal to the book value. Accrued interest is paid monthly. As a result of the short-term nature of this activity, the
carrying value of the accrued interest approximates fair value. The interest rate for the line of credit is a variable rate based on LIBOR
pricing options.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis. The
Company does not currently have any assets or liabilities measured at fair value on a nonrecurring basis.
8. Income Taxes
The provision for income taxes consists of the following for the years ended March 31:
Current:
Federal .......................................................................... $ 11,795,165
State ..............................................................................
1,886,079
$ 10,272,425
1,686,983
$
Total current .......................................................
13,681,244
11,959,408
6,870,420
1,132,605
8,003,025
2012
2011
2010
Deferred:
Federal ..........................................................................
State ..............................................................................
216,022
34,543
(1,217,796)
(199,992)
(1,045,103)
(172,288)
Total deferred .....................................................
250,565
(1,417,788)
(1,217,391)
Income tax expense ................................................................ $ 13,931,809
$ 10,541,620
$
6,785,634
43
8. Income Taxes (continued)
The net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes are reflected in deferred income taxes. Significant components of the Company’s deferred
tax assets consist of the following as of March 31:
Allowance for credit losses not currently deductible for tax purposes ... $ 8,037,787 $ 8,150,912
543,624
Share-based compensation .....................................................................
260,129
Other items .............................................................................................
436,131
230,181
2012
2011
$ 8,704,099 $ 8,954,665
The provision for income taxes reflects an effective U.S tax rate, which differs from the corporate tax rate for the following reasons:
Provision for income taxes at Federal statutory rate .................. $ 12,656,735
Increase resulting from:
$ 9,571,378
$
6,177,568
State income taxes, net of Federal benefit ........................
Other .................................................................................
1,248,404
26,670
966,544
3,698
624,206
(16,140)
2012
2011
2010
$ 13,931,809
$ 10,541,620
$
6,785,634
9. Share-Based Payments
The Company has share awards outstanding under three share-based compensation plans (the “Equity Plans”). The Company believes
that such awards better align the interests of its employees with those of its shareholders. Under the shareholder-approved 1998
Employee Stock Option Plan and Non-Employee Director Stock Option Plan (collectively the “1998 Plans”) the Board of Directors
was authorized to grant option awards for up to 1,551,000 common shares to employees and directors. On August 9, 2006, the
Company’s shareholders approved the Nicholas Financial, Inc. Equity Incentive Plan (the “2006 Plan”) for employees and non-
employee directors. Under the 2006 Plan, the Board of Directors is authorized to grant total share awards for up to 1,072,500 common
shares. The 2006 Plan replaced the 1998 Plans; accordingly no additional option awards may be granted under the 1998 Plans. In
addition to option awards, the 2006 Plan provides for restricted stock and performance share awards.
Option awards previously granted to employees and directors under the 1998 Plans generally vest ratably based on service over a five
and three-year period, respectively, and generally have a contractual term of ten years. Vesting and contractual terms for option
awards under the 2006 Plan are essentially the same as those of the 1998 Plans. Restricted stock awards generally cliff vest over a
three-year period based on service conditions. The annual vesting of performance share awards is contingent upon the attainment of
company-wide performance goals including annual revenue growth and operating income targets. There are no post-vesting
restrictions for share awards.
The Company funds share awards from authorized but unissued shares and does not purchase shares to fulfill the obligations of the
plans. Cash dividends, if any, are not paid on unvested performance shares or unexercised options, but are paid on unvested restricted
stock awards.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Risk-free interest rate ...........................................................................
Weighted average expected original term ............................................
Expected volatility ...............................................................................
Expected dividend yield.......................................................................
1.84%
5 years
1.88%
2.02%
5 years
5 years
49% 49%
0.00% 0.00%
47%
0.00%
2012
2011
2010
44
9. Share-Based Payments (continued)
A summary of option activity under the Equity Plans as of March 31, 2011, and changes during the year are presented below.
