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Error code: DatasetGenerationError
Exception: ArrowInvalid
Message: Failed to parse string: 'Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Supplementary Data, Financial Statement Schedules and Exhibits
See Index to Financial Statements under Item 8, “Financial Statements and Supplementary Data” of this From 10-Q.
(b) Exhibits
2.1
Asset Purchase Agreement, dated February 8, 2013, by and among IES Renewable Energy, LLC, Residential Renewable Energy Technologies, Inc., Energy Efficiency Solar, Inc., and Lonestar Renewable Technologies Acquisition Corp. (Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of
Regulation S-K. A copy of any omitted schedule or similar attachment will be furnished supplementally to the Securities and Exchange Commission upon request.) (1)
3.1
Second Amended and Restated Certificate of Incorporation of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form S-8 filed on May 12, 2006)
3.2
Bylaws of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit 4.2 to the Company’s registration statement on Form S-8, filed on May 12, 2006)
10.1
Joinder and First Amendment to Credit and Security Agreement dated February 13, 2013 by and among the Company each of the other Borrowers and Guarantors named therein and Wells Fargo Bank, National Association. (1)
31.1
Rule 13a-14(a)/15d-14(a) Certification of James M. Lindstrom, Chief Executive Officer(1)
31.2
Rule 13a-14(a)/15d-14(a) Certification of Robert W. Lewey, Chief Financial Officer(1)
32.1
Section 1350 Certification of James M. Lindstrom, Chief Executive Officer(1)
32.2
Section 1350 Certification of Robert W. Lewey, Chief Financial Officer(1)
**101.INS
XBRL Instance Document
**101.SCH
XBRL Schema Document
**101.LAB
XBRL Label Linkbase Document
**101.PRE
XBRL Presentation Linkbase Document
**101.DEF
XBRL Definition Linkbase Document
**101.CAL
XBRL Calculation Linkbase Document
** Furnished herewith
(1) Filed herewith.
SIGNATURES
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 on February 14, 2013.
INTEGRATED ELECTRICAL SERVICES, INC.
By:
/s/ ROBERT W. LEWEY
Robert W. Lewey
Senior Vice President and Chief Financial Officer' as a scalar of type double
Traceback: Traceback (most recent call last):
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/builder.py", line 1870, in _prepare_split_single
writer.write_table(table)
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/arrow_writer.py", line 622, in write_table
pa_table = table_cast(pa_table, self._schema)
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 2292, in table_cast
return cast_table_to_schema(table, schema)
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 2245, in cast_table_to_schema
arrays = [
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 2246, in <listcomp>
cast_array_to_feature(
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 1795, in wrapper
return pa.chunked_array([func(chunk, *args, **kwargs) for chunk in array.chunks])
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 1795, in <listcomp>
return pa.chunked_array([func(chunk, *args, **kwargs) for chunk in array.chunks])
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 2102, in cast_array_to_feature
return array_cast(
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 1797, in wrapper
return func(array, *args, **kwargs)
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/table.py", line 1949, in array_cast
return array.cast(pa_type)
File "pyarrow/array.pxi", line 996, in pyarrow.lib.Array.cast
File "/src/services/worker/.venv/lib/python3.9/site-packages/pyarrow/compute.py", line 404, in cast
return call_function("cast", [arr], options, memory_pool)
File "pyarrow/_compute.pyx", line 590, in pyarrow._compute.call_function
File "pyarrow/_compute.pyx", line 385, in pyarrow._compute.Function.call
File "pyarrow/error.pxi", line 154, in pyarrow.lib.pyarrow_internal_check_status
File "pyarrow/error.pxi", line 91, in pyarrow.lib.check_status
pyarrow.lib.ArrowInvalid: Failed to parse string: 'Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Supplementary Data, Financial Statement Schedules and Exhibits
See Index to Financial Statements under Item 8, “Financial Statements and Supplementary Data” of this From 10-Q.
(b) Exhibits
2.1
Asset Purchase Agreement, dated February 8, 2013, by and among IES Renewable Energy, LLC, Residential Renewable Energy Technologies, Inc., Energy Efficiency Solar, Inc., and Lonestar Renewable Technologies Acquisition Corp. (Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of
Regulation S-K. A copy of any omitted schedule or similar attachment will be furnished supplementally to the Securities and Exchange Commission upon request.) (1)
3.1
Second Amended and Restated Certificate of Incorporation of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit 4.1 to the Company’s registration statement on Form S-8 filed on May 12, 2006)
3.2
Bylaws of Integrated Electrical Services, Inc. (Incorporated by reference to Exhibit 4.2 to the Company’s registration statement on Form S-8, filed on May 12, 2006)
10.1
Joinder and First Amendment to Credit and Security Agreement dated February 13, 2013 by and among the Company each of the other Borrowers and Guarantors named therein and Wells Fargo Bank, National Association. (1)
31.1
Rule 13a-14(a)/15d-14(a) Certification of James M. Lindstrom, Chief Executive Officer(1)
31.2
Rule 13a-14(a)/15d-14(a) Certification of Robert W. Lewey, Chief Financial Officer(1)
32.1
Section 1350 Certification of James M. Lindstrom, Chief Executive Officer(1)
32.2
Section 1350 Certification of Robert W. Lewey, Chief Financial Officer(1)
**101.INS
XBRL Instance Document
**101.SCH
XBRL Schema Document
**101.LAB
XBRL Label Linkbase Document
**101.PRE
XBRL Presentation Linkbase Document
**101.DEF
XBRL Definition Linkbase Document
**101.CAL
XBRL Calculation Linkbase Document
** Furnished herewith
(1) Filed herewith.
SIGNATURES
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 on February 14, 2013.
INTEGRATED ELECTRICAL SERVICES, INC.
By:
/s/ ROBERT W. LEWEY
Robert W. Lewey
Senior Vice President and Chief Financial Officer' as a scalar of type double
The above exception was the direct cause of the following exception:
Traceback (most recent call last):
File "/src/services/worker/src/worker/job_runners/config/parquet_and_info.py", line 1415, in compute_config_parquet_and_info_response
parquet_operations, partial, estimated_dataset_info = stream_convert_to_parquet(
File "/src/services/worker/src/worker/job_runners/config/parquet_and_info.py", line 991, in stream_convert_to_parquet
builder._prepare_split(
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/builder.py", line 1741, in _prepare_split
for job_id, done, content in self._prepare_split_single(
File "/src/services/worker/.venv/lib/python3.9/site-packages/datasets/builder.py", line 1897, in _prepare_split_single
raise DatasetGenerationError("An error occurred while generating the dataset") from e
datasets.exceptions.DatasetGenerationError: An error occurred while generating the datasetNeed help to make the dataset viewer work? Make sure to review how to configure the dataset viewer, and open a discussion for direct support.
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1000045_10Q_2009_0001193125-10-031666.htm | 1,000,045 | 2010-02-16 | 2009-12-31 | 6,153 | null | ITEM 1. FINANCIAL STATEMENTS
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2009, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements of Nicholas Financial, Inc. (including its subsidiaries, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q pursuant to the Securities and Exchange Act of 1934, as amended in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2010. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2009 as filed with the Securities and Exchange Commission on June 15, 2009. The March 31, 2009 condensed consolidated balance sheet included herein has been derived from the March 31, 2009 audited consolidated balance sheet included in the aforementioned Form 10-K.
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, the net realizable value of assets held for resale, and the fair value of interest rate swaps.
On November 10, 2009 the Board 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 condensed 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.
2. Revenue Recognition
Interest income on finance receivables is recognized using the 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.
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 uncollectable amounts would be contemplated in estimating the allowance for loan losses.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. Earnings Per Share (adjusted for stock dividend)
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:
For the three and nine months ended December 31, 2009 potential common stock from stock options totaling 273,900 and 312,400, respectively, were not included in the diluted earnings per share calculation because their effect is anti-dilutive.
4. Finance Receivables
Finance receivables consist of automobile finance installment Contracts and direct consumer loans and are detailed as follows:
The terms of the receivables range from 12 to 72 months and bear a weighted average interest rate of approximately 23.3% as of December 31, 2009.
5. Line of Credit
The Company has a $115.0 million line of credit facility (the “Line”), which expires on November 30, 2010. The Company may borrow the lesser of the $115.0 million or amounts based upon formulas principally related to a percentage of eligible finance receivables, as defined. Borrowings under the Line may be under various LIBOR pricing options plus 162.5 basis points or at the prime rate. Prime rate based borrowings are generally less than $5.0 million. The Company’s cost of borrowed funds, which is based upon the interest rates charged under the Line and the effect of the interest rate swap agreements (see note 6), amounted to 3.92% and 4.57% for the three and nine month periods ended December 31, 2009, respectively, as compared to 4.87% and 5.28% for the three and nine month periods ended December 31, 2008, respectively. Pledged as collateral for this credit facility are all of the assets of the Company. As of December 31, 2009 the outstanding amount of the credit facility was approximately $110.4 million and the amount available under the Line was approximately $4.6 million. The Line requires compliance with certain financial ratios and covenants and satisfaction of specified financial tests, including maintenance of asset quality and performance tests. Cash dividends require consent in writing by the agent and majority lenders under the facility. As of December 31, 2009, the Company was in full compliance with all debt covenants. See note 9 “Subsequent Events” regarding the new credit agreement and increase of amounts available under the Line from $115.0 million to $140.0 million.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Interest Rate Swap Agreements
Effective April 2009, the Company adopted recent provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic (“ASC”) 815, Derivatives and Hedging, enhancing disclosures to better enable financial statement users to understand how and why the Company uses interest rate swap agreements, how the derivative instruments and related hedged items are accounted for, and how such affect the Company’s financial position, financial performance and cash flows. The adoption did not have a significant impact on the consolidated financial statements.
The Company utilizes interest rate swap agreements to manage interest rate exposure. The swap agreements, in effect, convert a portion of the Company’s floating rate debt to a fixed rate, more closely matching the interest rate characteristics of the Company’s finance receivables.
The following table summarizes the activity in the Company’s notional amounts of interest rate swaps:
As of December 31, 2009 and March 31, 2009, the Company had interest rate swaps comprising an aggregate notional amount of $50,000,000 and $80,000,000, respectively, which are detailed as follows:
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) are recorded in earnings. Unrealized losses previously recorded in accumulated other comprehensive loss are reclassified into earnings as interest payments on the Line affect earnings over the remaining term of the respective swap agreements. The Company does not use interest rate swaps for speculative purposes. Such instruments continue to be intended for use as economic hedges.
The locations and amounts of gains (losses) recognized in income during the three and nine months ended December 31, 2009 are as follows:
During the three and nine months ended December 31, 2009, approximately $199,000 and $784,000 of unrealized losses were reclassified from accumulated other comprehensive loss to the change in fair value of interest rate swaps line item of the consolidated statement of income. At December 31, 2009 remaining accumulated other comprehensive loss, net of tax, was approximately $272,000. Prospective amounts expected to be reclassified and affect net earnings are $94,000 during the remainder of fiscal 2010 and $178,000 during fiscal 2011.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Interest Rate Swap Agreements (continued)
In addition, the changes in the fair value of interest rate swaps for the three and nine months ended December 31, 2009 of approximately $464,000 and $1,581,000, respectively, were recorded in the change in fair value of interest rate swaps line item of the consolidated statement of income.
The Company records net realized gains and losses from the swap agreements into the interest expense line item of the consolidated statement of income. Such settlement payments approximated $541,000 and $226,000 for the three months ended December 31, 2009 and 2008, respectively. Such settlement payments approximated $2,030,000 and $829,000 for the nine months ended December 31, 2009 and 2008, respectively.
Under the swap agreements, the Company received an average variable rate of 0.24% and 2.89% and paid an average fixed rate of 3.91% and 4.01% for the three months ended December 31, 2009 and 2008, respectively. Under the swap agreements, the Company received an average variable rate of 0.32% and 2.67% and paid an average fixed rate of 3.98% and 4.03% for the nine months ended December 31, 2009 and 2008, respectively. The interest rate swap liabilities are recorded at fair value, which is approximately $1,174,000 and $2,755,000 as of December 31, 2009 and March 31, 2009, respectively, in the interest rate swaps line item of the consolidated balance sheets. Accumulated other comprehensive loss as of December, 31, 2009 and March 31, 2009 of approximately $272,000 and $756,000, respectively, represents the after-tax effect of changes in the fair value of interest rate swaps prior to October 2008 when the swaps were designated and qualifying as cash flow hedges. As noted above, these changes in fair value, which were previously recorded in accumulated other comprehensive loss while interest rate swaps were designated as cash flow hedges, are reclassified into earnings as interest payments on the Line affect earnings over the remaining term of the respective swap agreements.
The following table reconciles net income with comprehensive income.
7. Fair Value Disclosures
ASC 820, Fair Value Measurements and Disclosures, establishes a framework for using fair value and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities such as debt and equity securities and derivative contracts that are traded in an active market.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
7. Fair Value Disclosures (continued)
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Effective April 1, 2009, the Company adopted recent provisions of ASC 825, Financial Instruments, broadening the disclosures about the fair value of financial instruments to interim financial reporting. The adoption did not have a significant impact on the consolidated financial statements. The Company’s financial instruments consist of cash, finance receivables, accrued interest, the Line, interest rate swap agreements and accounts payable. For each of these financial instruments, excluding the Line, the carrying value is, or approximates, fair value. The carrying value of cash and cash equivalents 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. 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. Accrued interest is paid monthly. As a result of the short term nature of accrued interest and accounts payable, the carrying values approximate fair value. The interest rate for the Line is a variable rate based on LIBOR pricing options or at the prime rate. Any new or renewed credit facility would contain pricing that is materially higher than the Company’s current Line. Based on market conditions, the fair value of the Line was estimated to be $108,500,000 and $98,800,000 as of December 31, 2009 and March 31, 2009, respectively.
Interest rate swap agreements are recorded at fair value on a recurring basis. The Company estimates the fair value based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the measurement period, adjusted for nonperformance risk, if any, including a quantitative and/or qualitative evaluation of both the Company’s credit risk and the counterparty’s credit risk. Accordingly, the Company classifies interest rate swap agreements as Level 2. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents information about certain assets and liabilities measured at fair value:
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. Other Recently Issued Accounting Standards
Effective April 1, 2009, the Company adopted recent provisions of ASC 820 with respect to non-financial assets and liabilities as well as recent provisions providing additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to the usual activity for said asset or liability. The recent provisions also provide guidance on how to identify circumstances that could designate a transaction as not orderly. The adoption did not have a significant impact on the consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not, and are not believed by the Company to have a material impact on the Company’s present or future consolidated financial statements.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
9. Subsequent Events
The Company has evaluated subsequent events through February 12, 2010 which is the date that the condensed consolidated financial statements were issued. Pursuant to the requirements of FASB ACS Topic 855, “Subsequent Events”, there was one event that occurred during this subsequent event reporting period that requires further recognition and disclosure in the financial statements. On January 12, 2010 the Company announced that the Company has executed a new agreement with its consortium of lenders that increases the size of the Line from $115 million to $140 million, subject to formulas principally related to a percentage of eligible finance receivables, as defined. The pricing of the new agreement is 300 basis points above 30-day Libor with a 1% floor on Libor. The Line requires compliance with certain financial ratios and covenants and satisfaction of specified financial tests, including maintenance of asset quality and performance tests. Cash dividends require consent in writing by the agent and majority lenders under the facility.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This report on Form 10-Q contains various statements, other than those concerning historical information, that are based on management’s beliefs and assumptions, as well as information currently available to management, and should be considered forward-looking statements. This notice is intended to take advantage of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. When used in this document, the words “anticipate”, “estimate”, “expect”, and similar expressions are intended to identify forward-looking statements. Although 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. 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 have a direct bearing on the Company’s operating results are fluctuations in the economy, the ability to access bank financing, the degree and nature of competition, demand for consumer financing in the markets served by the Company, the Company’s products and services, increases in the default rates experienced on Contracts, adverse regulatory changes in the Company’s existing and future markets, the Company’s ability to expand its business, including its ability to 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 on the date hereof, and the Company assumes no obligations to update any such forward looking statement. You should also consult factors described from time to time in the Company’s filings made with the Securities and Exchange Commission, including its reports on Form 10-K, 10-Q, 8-K and annual reports to shareholders.
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, which includes a review of all loans on which full collectability may not be reasonably assured, 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, 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 the 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 state maximum interest rates or the maximum interest rate at 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.
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 performs internal branch audits 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 and the wholesale value of the vehicle. 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 credit loss reserve. The Company utilizes a static pool approach to track portfolio performance. A static pool retains an amount equal to 100% of the discount as a reserve for credit losses.
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 for credit losses 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 quarterly to determine if the loss reserves are adequate and adjustments are made if they are determined to be necessary.
Introduction
Consolidated net income increased to approximately $2.9 million for the three-month period ended December 31, 2009 as compared to $235,000 for the corresponding period ended December 31, 2008. Net income for the three months ended December 31, 2009 and 2008 includes a pre-tax gain of approximately $265,000 and a pre-tax charge of $1.7 million respectively, related to the change in fair value of interest rate swaps. Consolidated net income increased to approximately $7.6 million for the nine-month period ended December 31, 2009 as compared to $2.6 million for the corresponding period ended December 31, 2008. Net income for the nine months ended December 31, 2009 and 2008 includes a pre-tax gain of approximately $797,000 and a pre-tax charge of $1.7 million respectively, related to the change in fair value of interest rate swaps. Other than pre-tax gains related to the change in fair value of interest rate swaps, earnings were favorably impacted primarily by an increase in the average net receivables, a decrease in operating expenses as a percentage of average finance receivables, net of unearned interest, a reduction in the provision for credit losses and a decrease in the average cost of borrowed funds. The Company’s software subsidiary, Nicholas Data Services (“NDS”), did not contribute significantly to consolidated operations in the three and nine months ended December 31, 2009 or 2008, respectively.
As discussed in note 6 “Interest Rate Swap Agreements”, the Company made an economic decision which resulted in undesignating the interest rate swaps as cash flow hedges. Under accounting rules this has introduced volatility to the statement of income for changes in the fair value of interest rate swaps that historically have been captured in accumulated comprehensive income or loss in the statement of shareholders’ equity. The Company intends to hold interest rate swaps through their entire term. Accordingly, over the term of each interest rate swap agreement, the unrealized gains and losses from changes in the fair value of interest rate swaps, which are now recorded in the change in fair value of interest rate swaps line item of the statement of income, will net or offset to $0 and cumulatively have no impact on retained earnings.
For the three months ended December 31, 2009, net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 108% to $2.7 million compared to $1.3 million for the three months ended December 31, 2008. Per share diluted net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 109% to $0.23 for the three months ended December 31, 2009 as compared to $0.11 for the three months ended December 31, 2008.
For the nine months ended December 31, 2009, net earnings, excluding changes in fair value of interest rate swaps, increased 97% to $7.1 million compared to $3.6 million for the nine months ended December 31, 2008. Per share diluted net earnings, excluding changes in fair value of interest rate swaps, increased 91% to $0.61 for the nine months ended December 31, 2009 as compared to $0.32 for the nine months ended December 31, 2008.
See reconciliations of the non-GAAP measures on the following page.
Reconciliation of Non-GAAP Financial Measures
This filing contains disclosures of non-GAAP financial measures including: net earnings, excluding changes in fair value of interest rate swaps and per share diluted net earnings, excluding changes in fair value of interest rate swaps. These measures utilize the GAAP terms “net income” and “diluted earnings per share” and adjust the GAAP terms to exclude the effect of mark-to-market adjustments and reclassifications of previously recorded accumulated comprehensive gains and losses associated with interest rate swaps. Management believes this presentation provides additional and meaningful measures for the assessment of the Company’s ongoing results and performance. Because the Company has historically reported mark-to-market (interest rate swaps) through other comprehensive income under hedge accounting, management believes that the inclusion of this non-GAAP measure provides consistency in its financial reporting and facilitates investors’ understanding of the Company’s historic operating trends by providing an additional basis for comparisons to prior periods. Management recognizes that the use of non-GAAP measures has limitations, including the fact that they may not be directly comparable with similar non-GAAP financial measures used by other companies. All non-GAAP financial measures are intended to supplement the applicable GAAP disclosures and should not be considered in isolation from, or as substitute for, financial information prepared in accordance with GAAP. For a reconciliation of non-GAAP measures from GAAP reported amounts, please see the supplemental information below.
The following tables include reconciliations of GAAP reported net income to the non-GAAP measure, net earnings, excluding changes in fair value of interest rate swaps as well as GAAP reported diluted earnings per share to the non-GAAP measure, per share diluted net earnings, excluding changes in fair value of interest rate swaps. The non-GAAP measures exclude the effect of mark-to-market adjustments and reclassifications of previously recorded accumulated comprehensive losses associated with interest rate swaps.
(adjusted for stock dividend)
(a) Represents a non-GAAP financial measure. See information on non-GAAP financial measures above.
Portfolio Summary
Note: All three and nine month key performance indicators expressed as percentages have been annualized.
(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 Line. Average cost of borrowed funds represents interest expense as a percentage of average indebtedness.
(3) Finance revenue represents interest and fee income on finance receivables and does not include revenue generated by Nicholas Data Services, Inc., (“NDS”) the wholly-owned software subsidiary of Nicholas Financial, Inc.
(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 finance revenues as a percentage of average finance receivables, net of unearned interest. Net portfolio yield represents finance revenue 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 the calculation above are net of administrative expenses associated with NDS which approximated $55,000 and $48,000 during the three-month periods ended December 31, 2009 and 2008 and $164,000 and $259,000 during the nine-month periods ended December 31, 2009 and 2008, respectively.
(7) Pre-tax yield represents net portfolio yield minus marketing, salaries, employee benefits, depreciation and administrative 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.