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at March 31, 2011 ....................................................
Granted .........................................................................................
Exercised ......................................................................................
Forfeited .......................................................................................
661,255
45,000
(174,715)
(29,660)
$ 5.47
$ 12.96
$ 4.75
$ 6.17
Outstanding at March 31, 2012 ....................................................
501,880
$ 6.36
5.92
$ 3,429,135
Exercisable at March 31, 2012 .....................................................
364,740
$ 5.54
5.30 $ 2,788,713
The Company granted 45,000, 28,500 and 92,400 options with a weighted average fair value of $5.73, $4.19 and $1.55 during the
years ended March 31, 2012, 2011 and 2010, respectively. The total intrinsic value of options exercised during the years ended
March 31, 2012, 2011 and 2010 was approximately $1,335,000, $168,000 and $716,000, respectively.
During the fiscal year ended March 31, 2012, 174,715 options were exercised at exercise prices ranging from $2.00 to $10.21 per
share. During the same period 29,660 options were forfeited at exercise prices ranging from $2.77 to $12.96 per share.
Cash received from options exercised during the fiscal years ended March 31, 2012, 2011 and 2010 totaled approximately $830,000,
$56,000 and $269,000, respectively. Related income tax benefits during the same periods totaled approximately $511,000, $64,000
and $273,000, respectively. Such amounts are included in proceeds from exercise of stock options and income tax benefit related
thereto under cash flows from financing activities in the consolidated statements of cash flows. As of March 31, 2012, there was
approximately $415,000 of total unrecognized compensation cost related to options granted under the Plan. That cost is expected to be
recognized over a weighted-average period of approximately 3 years.
A summary of the status of the Company’s non-vested restricted shares under the 2006 Plan as of March 31, 2012, and changes during
the year then ended is presented below.
Restricted Share Awards
Non-vested at March 31, 2011 .....................................................
Granted .........................................................................................
Vested ...........................................................................................
Forfeited .......................................................................................
Non-vested at March 31, 2012 .....................................................
Weighted
Average
Grant Date
Fair Value
Shares
$ 4.25
184,900
5,000
$ 12.96
(55,000) $ 2.38
(34,400) $ 3.83
100,500
$ 5.85 0.36 $ 1,325,595
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
The Company awarded 5,000 restricted shares with a weighted average grant date fair value of $12.96 during the fiscal year ended
March 31, 2012. During the same period 34,400 restricted shares were forfeited with a weighted average grant date fair value of $3.83.
As of March 31, 2012, there was approximately $119,000 of total unrecognized compensation cost related to non-vested restricted
share awards granted under the 2006 Plan. That cost is expected to be recognized over a weighted-average period of approximately 6
months.
45
9. Share-Based Payments (continued)
A summary of the status of the Company’s non-vested performance shares under the 2006 Plan as of March 31, 2012, and changes
during the year then ended is presented below.
Performance Share Awards
Non-vested at March 31, 2011 ...............................................................
Granted ...................................................................................................
Vested .....................................................................................................
Forfeited .................................................................................................
Non-vested at March 31, 2012 ...............................................................
Shares
-
11,000
(9,000)
(2,000)
-
Weighted
Average
Grant Date
Fair Value
$ -
$ 12.00
12.00
$
$
11.98
$
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
$
The Company awarded 11,000 performance shares with a weighted average grant date fair value of $12.00 during the fiscal year
ended March 31, 2012. During the same period 2,000 performance shares were forfeited with a weighted average grant date fair value
of $11.98.
As of March 31, 2012, there was no unrecognized compensation cost related to non-vested performance share awards granted under
the 2006 Plan.
10. Employee Benefit Plans
The Company has a 401(k) retirement plan under which all employees are eligible to participate. Employee contributions are
voluntary and subject to Internal Revenue Service limitations. The Company matches, based on annually determined factors,
employee contributions provided the employee completes certain levels of service annually. For the plan years 2011 and 2010, the
Board of Directors suspended the Company’s matching. The Board will re-evaluate the Company’s matching policy for plan year
2012 later this year. For the fiscal years ended March 31, 2012, 2011 and 2010, the Company recorded expenses of approximately
$7,500, $7,000, and $7,000, respectively, related to this plan.
11. Commitments and Contingencies
The Company leases corporate and branch offices under operating lease agreements which provide for annual minimum rental
payments as follows:
Fiscal Year ending March 31:
2013 .............................................................................................................. $
2014 ..............................................................................................................
2015 ..............................................................................................................
2016 ..............................................................................................................
2017 ..............................................................................................................
1,701,149
865,838
394,612
141,275
51,270
3,154,144
$
Rent expense for the fiscal years ended March 31, 2012, 2011, and 2010 was approximately $1,761,000, $1,599,000, and $1,421,000,
respectively. The Company recognizes rent expense on a straight-line basis over the term of the lease, taking into account, when
applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over
the term of the lease.
The Company is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, none of
which, if decided adversely to the Company, in the opinion of management, would have a material adverse affect on the Company’s
financial position.
46
12. Quarterly Results of Operations (Unaudited)
First
Quarter
Fiscal Year ended March 31, 2012
Second
Quarter
Third
Quarter
Fourth
Quarter
Total revenue ............................................................. $ 16,634,305
Interest expense .........................................................
1,228,978
Provision for credit losses ..........................................
79,415
Non-interest expense ..................................................
6,695,286
$ 17,210,999
1,236,893
178,029
6,779,122
$ 17,139,971 $ 17,181,327
1,189,117
1,236,866
(706,464)
454,339
6,877,637
6,755,283
Operating income before income taxes ......................
Income tax expense ....................................................
8,630,626
3,327,833
9,016,955
3,496,851
8,693,483
3,330,762
9,821,037
3,776,363
Net income ................................................................. $ 5,302,793 $ 5,520,104
$ 5,362,721 $ 6,044,674
Earnings per share:
Basic ................................................................. $ 0.46
$ 0.47
$ 0.46 $ 0.51
Diluted .............................................................. $ 0.44
$ 0.46
$ 0.45 $ 0.50
Dividends per share ................................................... $ 0.00
$ 0.10
$ 0.10
$ 0.10
First
Quarter
Fiscal Year ended March 31, 2011
Second
Quarter
Third
Quarter
Fourth
Quarter
Total revenue ............................................................. $ 14,952,147
1,539,373
Interest expense .........................................................
1,595,661
Provision for credit losses ..........................................
(244,365)
Change in fair value of interest rate swaps ................
6,249,175
Non-interest expense ..................................................
$ 15,731,853
1,449,757
1,711,873
(137,828)
6,241,584
$ 15,995,350 $ 16,094,176
1,227,871
1,382,950
1,201,172
101,515
(95,756) (17,187)
6,976,551
6,244,376
Operating income before income taxes ......................
Income tax expense ....................................................
5,812,303
2,236,465
6,466,467
2,484,123
7,262,608
2,787,788
7,805,426
3,033,244
Net income ................................................................. $ 3,575,838 $ 3,982,344
$ 4,474,820 $ 4,772,182
Earnings per share:
Basic ................................................................. $ 0.31
$ 0.34
$ 0.39 $ 0.41
Diluted .............................................................. $ 0.30
$ 0.34
$ 0.38 $ 0.40
13. Subsequent Event
On June 4, 2012, the Company entered into an interest rate swap transaction to convert a portion of the floating rate debt to a fixed
rate, more closely matching the interest rate characteristics of finance receivables. The transaction sets forth the terms of a five-year
interest rate swap in which the Company would pay a fixed rate of 1% and receives payments from the counterparty on the 1-month
LIBOR rate. The swap has an effective date of June 13, 2012 and a notional amount of $25 million. The changes in the fair value of
the interest rate swap (unrealized gains and losses) will be recorded in earnings.