Three months ended December 31, 2009 compared to three months ended December 31, 2008
Interest Income and Loan Portfolio
Interest and fee income on finance receivables, predominately finance charge income, increased 9% to approximately $14.4 million for the three-month period ended December 31, 2009 from $13.2 million for the corresponding period ended December 31, 2008. Average finance receivables, net of unearned interest equaled approximately $226.3 million for the three-month period ended December 31, 2009, an increase of 9% from $208.4 million for the corresponding period ended December 31, 2008. The primary reason average finance receivables, net of unearned interest, increased was the increase in the receivable base of several existing branches in younger markets and the opening of one additional branch location. The gross finance receivable balance increased 9% to approximately $316.3 million as of December 31, 2009, from $291.5 million as of December 31, 2008. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased from 25.41% for the three-month period ended December 31, 2008 to 25.37% for the three-month period ended December 31, 2009. The net portfolio yield increased from 14.21% for the three-month period ended December 31, 2008 to 18.12% for the corresponding period ended December 31, 2009. The gross portfolio yield decreased primarily due to a lower weighted annual percentage rate (“APR”) earned on finance receivables. The net portfolio yield increased primarily due to a decrease in the average cost of borrowed funds and a reduction in the provision for credit losses.
Marketing, Salaries, Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries, employee benefits, depreciation and administrative expenses increased to approximately $5.8 million for the three-month period ended December 31, 2009 from approximately $5.4 million for the corresponding period ended December 31, 2008. Marketing, salaries, employee benefits, depreciation, and administrative expenses as a percentage of finance receivables, net of unearned interest, decreased to 10.12% for the three-month period ended December 31, 2009 from 10.22% for the three-month period ended December 31, 2008.
Interest Expense
Interest expense decreased to approximately $1.1 million for the three-month period ended December 31, 2009 from $1.3 million for the three-month period ended December 31, 2008. The average indebtedness for the three-month period ended December 31, 2009 increased to approximately $110.1 million as compared to $104.1 million for the corresponding period ended December 31, 2008. The Company’s average cost of borrowed funds decreased to 3.92% for the three-month period ended December 31, 2009 as compared to 4.87% for the corresponding period ended December 31, 2008. The weighted-average 30-day LIBOR rate decreased to 0.28% for the three months ended December 31, 2009 as compared to 2.89% for the corresponding period ended December 31, 2008. The decrease driven by the reduction in 30-day LIBOR rates was offset in part by the increase in average indebtedness and impacted by notional amounts of interest rate swap agreements, which convert a substantial portion of the Company’s floating rate debt to fixed rate debt. The weighted average notional amount of interest rate swaps was $57.4 million at a weighted average fixed rate of 3.91% for the three months ended December 31, 2009 as compared to $80.0 million at 4.01% for the corresponding period ended December 31, 2008. For further discussions regarding the Company’s cost of funds and the effect of interest rate swap agreements see note 6 - “Interest Rate Swap Agreements”. The average cost of borrowings in future periods will continue to be impacted by such factors as well as pricing options under the new credit agreement entered into on January 12, 2010. For further discussions regarding the new credit agreement and the increase of amounts available under the Line see note 9 - “Subsequent Events”.
Nine months ended December 31, 2009 compared to nine months ended December 31, 2008
Interest Income and Loan Portfolio
Interest income and fee on finance receivables, predominately finance charge income, increased 6% to approximately $42.2 million for the nine-month period ended December 31, 2009 from $39.8 million for the corresponding period ended December 31, 2008. Average finance receivables, net of unearned interest equaled approximately $221.6 million for the nine-month period ended December 31, 2009, an increase of 7% from $206.8 million for the corresponding period ended December 31, 2008. The primary reason average finance receivables, net of unearned interest, increased was the increase in the receivable base of several existing branches in younger markets and the opening of two additional branch locations. The gross finance receivable balance increased 9% to approximately $316.3 million as of December 31, 2009, from $291.5 million as of December 31, 2008. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased from 25.68% for the nine-month period ended December 31, 2008 to 25.37% for the nine-month period ended December 31, 2009. The net portfolio yield increased from 14.57% for the nine-month period ended December 31, 2008 to 17.41% for the corresponding period ended December 31, 2009. The gross portfolio yield decreased primarily due to a lower weighted annual percentage rate (“APR”) earned on finance receivables. The net portfolio yield increased primarily due to a decrease in the average cost of borrowed funds and a reduction in the provision for credit losses.
Marketing, Salaries, Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries, employee benefits, depreciation and administrative expenses increased to approximately $17.4 million for the nine-month period ended December 31, 2009 from approximately $16.8 million for the corresponding period ended December 31, 2008. Marketing, salaries, employee benefits, depreciation, and administrative expenses as a percentage of finance receivables, net of unearned interest, decreased to 10.38% for the nine-month period ended December 31, 2009 from 10.67% for the nine-month period ended December 31, 2008. The Company has implemented certain cost control measures which have reduced operating expenses during the nine-month period ended December 31, 2009.
Interest Expense
Interest expense decreased to approximately $3.6 million for the nine-month period ended December 31, 2009 from $4.1 million for the nine-month period ended December 31, 2008. The average indebtedness for the nine-month period ended December 31, 2009 increased to approximately $106.5 million as compared to $103.7 million for the corresponding period ended December 31, 2008. The Company’s average cost of borrowed funds decreased to 4.57% for the nine-month period ended December 31, 2009 as compared to 5.28% for the corresponding period ended December 31, 2008. The weighted-average 30-day LIBOR rate decreased to 0.35% for the nine months ended December 31, 2009 as compared to 2.67% for the corresponding period ended December 31, 2008. The decrease driven by the reduction in 30-day LIBOR rates was offset in part by the increase in average indebtedness and impacted by notional amounts of interest rate swap agreements, which convert a substantial portion of the Company’s floating rate debt to fixed rate debt. The weighted average notional amount of interest rate swaps was $72.5 million at a weighted average fixed rate of 3.98% for the nine months ended December 31, 2009 as compared to $74.8 million at 4.03% for the corresponding period ended December 31, 2008. For further discussions regarding the Company’s cost of funds and the effect of interest rate swap agreements see note 6 - “Interest Rate Swap Agreements”. The average cost of borrowings in future periods will continue to be impacted by such factors as well as pricing options under the new credit agreement entered into on January 12, 2010. For further discussions regarding the new credit agreement and the increase of amounts available under the Line see note 9 - “Subsequent Events”.
Contract Procurement
The Company purchases Contracts in the twelve states listed in the table below. The Contracts purchased by the Company are predominately for used vehicles; for the three-month and nine-month periods ended December 31, 2009 and 2008, less than 3% were for new vehicles. As of December 31, 2009, the average model year of vehicles collateralizing the portfolio was a 2004 vehicle.
The following tables present selected information on Contracts purchased by the Company, net of unearned interest.
Loan Origination
The following table presents selected information on direct loans originated by the Company, net of unearned interest.
Analysis of Credit Losses
As of December 31, 2009, the Company had 1,036 active static pools. The average pool upon inception consisted of 61 Contracts with aggregate finance receivables, net of unearned interest, of approximately $571,000.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts.
The Company has seen evidence that the changes made to underwriting guidelines approximately one year ago have resulted in a positive effect on the static pools originated during that same timeframe. During comparable liquidation cycles, the default rate for static pools originated during the last year has decreased when compared to the preceding year’s performance. However, from a historical perspective, charge-off rates remain high and the Company believes that continued weakness in employment will make it difficult for additional improvement. As a result, the Company experienced a lower net charge-off percentage of 8.39% during the three-month period ended December 31, 2009 as compared to 11.15% for the three-month period ended December 31, 2008. The Company experienced a lower net charge-off percentage of 8.12% during the nine-month period ended December 31, 2009 as compared to 10.27% for the nine-month period ended December 31, 2008. While the Company is encouraged with the decline in net charge-offs for these periods, it remains concerned over elevated delinquency levels, leading to an increase in the overall allowance for credit losses as a percentage of finance receivables.
The average dealer discount associated with new volume for the three months ended December 31, 2009 and 2008 were 9.08% and 9.23%, respectively. The average dealer discount associated with new volume for the nine months ended December 31, 2009 and 2008 were 9.07% and 9.03%, respectively. The amount of discount is a result of credit quality associated with contracts purchased and the competition in the markets in which the Company operates. The Company intends to remain focused on maintaining these discount levels to help off-set above average loss rates.
With the decrease in the net charge off percentage noted above, the provision for credit losses decreased from approximately $4.6 million for the three-month period ended December 31, 2008, to $3.0 million for the three-month period ended December 31, 2009. The provision for credit losses decreased from approximately $13.1 million for the nine-month period ended December 31, 2008, to $9.6 million for the nine-month period ended December 31, 2009. The Company’s losses absorbed as a percentage of liquidation decreased from 14.62% for the three months ended December 31, 2008, to 11.27% for the three months ended December 31, 2009. The Company’s losses absorbed as a percentage of liquidation decreased from 12.90% for the nine months ended December 31, 2008, to 11.07% for the nine months ended December 31, 2009. In addition, excess provisions reversed, increased from $68,000 for the three-month period ended December 31, 2008 to approximately $214,000 for the three-month period ended December 31, 2009. Excess provisions reversed increased from $78,000 for the nine-month period ended December 31, 2008 to approximately $467,000 for the nine-month period ended December 31, 2009. The reversal of provisions previously recorded in each period was due to the favorable charge-off performance of static pools originated from April 2005 through June 2006.
The Company anticipates losses absorbed as a percentage of liquidation will be in the 9%-11% range during the remainder of the current fiscal year; however, no assurances can be given that the actual losses absorbed may not be higher as a result of further economic weakness. Effective October 1, 2008, the Company modified its Contract procurement underwriting guidelines. The primary changes include: raising the minimum income required by the debtor to qualify for loan approval, reducing the maximum dollar amount that can be advanced for certain loan applications, and the maximum dollar amount that can be approved by a branch manager on certain approvals. The longer-term outlook for portfolio performance will depend on the overall economic conditions, the unemployment rate, the economic impact of any government sponsored stimulus package, and the price of oil which impacts the cost of gasoline, food and many other items used or consumed by the average person. Also, the Company’s ability to monitor, manage and implement its underwriting philosophy in additional geographic areas as it strives to continue its expansion will impact future portfolio performance. The Company does not believe there have been any significant changes in loan concentrations or terms of Contracts purchased during the three and nine months ended December 31, 2009; however, the changes made to underwriting guidelines approximately one year ago have resulted in a positive effect on the static pools originated during that same timeframe.
Recoveries as a percentage of charge-offs increased from approximately 8% for the three months ended December 31, 2008 to approximately 11% for the three months ended December 31, 2009. Recoveries as a percentage of charge-offs increased from approximately 9% for the nine months ended December 31, 2008 to approximately 11% for the nine months ended December 31, 2009. Historically, recoveries as a percentage of charge-off’s fluctuate from period to period and the Company does not attribute this increase to any particular change in operational strategy or economic event.
The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and under its direct consumer loan program:
The delinquency percentage for Contracts more than thirty days past due as of December 31, 2009 was 5.50% as compared to 6.79% as of December 31, 2008. The delinquency percentage for direct loans more than thirty days past due as of December 31, 2009 was 4.79% as compared to 5.79% as of December 31, 2008.