47
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in its reports filed
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required
disclosure. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the
Company’s disclosure controls and procedures or internal controls will prevent all possible error and fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March
31, 2012. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures were effective as of March 31, 2012.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of
financial statements in accordance with generally accepted accounting principles. The Company’s management, including our Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial
reporting as of March 31, 2012, the end of the fiscal year covered by this Report, based on the criteria set forth in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on
management’s evaluation under the framework in Internal Control-Integrated Framework, management has concluded that the
Company’s internal control over financial reporting was effective as of March 31, 2012.
Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the effectiveness of our internal control
over financial reporting as of March 31, 2012, as stated in their report, which is included below.
June 14, 2012
Peter L. Vosotas
Chairman of the Board, President
and Chief Executive Officer
Ralph T. Finkenbrink
Senior Vice President-Finance
and Chief Financial Officer
Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the Company’s last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Nicholas Financial, Inc.
We have audited Nicholas Financial, Inc. and subsidiaries (the “Company”) internal control over financial reporting as of March 31,
2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31,
2012, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements of Nicholas Financial, Inc. as of and for the year ended March 31, 2012, and our report dated June
14, 2012, expressed an unqualified opinion.
/s/Dixon Hughes Goodman LLP
Atlanta, Georgia
June 14, 2012
49
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information to be set forth under the captions “Proposal 1: Election of Directors,” “Board of Directors,” “Executive Officers and
Compensation” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement and Information
Circular for the 2012 Annual General Meeting of Members of the Company, which will be filed with the SEC on or about July 6, 2012
(the “Proxy Statement”), is incorporated herein by reference.
The Company has adopted a written code of ethics applicable to its chief executive officer, chief financial officer, principal accounting
officer and persons performing similar functions. The text of this code of ethics is filed as Exhibit 14 to this Report. A copy of the
code of ethics is also posted on the Company’s web site at www.nicholasfinancial.com. The Company intends to satisfy the disclosure
requirements under Item 5.05 of the SEC’s Current Report on Form 8-K regarding amendments to, or waivers from, the code of ethics
by posting such information on the Company’s web site at www.nicholasfinancial.com. The Company is not including the information
contained on or available through its web site as a part of, or incorporating such information by reference into, this Report.
Item 11. Executive Compensation, Compensation Interlocks and Insider Participation
The information to be set forth under the captions “Executive Officers and Compensation” and “Board of Directors” in the Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information to be set forth under the caption “Voting Shares and Ownership of Management and Principal Holders” in the Proxy
Statement is incorporated herein by reference. See also “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities – Securities Authorized for Issuance Under Equity Compensation Plans” on page 16 of this
Report for certain information relating to the Company’s equity compensation plans.
Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors
The information to be set forth under the captions "Board of Directors" and “Certain Relationships and Related Transactions” in the
Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information to be set forth under the caption “Proposal 2: Appointment of Independent Auditors” in the Proxy Statement is
incorporated herein by reference.
50
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
PART IV
(1) Financial Statements
See Part II, Item 8, of this Report.
(2) Financial Statement Schedules
All financial schedules are omitted as the required information is not applicable or the information is presented in
the consolidated financial statements or related notes.
(3) Exhibits
Exhibit
No.
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Description
Articles of Nicholas Financial, Inc. (1)
Notice of Articles of Nicholas Financial, Inc. (2)
Form of Common Stock Certificate (3)
Second Amended and Restated Loan and Security Agreement, dated January 12, 2010 (4)
Amendment No. 1 to Second Amended and Restated Loan and Security Agreement, dated September 1, 2011 (5)
Nicholas Financial, Inc. Employee Stock Option Plan (6)*
Nicholas Financial, Inc. Non-Employee Director Stock Option Plan (7)*
Employment Contract, dated November 22, 1999, between Nicholas Financial, Inc. and Ralph Finkenbrink, Senior Vice
President of Finance (8)*
Employment Contract, dated March 16, 2001, between Nicholas Financial, Inc. and Peter L. Vosotas, President and Chief
Executive Officer (9)*
Summary of Fiscal 2012/2013 Annual Incentive Programs*
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements
Nicholas Financial, Inc. Equity Incentive Plan (10) *
10.10
Form of Nicholas Financial, Inc. Equity Incentive Plan Stock Option Award (11)*
10.11
Form of Nicholas Financial, Inc. Equity Incentive Plan Restricted Stock Award (12)*
10.12
Form of Nicholas Financial, Inc. Equity Incentive Plan Performance Share Award (13)*
14
21
23
24
Code of Ethics for Chief Executive Officer and Senior Financial Officers
Subsidiaries of Nicholas Financial, Inc. (14)
Consent of Dixon Hughes Goodman LLP
Powers of Attorney (included on signature page hereto)
31.1
Certification of President and Chief Executive Officer
31.2
Certification of Senior Vice President and Chief Financial Officer
32.1
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. § 1350
32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. § 1350
51
*
officer of the Company participated.
(1)
Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive
Incorporated by reference to Appendix B to the Company’s Proxy Statement and Information Circular for the 2006 Annual
General Meeting of Shareholders filed with the SEC on June 30, 2006 (File No. 0-26680).
Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed with the SEC on May 24,
2007 (SEC File No. 0-26680).
Incorporated by reference to Exhibit 4 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31,
2004, as filed with the SEC on June 29, 2004.
Incorporated by reference to Exhibit 10.1 to the Company’s Amendment No. 1 to Quarterly Report on Form 10-Q/A for the
fiscal quarter ended December 31, 2009 filed with the SEC on March 23, 2010.
Incorporated by reference to Exhibit 10.1.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2011 filed with the SEC on November 9, 2011.
Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 filed with the SEC on June 30,
1999 (SEC File No. 333-81967).
Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 filed with the SEC on June 30,
1999 (SEC File No. 333-81961).
Incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
Incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) Incorporated by reference to Appendix A to the Company’s Proxy Statement and Information Circular for the 2006 Annual
General Meeting of Shareholders filed with the SEC on June 30, 2006.
(11) Incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 filed with the SEC on May 24,
2007 (Reg. No. 333-143245).
(12) Incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-8 filed with the SEC on May 24,
2007 (Reg. No. 333-143245).
(13) Incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-8 filed with the SEC on May 24,
2007 (Reg. No. 333-143245).
(14) Incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31,
2004, as filed with the SEC on June 29, 2004.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: June 14, 2012
NICHOLAS FINANCIAL, INC.
By: /s/ Peter L. Vosotas
Peter L. Vosotas
Chairman of the Board, Chief Executive Officer and President
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Peter L.
Vosotas and Ralph T. Finkenbrink, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to perform each and every act
and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agents or either of them, or their substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Peter L. Vosotas
Peter L. Vosotas
/s/ Ralph T. Finkenbrink
Ralph T. Finkenbrink
/s/ Stephen Bragin
Stephen Bragin
/s/ Alton R. Neal
Alton R. Neal
/s/ Scott Fink
Scott Fink
Chairman of the Board, Chief Executive Officer, President and Director
June 14, 2012
Sr. Vice President – Finance, Chief Financial Officer, Chief Accounting
Officer and Director
June 14, 2012
Director
Director
Director
June 14, 2012
June 14, 2012
June 14, 2012
53
Exhibit No.