The Company believes delinquency trends over several reporting periods are useful in estimating future losses and overall portfolio performance. The Company also estimates future portfolio performance by considering various factors, the most significant of which are described as follows. The Company analyzes historical static pool performance for each branch location when determining appropriate reserve levels. Additionally, the Company utilizes internal branch audits as an indication of future static pool performance. The Company also considers such things as the current unemployment rate in markets the Company operates in, the percentage of voluntary repossessions as compared to prior periods, the percentage of bankruptcy filings as compared to prior periods and other leading economic indicators.
Income Taxes
Driven by increases in operating income, the provision for income taxes increased to approximately $1.8 million for the three months ended December 31, 2009 as compared to approximately $144,000 for the three months ended December 31, 2008. The provision for income taxes increased to approximately $4.7 million for the nine months ended December 31, 2009 as compared to approximately $1.6 million for the nine months ended December 31, 2008. The Company’s effective tax rate increased from 38.08% for the three months ended December 31, 2008 to 38.66% for the three months ended December 31, 2009. The Company’s effective tax rate increased from 38.09% for the nine months ended December 31, 2008 to 38.41% for the nine months ended December 31, 2009. The primary reason for increases in the effective tax rate was the result of a portion of the Company’s taxable income reaching the 35% maximum Federal tax rate.
Liquidity and Capital Resources
The Company’s cash flows are summarized as follows:
The Company’s primary use of working capital for the nine months ended December 31, 2009 was the funding of the purchase of Contracts. The Company’s Line is secured by all of the assets of the Company’s Nicholas Financial, Inc. subsidiary. As of December 31, 2009 the Company could borrow the lesser of $115.0 million or amounts based upon formulas principally related to a percentage of eligible finance receivables, as defined. Borrowings under the Line may be under various LIBOR pricing options plus 162.5 basis points or at the prime rate. Prime rate based borrowings are generally less than $5.0 million. As of December 31, 2009, the amount outstanding under the Line was approximately $110.4 million and the amount available under the Line was approximately $4.6 million.
Amounts outstanding under the Line have increased by $8.3 million during the nine months ended December 31, 2009. The growth of the Line is principally related to funding the purchase of Contracts and is consistent with the growth of finance receivables.
On January 12, 2010, the Company executed a new agreement with its consortium of lenders that increases the size of the Line from $115.0 million to $140.0 million. The contract extends the maturity date to November 30, 2011 and includes Wells Fargo Preferred Capital as a new participant in the Company’s consortium of lenders. This amendment was effective January 12, 2010. The pricing of the new agreement is 300 basis points above 30-day Libor with a 1% floor on Libor. The Company will continue to depend on the availability of the Line, together with cash from operations, to finance future operations including the growth of existing branches and future branch openings (see “Future Expansion” below).
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 November 30, 2011. 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. The Company believes its lenders will continue to allow it to operate in the event of a condition of default; however no assurance can be given that this would occur.
The Company has entered into interest rate swap agreements, each of which, in effect, convert a portion of the Company’s floating-rate debt to a fixed-rate, thus reducing the impact of interest rate change on the Company’s interest expense. As of December 31, 2009, approximately 45% of the Company’s borrowings under the Line were subject to interest rate swap agreements as compared to 78% as of March 31, 2009. These swap agreements have maturities ranging from May 19, 2010 through February 2, 2011. Consistent with the Company’s objective to minimize the cost of borrowing through an appropriate mix of fixed and floating rate debt, the Company is evaluating the extent to which it will enter additional interest rate swap agreements, if any, in managing fluctuating interest rate exposure under the new credit agreement.
On November 10, 2009 the Board 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 paid in capital. This amount was derived from using 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 condensed 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.
Future Expansion
The Company currently operates a total of fifty branch locations in twelve states, including nineteen in Florida, seven in Ohio, six in North Carolina, five in Georgia, three in Kentucky, two in Virginia, two in Indiana, two in Alabama and one in Michigan, Maryland, South Carolina, and Tennessee. Each office is budgeted (size of branch, number of employees and location) to handle up to 1,000 accounts and up to $7.5 million in outstanding finance receivables, net of unearned interest. To date, ten of our branches have reached this capacity. While the Company remains cautious, we are encouraged that the economy is showing some signs of stability and, subject to favorable market conditions, we will proceed with our planned expansion. We expect to open a second location in Tennessee, specifically in Antioch, during our fourth quarter ending March 31, 2010. We also plan on opening two additional branch locations during the first quarter of fiscal year 2011 which ends June 30, 2010. The Company continues to evaluate additional markets for future branch locations, and subject to market conditions, could open additional branch locations during the remaining quarters of fiscal 2011. The Company remains open to acquisitions should an opportunity present itself.
ITEM 3. 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’s objective is to minimize the cost of borrowing through an appropriate mix of fixed and floating rate debt. Derivative financial instruments, such as interest rate swap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from ongoing business operations. During fiscal 2009, the Company undesignated all of its interest rate swaps as cash flow hedges. (See note 6 - “Interest Rate Swap Agreements”) The Company does not use interest rate swaps for speculative purposes. Such instruments continue to be intended for use as economic hedges.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.
Changes in internal controls. There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION | null | null | null | null | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company’s Annual General Meeting of Shareholders was held on August 11, 2009. The information set forth in this Item 4 was inadvertently omitted from the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2009.
(b) At the Company’s Annual General Meeting of Shareholders, the following directors were reelected for terms expiring in 2012 by the votes indicated below:
The directors whose terms of office as directors continued after the meeting were Peter L. Vosotas, Ralph T. Finkenbrink and Stephen Bragin.
(c) The only matter other than election of directors, brought for a vote at the Company’s Annual General Meeting of Shareholders, passed by the following vote: | null | ITEM 6. EXHIBITS
See exhibit index following the signature page.
SIGNATURES
Pursuant to the requirements 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.
NICHOLAS FINANCIAL, INC.
(Registrant)
Date: February 16, 2010
/s/ Peter L. Vosotas
Peter L. Vosotas
Chairman of the Board, President,
Chief Executive Officer and Director
Date: February 16, 2010
/s/ Ralph T. Finkenbrink
Ralph T. Finkenbrink
Senior Vice President,
Chief Financial Officer and Director
EXHIBIT INDEX
Exhibit No.
Description
10.1
Second Amended and Restated Loan and Security Agreement, dated January 12, 2010
10.9
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements
31.1
Certification of the President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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 | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2010_0001193125-10-189507.htm | 1,000,045 | 2010-08-16 | 2010-06-30 | 6,153 | null | ITEM 1. FINANCIAL STATEMENTS
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2010, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements of Nicholas Financial, Inc. (including its subsidiaries, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q pursuant to the Securities and Exchange Act of 1934, as amended in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2011. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010 as filed with the Securities and Exchange Commission on June 14, 2010. The March 31, 2010 condensed consolidated balance sheet included herein has been derived from the March 31, 2010 audited consolidated balance sheet included in the aforementioned Form 10-K.
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, the net realizable value of assets held for resale, and the fair value of interest rate swaps.
2. Reclassification
Certain amounts in our prior-period consolidated financial statements have been reclassified to conform to the current-period presentation.
3. Revenue Recognition
Interest income on finance receivables is recognized using the 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 June 30, 2010 and March 31, 2010, the amount of gross finance receivables not accruing interest was approximately $3,527,000 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 uncollectable amounts would be contemplated in estimating the allowance for loan losses.
Sales relate principally to telephone support agreements and the sale of business forms to small businesses located primarily in the Southeast United States. The aforementioned sales of the Nicholas Data Services, Inc. subsidiary, (“NDS”) represent less than 1% of the Company’s consolidated revenues.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
4. 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:
For the three months ended June 30, 2010 and 2009 potential common stock from stock options totaling 141,700 and 459,415 respectively were not included in the diluted earnings per share calculation because their effect is anti-dilutive.
5. Finance Receivables
Finance receivables consist of automobile finance installment Contracts and direct consumer loans and are detailed as follows:
The terms of the Contract receivables range from 12 to 72 months and the direct consumer loans range from 6 to 48 months. The receivables bear a weighted average interest rate of approximately 24% for the three month period ending June 30, 2010.
6. Line of Credit
Prior to January 12, 2010, the Company had a $115,000,000 line of credit facility expiring on November 30, 2010. Under this former facility, the Company could borrow the lesser of the $115,000,000 or amounts based upon formulas principally related to a percentage of eligible finance receivables, as defined. Borrowings under the former facility could be under various LIBOR pricing options plus 162.5 basis points or at the prime rate.
On January 12, 2010, the Company executed a new agreement with its consortium of lenders that increases the size of the line of credit facility (the “Line”) from $115,000,000 to $140,000,000, subject to formulas principally related to a percentage of eligible finance receivables, as defined. The pricing of the Line, which expires on November 30, 2011, is 300 basis points above 30-day LIBOR (4.00% at June 30, 2010) with a 1% floor on LIBOR or at the prime rate. Prime rate borrowings are generally less than $5.0 million. The Company’s cost of borrowed funds, which is based upon the interest rates charged under the Line and the effect of the interest rate swap agreements (see note 7), amounted to 5.69% and 4.94% for the three months ended June 30, 2010 and 2009, respectively.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Line of Credit (continued)
Pledged as collateral for this credit facility are all of the assets of the Company. The outstanding amount of the credit facility was approximately $110,000,000 and $107,000,000 as of June 30, 2010 and March 31, 2010, respectively. The amount available under the line of credit was approximately $30,000,000 and $33,000,000 as of June 30, 2010 and March 31, 2010, respectively. 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 require consent in writing by the agent and majority lenders under the facility. As of June 30, 2010, the Company was in full compliance with all debt covenants.
7. Interest Rate Swap Agreements
The Company utilizes interest rate swap agreements to manage interest rate exposure. The swap agreements, in effect, convert a portion of the Company’s floating rate debt to a fixed rate, more closely matching the interest rate characteristics of the Company’s finance receivables.
The following table summarizes the activity in the Company’s notional amounts of interest rate swaps:
As of June 30, 2010 and March 31, 2010, the Company had interest rate swaps comprising an aggregate notional amount of $40.0 million and $50.0 million, respectively, which are detailed as follows:
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) are recorded in earnings. Unrealized losses previously recorded in accumulated other comprehensive loss are reclassified into earnings as interest payments on the Line affect earnings over the remaining term of the respective swap agreements. The Company does not use interest rate swaps for speculative purposes. Such instruments continue to be intended for use as economic hedges.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
7. Interest Rate Swap Agreements (continued)
The locations and amounts of gains (losses) recognized in income during the three months ended June 30, 2010 and June 30, 2009 are as follows:
The interest rate swap liabilities are recorded at fair value, which is approximately $390,000 and $784,000 as of June 30, 2010 and March 31, 2010, respectively, in the interest rate swaps line item of the consolidated balance sheets.
For the three months ended June 30, 2010 and 2009, approximately $149,000 and $292,000 of unrealized losses were reclassified from accumulated other comprehensive loss to the change in fair value of interest rate swaps line item of the consolidated statement of income. In addition, the changes in the fair value of interest rate swaps for the three months ended June 30, 2010 and June 30, 2009 of approximately $393,000 and $590,000, respectively, was recorded in the change in fair value of interest rate swaps line item of the consolidated statement of income.