EXHIBIT INDEX
Description
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
14
21
23
24
31.1
31.2
32.1
32.2
Articles of Nicholas Financial, Inc.*
Notice of Articles of Nicholas Financial, Inc.*
Form of Common Stock Certificate*
Second Amended and Restated Loan and Security Agreement, dated January 12, 2010*
Amendment No. 1 to Second Amended and Restated Loan and Security Agreement, dated September 1, 2011*
Nicholas Financial, Inc. Employee Stock Option Plan*
Nicholas Financial, Inc. Non-Employee Director Stock Option Plan*
Employment Contract, dated November 22, 1999, between Nicholas Financial, Inc. and Ralph Finkenbrink, Senior
Vice President of Finance*
Employment Contract, dated March 16, 2001, between Nicholas Financial, Inc. and Peter L. Vosotas, President and
Chief Executive Officer*
Summary of Fiscal 2012/2013 Annual Incentive Bonus Programs
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements
Nicholas Financial, Inc. Equity Incentive Plan*
Form of Nicholas Financial, Inc. Equity Incentive Plan Stock Option Award*
Form of Nicholas Financial, Inc. Equity Incentive Plan Restricted Stock Award*
Form of Nicholas Financial, Inc. Equity Incentive Plan Performance Share Award*
Code of Ethics for Chief Executive Officer and Senior Financial Officers
Subsidiaries of Nicholas Financial, Inc.*
Consent of Dixon Hughes Goodman LLP
Powers of Attorney (included on signature page hereto)
Certification of President and Chief Executive Officer
Certification of Senior Vice President and Chief Financial Officer
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. §1350
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. §1350
*
Incorporated by reference.
S H A R E H O L D E R
I N F O R M A T I O N
Corporate Offi ces:
Corporate Offices:
Independent Auditors:
Independent Auditors:
Nicholas Financial, Inc.
2454 McMullen Booth Road
Clearwater, Florida 33759
Directors:
Directors:
Peter L. Vosotas
Chairman, CEO & President
Stephen Bragin
Audit Committee Member
Compensation Committee Member
Former Owner, Florida Produce Co.
Scott Fink
Audit Committee Member
Compensation Committee Member
Owner,
Multiple Franchise Auto Dealerships
Ralph T. Finkenbrink
Senior Vice President & CFO
Corporate Secretary
Alton R. "Charlie" Neal
Audit Committee Chairman
Compensation Committee Member
Former Partner,
Johnson, Blakely, Pope, Bokor,
Ruppel & Burns
0
3
.
1
1
9
6
.
9
4
3
.
8
4
4
.
7
1
9
.
6 6
1
.
6
3
0
.
5
6
0
.
4
3
0
.
3
3
5
.
2
03
04
05
06
07
08
09
10
11
12
Ten Year Book Value Per Share History
(in $ Dollars)
Dixon Hughes
Atlanta, Georgia
General Counsel:
General Counsel:
Foley & Lardner
Chicago, Illinois
Transfer Agent & Registrar:
Computershare Investor Services
Vancouver, BC, Canada V6C 3B9
Stock Information:
Listed on the NASDAQ National
Market System
Trading Symbol: NICK
Corporate Offi cers:
Ralph T. Finkenbrink
Senior Vice President & CFO
Peter L. Vosotas
CEO & President
Notice To Shareholders:
The Company will supply to any
owner of Common Stock, upon
written request to the Company at the
above address and without charge,
a copy of the Annual Report on
Form 10-K for the year ended
March 31, 2012, which has been
filed with the Securities and
Exchange Commission.
The Annual Report and Form 10-K
are also available on the Company's
internet website at:
www.nicholasfi nancial.com
The Annual Meeting is on August 7,
2012 at 11:00 am, at the Nicholas
Financial, Inc., Corporate Headquarters
in Clearwater, FL:
Nicholas Financial, Inc.
2454 McMullen-Booth Road N.
Building C
Clearwater, FL 33759
(727) 726-0763
Nicholas Financial, Inc.
2454 McMullen Booth Road
Building C
Clearwater, Florida 33759 USA
- (727) 726-0763
Telephone
Fax
- (727) 726-2140
www.NicholasFinancial.com