The Company records net realized gains and losses from the swap agreements into the interest expense line item of the consolidated statement of income. Such settlement payments approximated $392,000 and $727,000 for the three months ended June 30, 2010 and 2009, respectively. Under the swap agreements, the Company received an average variable rate of 0.29% and 0.41% and paid an average fixed rate of 3.89% and 4.01% for the three months ended June 30, 2010 and 2009, respectively.
Accumulated other comprehensive loss as of June 30, 2010 and March 31, 2010 of approximately $86,000 and $178,000, respectively, represents the after-tax effect of changes in the fair value of interest rate swaps prior to October 2008 when the swaps were designated and qualifying as cash flow hedges. At June 30, 2010 remaining accumulated other comprehensive loss, net of tax, was approximately $86,000, and is expected to be reclassified and affect net earnings during the remainder of fiscal 2011.
The following table reconciles net income with comprehensive income.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
8. Fair Value Disclosures
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. 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.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The Company estimates the fair value of interest rate swap agreements based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the measurement period, adjusted for nonperformance risk, if any, including a quantitative and qualitative evaluation of both the Company’s credit risk and the counterparty’s credit risk. Accordingly, the Company classifies interest rate swap agreements as Level 2.
Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the interest rate swaps existed.
Financial Instruments Not Measured at Fair Value
The Company’s financial instruments, other than the interest rate swap agreements, 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 signed within the fourth quarter of fiscal year ending March 31, 2010. Currently, any new or renewed credit facility would contain pricing that is equal to the Company’s current Line. Based on these market conditions, the fair value of the Line as of June 30, 2010 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 or at the prime rate.
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.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
9. Other Recently Issued Accounting Standards
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20: “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” on July 21, 2010. The ASU’s main objective is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The ASU amends current guidance and may require additional disclosures, including the requirement to provide a greater level of disaggregated data, as it relates to exposure to credit losses. The ASU will be effective for the Company for the interim reporting period ending December 31, 2010.
Other recent accounting guidance did not have a material impact on the Company’s consolidated financial statements.
Any other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC, including Accounting Standards Codification (“ASC”) Topic 810, “Consolidations”, and ASC Topic 860, “Transfers and Servicing”, did not have a material impact on the Company’s present or future consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This report on Form 10-Q contains various statements, other than those concerning historical information, that are based on management’s beliefs and assumptions, as well as information currently available to management, and should be considered forward-looking statements. This notice is intended to take advantage of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. When used in this document, the words “anticipate”, “estimate”, “expect”, and similar expressions are intended to identify forward-looking statements. Although 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. 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 have a direct bearing on the Company’s operating results are fluctuations in the economy, the ability to access bank financing, the degree and nature of competition, demand for consumer financing in the markets served by the Company, the Company’s products and services, increases in the default rates experienced on Contracts, adverse regulatory changes in the Company’s existing and future markets, the Company’s ability to expand its business, including its ability to 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 on the date hereof, and the Company assumes no obligations to update any such forward looking statement. You should also consult factors described from time to time in the Company’s filings made with the Securities and Exchange Commission, including its reports on Form 10-K, 10-Q, 8-K and annual reports to shareholders.
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 discount 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, 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 the 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 state maximum interest rates or the maximum interest rate at 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.
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 Company considers the entire amount of discount to be related to credit quality and is part of the credit loss reserve. The Company utilizes a static pool approach to track portfolio performance. A static pool retains an amount equal to 100% of the discount as a reserve for credit losses.
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.
Introduction
Consolidated net income increased to approximately $3.6 million for the three-month period ended June 30, 2010 as compared to $2.3 million for the corresponding period ended June 30, 2009. Net income for the three months ended June 30, 2010 and 2009 includes a pre-tax gain of approximately $244,000 and $297,000, respectively, related to the change in fair value of interest rate swaps. Earnings were favorably impacted primarily by an increase in average finance receivables, a decrease in operating expenses as a percentage of average finance receivables, net of unearned interest, and a decrease in write-offs and corresponding reduction in the provision for credit losses; these favorable items were partially offset with an increase in interest expense. The Company’s software subsidiary, Nicholas Data Services (“NDS”), did not contribute significantly to consolidated operations in the three months ended June 30, 2010 or 2009, respectively.
As discussed in note 7 “Interest Rate Swap Agreements”, the Company made an economic decision which resulted in undesignating the interest rate swaps as cash flow hedges. Under accounting rules this has introduced volatility to the statement of income for changes in the fair value of interest rate swaps that historically have been captured in accumulated comprehensive income or loss in the statement of shareholders’ equity. The Company intends to hold interest rate swaps through their entire term. Accordingly, over the term of each interest rate swap agreement, the unrealized gains and losses from changes in the fair value of interest rate swaps, which are now recorded in the change in fair value of interest rate swaps line item of the statement of income, will net or offset to $0 and cumulatively have no impact on retained earnings.
For the three months ended June 30, 2010, net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 62% to $3.4 million compared to $2.1 million for the three months ended June 30, 2009. Per share diluted net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 61% to $0.29 for the three months ended June 30, 2010 as compared to $0.18 for the three months ended June 30, 2009.
See reconciliations of the non-GAAP measures on the following page.
Reconciliation of Non-GAAP Financial Measures
This filing contains disclosures of non-GAAP financial measures including: net earnings, excluding changes in fair value of interest rate swaps and per share diluted net earnings, excluding changes in fair value of interest rate swaps. These measures utilize the GAAP terms “net income” and “diluted earnings per share” and adjust the GAAP terms to exclude the effect of mark-to-market adjustments and reclassifications of previously recorded accumulated comprehensive gains and losses associated with interest rate swaps. Management believes this presentation provides additional and meaningful measures for the assessment of the Company’s ongoing results and performance. Because the Company has historically reported mark-to-market (interest rate swaps) through other comprehensive income under hedge accounting, management believes that the inclusion of this non-GAAP measure provides consistency in its financial reporting and facilitates investors’ understanding of the Company’s historic operating trends by providing an additional basis for comparisons to prior periods. Management recognizes that the use of non-GAAP measures has limitations, including the fact that they may not be directly comparable with similar non-GAAP financial measures used by other companies. All non-GAAP financial measures are intended to supplement the applicable GAAP disclosures and should not be considered in isolation from, or as substitute for, financial information prepared in accordance with GAAP.
The following tables include reconciliations of GAAP reported net income to the non-GAAP measure, net earnings, excluding changes in fair value of interest rate swaps as well as GAAP reported diluted earnings per share to the non-GAAP measure, per share diluted net earnings, excluding changes in fair value of interest rate swaps. The non-GAAP measures exclude the effect of mark-to-market adjustments and reclassifications of previously recorded accumulated comprehensive losses associated with interest rate swaps.
(adjusted for stock dividend)
(a) Represents a non-GAAP financial measure. See information on non-GAAP financial measures above.
Note: All three month key performance indicators expressed as percentages have been annualized.
(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 Line. Average cost of borrowed funds represents interest expense as a percentage of average indebtedness.
(3) Interest and fee income on finance receivables does not include revenue generated by Nicholas Data Services, Inc., (“NDS”) the wholly-owned software subsidiary of Nicholas Financial, Inc.
(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 the calculation above are net of administrative expenses associated with NDS which approximated $58,000 and $52,000 during the three-month periods ended June 30, 2010 and 2009, 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.
Three months ended June 30, 2010 compared to three months ended June 30, 2009
Interest Income and Loan Portfolio
Interest and fee income on finance receivables, predominately finance charge income, increased 9% to approximately $14.9 million for the three-month period ended June 30, 2010 from $13.7 million for the corresponding period ended June 30, 2009. Average finance receivables, net of unearned interest equaled approximately $238.3 million for the three-month period ended June 30, 2010, an increase of 10% from $215.7 million for the corresponding period ended June 30, 2009. The primary reason average finance receivables, net of unearned interest, increased was the increase in the receivable base of several existing branches in younger markets. The gross finance receivable balance increased 11% to approximately $340.7 million as of June 30, 2010, from $307.9 million as of June 30, 2009. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased to 25.08% for the three-month period ended June 30, 2010 from 25.35% for the three-month period ended June 30, 2009. The net portfolio yield increased to 19.82% for the corresponding period ended June 30, 2010 from 16.83% for the three-month period ended June 30, 2009. The gross portfolio yield decreased primarily due to a lower weighted APR earned on finance receivables. The net portfolio yield increased primarily due to a reduction in the provision for credit losses.
Marketing, Salaries, Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries, employee benefits, depreciation and administrative expenses increased to approximately $6.2 million for the three-month period ended June 30, 2010 from approximately $5.7 million for the corresponding period ended June 30, 2009. The increase of 9% was primarily attributable to salaries expense. The Company opened additional branches and had more employees that were eligible for bonuses for the three months ended June 30, 2010 than the three months ended June 30, 2009. Marketing, salaries, employee benefits, depreciation, and administrative expenses as a percentage of finance receivables, net of unearned interest, decreased to 10.39% for the three-month period ended June 30, 2010 from 10.49% for the three-month period ended June 30, 2009.
Interest Expense
Interest expense increased to approximately $1.5 million for the three-month period ended June 30, 2010 from $1.3 million for the three-month period ended June 30, 2009. The following table summarizes the Company’s average cost of borrowed funds for the three-month period ended June 30:
On January 12, 2010, the Company executed a new line of credit facility. At this time, the 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. For further discussions regarding the Company’s line of credit see note 6 - “Line of Credit”. The increase in the credit spread under the new facility is the primary reason the Company’s average cost of funds increased.
The weighted-average 30-day LIBOR rate decreased to 0.29% for the three-month period ended June 30, 2010 as compared to 0.41% for the three-month period ended June 30, 2009. The reduction in 30-day LIBOR rates was offset in part by the Company’s interest rate swap agreements, which convert a portion of the Company’s floating rate debt to fixed rate debt, as well as the 1% floor on LIBOR under the new credit facility.
The weighted average notional amount of interest rate swaps was $45.4 million at a weighted average fixed rate of 3.89% for the three-month period ended June 30, 2010 as compared to $80.0 million at 4.01% for the corresponding period ended June 30, 2009. For further discussions regarding the effect of interest rate swap agreements see note 7 - “Interest Rate Swap Agreements”.
Contract Procurement
The Company purchases Contracts in the twelve states listed in the table below. The Contracts purchased by the Company are predominately for used vehicles; for the three-month periods ended June 30, 2010 and 2009, less than 2% were for new vehicles. As of June 30, 2010, the average model year of vehicles collateralizing the portfolio was a 2004 vehicle.
The following tables present selected information on Contracts purchased by the Company, net of unearned interest.
Loan Origination
The following table presents selected information on direct loans originated by the Company, net of unearned interest.
Analysis of Credit Losses
As of June 30, 2010, the Company had 1,088 active static pools. The average pool upon inception consisted of 59 Contracts with aggregate finance receivables, net of unearned interest, of approximately $558,000.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on direct loans.
The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and under its direct consumer loan program:
The average dealer discount associated with new volume for the three months ended June 30, 2010 and 2009 was 8.91% and 9.29%, respectively. The amount of discount is a result of credit quality associated with contracts purchased and the competition in the markets in which the Company operates.
The Company’s losses as a percentage of liquidation decreased to 6.49% for the three months ended June 30, 2010 as compared to 10.80% for the three months ended June 30, 2009. Since the inception of the revised underwriting guidelines in October 2008, the Company has seen improvements in the quality of its Contracts. During comparable liquidation cycles, the default rate for static pools originated since the revision of underwriting guidelines has decreased when compared to the preceding year’s performance.
The Company believes that continued weakness in employment will make it difficult for additional improvement. The provision for credit losses decreased to $1.6 million for the three months ended June 30, 2010 from $3.3 million for the three months ended June 30, 2009, largely due to the decrease in the net charge-off rate to 4.59% for the three months ended June 30, 2010 as compared to 7.72% for the three months ended June 30, 2009. While the Company is encouraged with the decline in net charge-offs and delinquency percentages for these periods, from a historical perspective, charge-off rates and delinquencies remain high; leading to an increase in the overall allowance for credit losses as a percentage of finance receivables.
The Company’s losses as a percentage of liquidation decreased to 6.49% for the three months ended June 30, 2010 as compared to 10.80% for the three months ended June 30, 2009. Since the inception of the revised underwriting guidelines in October 2008, the Company has seen improvements in the quality of its Contracts. During comparable liquidation cycles, the default rate for static pools originated since the revision of underwriting guidelines has decreased when compared to the preceding year’s performance.
The Company anticipates losses absorbed as a percentage of liquidation will be in the 6%-10% range during the remainder of the current fiscal year; however, no assurances can be given that the actual losses absorbed may not be higher as a result of further economic weakness. The longer-term outlook for portfolio performance will depend on the overall economic conditions, the unemployment rate, and the price of oil which impacts the cost of gasoline, food and many other items used or consumed by the average person. Also, the Company’s ability to monitor, manage and implement its underwriting philosophy in additional geographic areas as it strives to continue its expansion will impact future portfolio performance. The Company does not believe there have been any significant changes in loan concentrations or terms of Contracts purchased during the three months ended June 30, 2010.
Recoveries as a percentage of charge-offs increased to approximately 20.12% for the three months ended June 30, 2010 from approximately 10.97% for the three months ended June 30, 2009. Historically, recoveries as a percentage of charge-off’s fluctuate from period to period; however, with historically high charge off rates in recent prior periods, the Company attributes a large portion of the increase to recouping a percent of those losses.
The delinquency percentage for Contracts more than thirty days past due as of June 30, 2010 was 3.83% as compared to 4.78% as of June 30, 2009. The delinquency percentage for direct loans more than thirty days past due as of June 30, 2010 was 2.33% as compared to 4.41% as of June 30, 2009. The delinquency percentage decrease is attributable to allocating additional resources focused on collections, and stricter underwriting guidelines.
In accordance with our policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts. For the three months ended June 30, 2010 and June 30, 2009 the Company granted deferrals to approximately 6% and 11%, respectively, of total Contracts. The number of deferrals is influenced by portfolio performance, general economic conditions and the unemployment rate.
The Company believes delinquency trends over several reporting periods are useful in estimating future losses and overall portfolio performance. The Company also estimates future portfolio performance by considering various factors, the most significant of which are described as follows. The Company analyzes historical static pool performance for each branch location when determining appropriate reserve levels. Additionally, the Company utilizes internal branch audits as an indication of future static pool performance. The Company also considers such things as the current unemployment rate in markets the Company operates in, the percentage of voluntary repossessions as compared to prior periods, the percentage of bankruptcy filings as compared to prior periods and other leading economic indicators.
Income Taxes
Driven by increases in operating income, the provision for income taxes increased to approximately $2.2 million for the three months ended June 30, 2010 as compared to approximately $1.4 million for the three months ended June 30, 2009. The Company’s effective tax rate remained flat for the three months ended June 30, 2010 compared to June 30, 2009 as taxable income was subject to higher graduated tax rates during both periods. For the three month period ending June 30, 2010, the effective tax rate was 38.48%.
Liquidity and Capital Resources
The Company’s cash flows are summarized as follows:
The Company’s primary use of working capital during the three months ended June 30, 2010 was the funding of the purchase of Contracts which are financed substantially through borrowings under the Company’s Line. During 2010, the Company increased the size of the Line and extended the maturity date to November 30, 2011. The Line is secured by all of the assets of Nicholas Financial. The Company may borrow the lesser of $140.0 million or amounts based upon formulas principally related to a percentage of eligible finance receivables, as defined. Borrowings under the Line may be under various LIBOR pricing options plus 300 basis points with a 1% floor on LIBOR or at the prime rate. Prime rate based borrowings are generally less than $5.0 million. As of June 30, 2010, the amount outstanding under the Line was approximately $110.0 million, and the amount available under the Line was approximately $30.0 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 have increased by approximately $2.7 million during the three months ended June 30, 2010. The growth of the Line is principally related to funding the purchase of Contracts and is consistent with the growth of finance receivables. 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, 2011. 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. The Company believes its lenders will continue to allow it to operate in the event of a condition of default; however no assurance can be given that this would occur.
The Company has entered into interest rate swap agreements, each of which effectively converts a portion of the Company’s floating-rate debt to a fixed-rate, thus reducing the impact of interest rate change on the Company’s interest expense. Approximately 36% and 47% of the Company’s borrowings under the Line were subject to interest rate swap agreements as of June 30, 2010 and March 31, 2010, respectively. The decrease in this percentage is attributable to the maturing of swaps along with management’s ongoing evaluation of interest rate swap agreements necessary to meet the Company’s objective to minimize the cost of borrowings in light of current and expected future interest rates under the Line. The swap agreements as of June 30, 2010 have maturities ranging from July 2, 2010 through February 2, 2011.
Future Expansion
The Company currently operates a total of fifty-four branch locations in twelve states, including nineteen in Florida, seven in Ohio, six in North Carolina, six in Georgia, three in Kentucky, three in Indiana, two in Virginia, two in Alabama, two in Michigan, two in Tennessee, and one each in Maryland and South Carolina. Each office is budgeted (size of branch, number of employees and location) to handle up to 1,000 accounts and up to $7.5 million in gross finance receivables. To date, thirteen of our branches have reached this capacity. The Company is currently developing relationships with auto dealers in the Chicago metropolitan area and plans to open its first branch location in Illinois during fiscal 2011. The Company continues to evaluate additional markets for future branch locations, and subject to market conditions, could open additional branch locations during the remaining quarters of fiscal 2011. The Company remains open to acquisitions should an opportunity present itself.
ITEM 3. 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’s objective is to minimize the cost of borrowing through an appropriate mix of fixed and floating rate debt. Derivative financial instruments, such as interest rate swap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from ongoing business operations. The Company does not use interest rate swaps for speculative purposes. Such instruments continue to be intended for use as economic hedges.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.
Changes in internal controls. There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION | null | null | null | null | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company’s Annual General Meeting of Shareholders was held on August 11, 2010.
(b) At the Company’s Annual General Meeting of Shareholders, the following directors were reelected for terms expiring in 2013 by the votes indicated below:
The directors whose terms of office as directors continued after the meeting were Scott Fink, Alton R. Neal, and Stephen Bragin.
(c) The only matter other than election of directors, brought for a vote at the Company’s Annual General Meeting of Shareholders, passed by the following vote: | null | ITEM 6. EXHIBITS
See exhibit index following the signature page.
SIGNATURES
Pursuant to the requirements 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.
NICHOLAS FINANCIAL, INC.
(Registrant)
Date: August 16, 2009
/s/ Peter L. Vosotas
Peter L. Vosotas
Chairman of the Board, President,
Chief Executive Officer and Director
Date: August 16, 2009
/s/ Ralph T. Finkenbrink
Ralph T. Finkenbrink
Senior Vice President,
Chief Financial Officer and Director
EXHIBIT INDEX
Exhibit No.
Description
10.9
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements
31.1
Certification of the President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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 | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2010_0001193125-10-257749.htm | 1,000,045 | 2010-11-12 | 2010-09-30 | 6,153 | null | ITEM 1. FINANCIAL STATEMENTS
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2010, which has been derived from audited financial statements, and the accompanying unaudited interim condensed consolidated financial statements of Nicholas Financial, Inc. (including its subsidiaries, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q pursuant to the Securities and Exchange Act of 1934, as amended in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements, although the Company believes that the disclosures made are adequate to ensure the information is not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year ending March 31, 2011. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010 as filed with the Securities and Exchange Commission on June 14, 2010. The March 31, 2010 condensed consolidated balance sheet included herein has been derived from the March 31, 2010 audited consolidated balance sheet included in the aforementioned Form 10-K.
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, the net realizable value of assets held for resale, and the fair value of interest rate swaps.
2. Revenue Recognition
Interest income on finance receivables is recognized using the 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 September 30, 2010 and March 31, 2010, the amount of gross finance receivables not accruing interest was approximately $4,317,000 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. 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 paid for the Contract. After the analysis of purchase date accounting is complete, any uncollectable amounts would be contemplated in estimating the allowance for loan losses.
Sales relate principally to telephone support agreements and the sale of business forms to small businesses located primarily in the Southeast United States. The aforementioned sales of the Nicholas Data Services, Inc. subsidiary, (“NDS”) represent less than 1% of the Company’s consolidated revenues.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. 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:
For the three and six months ended September 30, 2010 potential common stock from stock options totaling 124,100 in each period were not included in the diluted earnings per share calculation because their effect is anti-dilutive. For the three months and six months ended September 30, 2009 potential common stock from stock options totaling 331,650 and 365,640, respectively, were not included in the diluted earnings per share calculation because their effect is anti-dilutive.
4. Finance Receivables
Finance receivables consist of automobile finance installment Contracts and direct consumer loans and are detailed as follows:
The terms of the finance receivables range from 12 to 72 months and the direct consumer loans range from 6 to 48 months. The receivables bear a weighted average interest rate of approximately 24% for the three month period ending September 30, 2010.
5. Line of Credit
Prior to January 12, 2010, the Company had a $115,000,000 line of credit facility expiring on November 30, 2010. Under this former facility, the Company could borrow the lesser of the $115,000,000 or amounts based upon formulas principally related to a percentage of eligible finance receivables, as defined. Borrowings under the former facility could be under various LIBOR pricing options plus 162.5 basis points or at the prime rate.
On January 12, 2010, the Company executed a new agreement with its consortium of lenders that increases the size of the line of credit facility (the “Line”) from $115,000,000 to $140,000,000, subject to formulas principally related to a percentage of eligible finance receivables, as defined. The pricing of the Line, which expires on November 30, 2011, is 300 basis points above 30-day LIBOR (4.00% at September 30, 2010) with a 1% floor on LIBOR or at the prime rate. Prime rate borrowings are generally less than $5.0 million. The Company’s cost of borrowed funds, which is based upon the interest rates charged under the Line and the effect of the interest rate swap agreements (see note 6), amounted to 5.12% and 4.87% for the three months ended September 30, 2010 and 2009 and 5.40% and 4.90% for the six months ended September 30, 2010 and 2009, respectively.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5. Line of Credit (continued)
Pledged as collateral for this credit facility are all of the assets of the Company. The outstanding amount of the credit facility was approximately $117,000,000 and $107,000,000 as of September 30, 2010 and March 31, 2010, respectively. The amount available under the line of credit was approximately $23,000,000 and $33,000,000 as of September 30, 2010 and March 31, 2010, respectively. 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 require consent in writing by the agent and majority lenders under the facility. As of September 30, 2010, the Company was in full compliance with all debt covenants.
6. Interest Rate Swap Agreements
The Company utilizes interest rate swap agreements to manage interest rate exposure. The swap agreements, in effect, convert a portion of the Company’s floating rate debt to a fixed rate, more closely matching the interest rate characteristics of the Company’s finance receivables.
The following table summarizes the activity in the Company’s notional amounts of interest rate swaps:
As of September 30, 2010 and March 31, 2010, the Company had interest rate swaps comprising an aggregate notional amount of $20.0 million and $50.0 million, respectively, which are detailed as follows:
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) are recorded in earnings. Unrealized losses previously recorded in accumulated other comprehensive loss are reclassified into earnings as interest payments on the Line affect earnings over the remaining term of the respective swap agreements. The Company does not use interest rate swaps for speculative purposes. Such instruments continue to be intended for use as economic hedges.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Interest Rate Swap Agreements (continued)
The locations and amounts of losses recognized in income during the three and six months ended September 30, 2010 and September 30, 2009 are as follows:
The interest rate swap liabilities are recorded at fair value, which is approximately $162,000 and $784,000 as of September 30, 2010 and March 31, 2010, respectively, in the interest rate swaps line item of the consolidated balance sheets. The changes in the fair value of interest rate swaps are recorded in the change in fair value of interest rate swaps line item of the consolidated statement of income.
Accumulated other comprehensive loss as of September 30, 2010 and March 31, 2010 of approximately $30,000 and $178,000, respectively, represents the after-tax effect of changes in the fair value of interest rate swaps prior to October 2008 when the swaps were designated and qualifying as cash flow hedges. The remaining accumulated other comprehensive loss is expected to be reclassified and affect net earnings during the remainder of fiscal 2011.
The Company records net realized gains and losses from the swap agreements in the interest expense line item of the consolidated statement of income. The following table summarizes the average variable rates received and average fixed rates paid under the swap agreements.
The following table reconciles net income with comprehensive income.
7. Fair Value Disclosures
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. 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.
Nicholas Financial, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Continued)
(Unaudited)
7. Fair Value Disclosures (continued)
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The Company estimates the fair value of interest rate swap agreements based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the measurement period, adjusted for nonperformance risk, if any, including a quantitative and qualitative evaluation of both the Company’s credit risk and the counterparty’s credit risk. Accordingly, the Company classifies interest rate swap agreements as Level 2.
Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the interest rate swaps existed.
Financial Instruments Not Measured at Fair Value
The Company’s financial instruments, other than the interest rate swap agreements, 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 signed within the fourth quarter of fiscal year ending March 31, 2010. Currently, any new or renewed credit facility would contain pricing that is equal to the Company’s current Line. Based on these market conditions, the fair value of the Line as of September 30, 2010 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 or at the prime rate.
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. Other Recently Issued Accounting Standards
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-20: “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” on July 21, 2010. The ASU’s main objective is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The ASU amends current guidance and requires additional disclosures, including the requirement to provide a greater level of disaggregated data, as it relates to exposure to credit losses. The ASU will be effective for the Company for the interim reporting period ending December 31, 2010.
Other recent accounting guidance did not have a material impact on the Company’s consolidated financial statements.
Any other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC, including Accounting Standards Codification (“ASC”) Topic 810, “Consolidations”, and ASC Topic 860, “Transfers and Servicing”, did not have a material impact on the Company’s present or future consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This report on Form 10-Q contains various statements, other than those concerning historical information, that are based on management’s beliefs and assumptions, as well as information currently available to management, and should be considered forward-looking statements. This notice is intended to take advantage of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. When used in this document, the words “anticipate”, “estimate”, “expect”, and similar expressions are intended to identify forward-looking statements. Although 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. 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 have a direct bearing on the Company’s operating results are fluctuations in the economy, the ability to access bank financing, the degree and nature of competition, demand for consumer financing in the markets served by the Company, the Company’s products and services, increases in the default rates experienced on Contracts, adverse regulatory changes in the Company’s existing and future markets, the Company’s ability to expand its business, including its ability to 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 on the date hereof, and the Company assumes no obligations to update any such forward looking statement. You should also consult factors described from time to time in the Company’s filings made with the Securities and Exchange Commission, including its reports on Form 10-K, 10-Q, 8-K and annual reports to shareholders.
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 discount and a provision for losses 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, 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 the 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 state maximum interest rates or the maximum interest rate 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.
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 Company considers the entire amount of discount to be related to credit quality and is part of the credit loss reserve. The Company utilizes a static pool approach to track portfolio performance. A static pool retains an amount equal to 100% of the discount as a reserve for credit losses.
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.
Introduction
Consolidated net income increased 64% to approximately $4.0 million for the three-month period ended September 30, 2010 as compared to $2.4 million for the corresponding period ended September 30, 2009. Net income for the three months ended September 30, 2010 and 2009 includes a pre-tax gain of approximately $138,000 and $235,000, respectively, related to the change in fair value of interest rate swaps. Diluted earnings per increased 62% to $0.34 for the three months ended September 30, 2010 as compared to $0.21 for the three months ended September 30, 2009. Consolidated net income increased to approximately $7.6 million for the six-month period ended September 30, 2010 as compared to $4.7 million for the corresponding period ended September 30, 2009. Net income for the six months ended September 30, 2010 and 2009 includes a pre-tax gain of approximately $382,000 and $532,000, respectively, related to the change in fair value of interest rate swaps. Diluted earnings per increased 60% to $0.64 for the six months ended September 30, 2010 as compared to $0.40 for the six months ended September 30, 2009.
Earnings were favorably impacted primarily by an increase in average finance receivables, a decrease in operating expenses as a percentage of average finance receivables, net of unearned interest, and a decrease in the net charge off percentage and corresponding reduction in the provision for credit losses; these favorable items were partially offset with an increase in interest expense. The Company’s software subsidiary, Nicholas Data Services (“NDS”), did not contribute significantly to consolidated operations in the three or six months ended September 30, 2010 or 2009, respectively.
As discussed in note 6 “Interest Rate Swap Agreements”, in October 2008 the Company made an economic decision which resulted in undesignating the interest rate swaps as cash flow hedges. Under accounting rules this has introduced volatility to the statement of income for changes in the fair value of interest rate swaps that were previously captured in accumulated comprehensive income or loss in the statement of shareholders’ equity. The Company intends to hold interest rate swaps through their entire term. Accordingly, over the term of each interest rate swap agreement, the unrealized gains and losses from changes in the fair value of interest rate swaps, which are now recorded in the change in fair value of interest rate swaps line item of the statement of income, will net or offset to $0 and cumulatively have no impact on retained earnings.
For the three months ended September 30, 2010, net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 70% to $3.9 million compared to $2.3 million for the three months ended September 30, 2009. Per share diluted net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 65% to $0.33 for the three months ended September 30, 2010 as compared to $0.20 for the three months ended September 30, 2009.
For the six months ended September 30, 2010, net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 68% to $7.3 million compared to $4.4 million for the six months ended September 30, 2009. Per share diluted net earnings, excluding changes in fair value of interest rate swaps (non-GAAP), increased 63% to $0.62 for the six months ended September 30, 2010 as compared to $0.38 for the six months ended September 30, 2009.
See reconciliations of the non-GAAP measures on the following page.
Reconciliation of Non-GAAP Financial Measures
This filing contains disclosures of non-GAAP financial measures including: net earnings, excluding changes in fair value of interest rate swaps and per share diluted net earnings, excluding changes in fair value of interest rate swaps. These measures utilize the GAAP terms “net income” and “diluted earnings per share” and adjust the GAAP terms to exclude the effect of mark-to-market adjustments and reclassifications of previously recorded accumulated comprehensive gains and losses associated with interest rate swaps. Management believes this presentation provides additional and meaningful measures for the assessment of the Company’s ongoing results and performance. Because the Company reported mark-to-market (interest rate swaps) through other comprehensive income under hedge accounting prior to October 2008 and has reported the non-GAAP financial measures of net earnings, excluding changes in fair value of interest rate swaps and per share diluted net earnings, excluding changes in fair value of interest rate swaps, since October 2008. Management believes that the inclusion of these non-GAAP measures provides consistency in its financial reporting and facilitates investors’ understanding of the Company’s historic operating trends by providing an additional basis for comparisons to prior periods. Further, management believes these non-GAAP financials measures provide an additional and meaningful assessment of our ongoing results and performance. We utilize such non-GAAP measure to establish financial and operational goals. Management recognizes that the use of non-GAAP measures has limitations, including the fact that they may not be directly comparable with similar non-GAAP financial measures used by other companies. All non-GAAP financial measures are intended to supplement the applicable GAAP disclosures and should not be considered in isolation from, or as substitute for, financial information prepared in accordance with GAAP.
The following tables include reconciliations of GAAP reported net income to the non-GAAP measure, net earnings, excluding changes in fair value of interest rate swaps as well as GAAP reported diluted earnings per share to the non-GAAP measure, per share diluted net earnings, excluding changes in fair value of interest rate swaps. The non-GAAP measures exclude the effect of mark-to-market adjustments and reclassifications of previously recorded accumulated comprehensive losses associated with interest rate swaps.
(a) Represents a non-GAAP financial measure. See information on non-GAAP financial measures above.
Note: All three and six month key performance indicators expressed as percentages have been annualized.
(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 Line. Average cost of borrowed funds represents interest expense as a percentage of average indebtedness.
(3) Interest and fee income on finance receivables does not include revenue generated by Nicholas Data Services, Inc., (“NDS”) the wholly-owned software subsidiary of Nicholas Financial, Inc.
(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 finance revenues as a percentage of average finance receivables, net of unearned interest. Net portfolio yield represents finance revenue 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 the calculation above are net of administrative expenses associated with NDS which approximated $53,000 and $56,000 during the three-month periods ended September 30, 2010 and 2009 and $111,000 and $109,000 during the six-month periods ended September 30, 2010 and 2009, 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.
Three months ended September 30, 2010 compared to three months September 30, 2009
Interest Income and Loan Portfolio
Interest and fee income on finance receivables, predominately finance charge income, increased 11% to approximately $15.7 million for the three-month period ended September 30, 2010 from $14.1 million for the corresponding period ended September 30, 2009. Average finance receivables, net of unearned interest equaled approximately $249.1 million for the three-month period ended September 30, 2010, an increase of 12% from $222.7 million for the corresponding period ended September 30, 2009. The primary reason average finance receivables, net of unearned interest, increased was the increase in the receivable base of several existing branches in younger markets and also the opening of new branch locations. The gross finance receivable balance increased 12% to approximately $355.4 million as of September 30, 2010, from $316.5 million as of September 30, 2009. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased to 25.25% for the three-month period ended September 30, 2010 from 25.39% for the three-month period ended September 30, 2009. The net portfolio yield increased to 20.17% for the corresponding period ended September 30, 2010 from 17.23% for the three-month period ended September 30, 2009. The gross portfolio yield decreased primarily due to a lower weighted APR earned on finance receivables. The net portfolio yield increased primarily due to a decrease in change of charge offs and a corresponding decrease in the provision for credit losses.
Marketing, Salaries, Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries, employee benefits, depreciation and administrative expenses increased to approximately $6.2 million for the three-month period ended September 30, 2010 from approximately $5.9 million for the corresponding period ended September 30, 2009. The increase of 5% was primarily attributable to salaries expense. The Company opened additional branches and increased headcount to 272 as of September 30, 2010 from 258 as of September 30, 2009. Marketing, salaries, employee benefits, depreciation, and administrative expenses as a percentage of finance receivables, net of unearned interest, decreased to 9.93% for the three-month period ended September 30, 2010 from 10.53% for the three-month period ended September 30, 2009.
Interest Expense
Interest expense increased to approximately $1.4 million for the three-month period ended September 30, 2010 from $1.3 million for the three-month period ended September 30, 2009. The following table summarizes the Company’s average cost of borrowed funds:
On January 12, 2010, the Company executed a new line of credit facility. At this time, the 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. For further discussions regarding the Company’s line of credit see note 5 - “Line of Credit”. The increase in the credit spread under the new facility is the primary reason the Company’s average cost of funds increased. The weighted-average 30-day LIBOR rate increased to 0.31% for the three-month period ended September 30, 2010 as compared to 0.28% for the three-month period ended September 30, 2009.
Settlements under interest rate swap agreements decreased as a result of maturing interest rate swap agreements. The weighted average notional amount of interest rate swaps was $27.2 million at a weighted average fixed rate of 3.86% for the three-month period ended September 30, 2010 as compared to $80.0 million at 4.01% for the corresponding period ended September 30, 2009. For further discussions regarding the effect of interest rate swap agreements see note 6 - “Interest Rate Swap Agreements”.
Six months ended September 30, 2010 compared to six months ended September 30, 2009
Interest Income and Loan Portfolio
Interest and fee income on finance receivables, predominately finance charge income, increased 10% to approximately $30.7 million for the six-month period ended September 30, 2010 from $27.8 million for the corresponding period ended September 30, 2009. Average finance receivables, net of unearned interest equaled approximately $243.7 million for the six-month period ended September 30, 2010, an increase of 11% from $219.2 million for the corresponding period ended September 30, 2009. The primary reason average finance receivables, net of unearned interest, increased was the increase in the receivable base of several existing branches in younger markets and also the opening of new branch locations. The gross finance receivable balance increased 12% to approximately $355.4 million as of September 30, 2010, from $316.5 million as of September 30, 2009. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield decreased to 25.17% for the six-month period ended September 30, 2010 from 25.37% for the six-month period ended September 30, 2009. The net portfolio yield increased to 20.01% for the corresponding period ended September 30, 2010 from 17.03% for the six-month period ended September 30, 2009. The gross portfolio yield decreased primarily due to a lower weighted APR earned on finance receivables. The net portfolio yield increased primarily due to a decrease in change of charge offs and a corresponding decrease in the provision for credit losses.
Marketing, Salaries, Employee Benefits, Depreciation, and Administrative Expenses
Marketing, salaries, employee benefits, depreciation and administrative expenses increased to approximately $12.5 million for the six-month period ended September 30, 2010 from approximately $11.6 million for the corresponding period ended September 30, 2009. The increase of 7% was primarily attributable to salaries expense. The Company opened additional branches and increased headcount to 272 as of September 30, 2010 from 258 as of September 30, 2009. Marketing, salaries, employee benefits, depreciation, and administrative expenses as a percentage of finance receivables, net of unearned interest, decreased to 10.15% for the six-month period ended September 30, 2010 from 10.51% for the six-month period ended September 30, 2009.
Interest Expense
Interest expense increased to approximately $3.0 million for the six-month period ended September 30, 2010 from $2.6 million for the six-month period ended September 30, 2009. The following table summarizes the Company’s average cost of borrowed funds for the six-month period ended September 30:
On January 12, 2010, the Company executed a new line of credit facility. At this time, the 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. For further discussions regarding the Company’s line of credit see note 6 - “Line of Credit”. The increase in the credit spread under the new facility is the primary reason the Company’s average cost of funds increased. The weighted-average 30-day LIBOR rate decreased to 0.30% for the six-month period ended September 30, 2010 as compared to 0.35% for the six-month period ended September 30, 2009. The reduction in 30-day LIBOR rates was offset in part by the Company’s interest rate swap agreements, which convert a portion of the Company’s floating rate debt to fixed rate debt, as well as the 1% floor on LIBOR under the new credit facility.
Settlements under interest rate swap agreements decreased as a result of maturing interest rate swap agreements. The weighted average notional amount of interest rate swaps was $36.2 million at a weighted average fixed rate of 3.96% for the six-month period ended September 30, 2010 as compared to $80.0 million at 4.01% for the corresponding period ended September 30, 2009. For further discussions regarding the effect of interest rate swap agreements see note 6 - “Interest Rate Swap Agreements”.
Contract Procurement
The Company purchases Contracts in the twelve states listed in the table below. The Contracts purchased by the Company are predominately for used vehicles; for the three-month and six-month periods ended September 30, 2010 and 2009, less than 2% were for new vehicles. As of September 30, 2010, the average model year of vehicles collateralizing the portfolio was a 2004 vehicle.
The following tables present selected information on Contracts purchased by the Company, net of unearned interest.
Loan Origination
The following table presents selected information on direct loans originated by the Company, net of unearned interest.
Analysis of Credit Losses
As of September 30, 2010, the Company had 1,114 active static pools. The average pool upon inception consisted of 78 Contracts with aggregate finance receivables, net of unearned interest, of approximately $751,000.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts.
The following table sets forth a reconciliation of the changes in the allowance for credit losses on direct loans.
The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and under its direct consumer loan program:
The average dealer discount associated with new volume for the three months ended September 30, 2010 and 2009 was 8.70% and 8.96%, respectively. The average dealer discount associated with new volume for the six months ended September 30, 2010 and 2009 was 8.78% and 9.07%, respectively. The amount of discount is a result of credit quality associated with Contracts purchased and the competition in the markets in which the Company operates.
The Company’s losses as a percentage of liquidation decreased to 7.18% for the three months ended September 30, 2010 from 11.11% for the three months ended September 30, 2009. The Company’s losses as a percentage of liquidation decreased to 6.85% for the six months ended September 30, 2010 from 10.96% for the six months ended September 30, 2009. Since the inception of the revised underwriting guidelines in October 2008, the Company has seen improvements in the quality of its Contracts. During comparable liquidation cycles, the default rate for static pools originated since the revision of underwriting guidelines has decreased when compared to the preceding year’s performance.
The Company believes that continued weakness in employment will make it difficult for additional improvement. The provision for credit losses decreased to $1.7 million for the three months ended September 30, 2010 from $3.3 million for the three months ended September 30, 2009, largely due to the decrease in the net charge-off rate to 5.31% for the three months ended September 30, 2010 as compared to 8.24% for the three months ended September 30, 2009. The provision for credit losses decreased to $3.3 million for the six months ended September 30, 2010 from $6.6 million for the six months ended September 30, 2009, largely due to the decrease in the net charge-off rate to 4.96% for the six months ended September 30, 2010 as compared to 7.98% for the six months ended September 30, 2009. While the Company is encouraged with the decline in net charge-offs and delinquency percentages for these periods, from a historical perspective, delinquencies remain high; leading to an increase in the overall allowance for credit losses as a percentage of finance receivables. Because of the seasonality of the business, the Company experiences higher net charge-offs for the quarters ending September 30 and December 31 than the quarters ending June 30 and March 31.
The Company anticipates losses absorbed as a percentage of liquidation will be in the 6%-10% range during the remainder of the current fiscal year; however, no assurances can be given that the actual losses absorbed may not be higher as a result of further economic weakness. The longer-term outlook for portfolio performance will depend on the overall economic conditions, the unemployment rate, and the price of oil which impacts the cost of gasoline, food and many other items used or consumed by the average person. Also, the Company’s ability to monitor, manage and implement its underwriting philosophy in additional geographic areas as it strives to continue its expansion will impact future portfolio performance. The Company does not believe there have been any significant changes in loan concentrations or terms of Contracts purchased during the three and six months ended September 30, 2010.
Recoveries as a percentage of charge-offs increased to approximately 16.05% for the three months ended September 30, 2010 from approximately 10.39% for the three months ended September 30, 2009. Recoveries as a percentage of charge-offs increased to approximately 17.94% for the six months ended September 30, 2010 from approximately 10.67% for the three months ended September 30, 2009. Historically, recoveries as a percentage of charge-off’s fluctuate from period to period; however, with historically high charge off rates in recent prior periods, the Company attributes a large portion of the increase to recouping a percent of those losses.
The delinquency percentage for Contracts more than thirty days past due as of September 30, 2010 was 3.70% as compared to 5.43% as of September 30, 2009. The delinquency percentage for direct loans more than thirty days past due as of September 30, 2010 was 2.25% as compared to 4.66% as of September 30, 2009. The delinquency percentage decrease is attributable to allocating additional resources focused on collections, and stricter underwriting guidelines.
In accordance with our policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts. For the three months ended September 30, 2010 and September 30, 2009 the Company granted deferrals to approximately 7.96% and 10.82%, respectively, of total Contracts. For the six months ended September 30, 2010 and September 30, 2009 the Company granted deferrals to approximately 13.78% and 21.81%, respectively, of total Contracts. The number of deferrals is influenced by portfolio performance, general economic conditions and the unemployment rate.
The Company believes delinquency trends over several reporting periods are useful in estimating future losses and overall portfolio performance. The Company also estimates future portfolio performance by considering various factors, the most significant of which are described as follows. The Company analyzes historical static pool performance for each branch location when determining appropriate reserve levels. Additionally, the Company utilizes results from internal branch audits as an indicator of future static pool performance. The Company also considers such things as the current unemployment rate in markets the Company operates in, the percentage of voluntary repossessions as compared to prior periods, the percentage of bankruptcy filings as compared to prior periods and other leading economic indicators.
Income Taxes
Driven by increases in operating income, the provision for income taxes increased to approximately $2.5 million for the three months ended September 30, 2010 from approximately $1.5 million for the three months ended September 30, 2009. The provision for income taxes increased to approximately $4.7 million for the six months ended September 30, 2010 from approximately $2.9 million for the six months ended September 30, 2009. The Company’s effective tax rate increased to 38.42% for the three months ended September 30, 2010 from 38.34% for the three months ended September 30, 2009. The Company’s effective tax rate increased to 38.45% for the six months ended September 30, 2010 from 38.25% for the six months ended September 30, 2009.
Liquidity and Capital Resources
The Company’s cash flows are summarized as follows:
The Company’s primary use of working capital during the six months ended September 30, 2010 was the funding of the purchase of Contracts which are financed substantially through borrowings under the Company’s Line. During 2010, the Company increased the size of the Line and extended the maturity date to November 30, 2011. The Line is secured by all of the assets of the Company. The Company may borrow the lesser of $140.0 million or amounts based upon formulas principally related to a percentage of eligible finance receivables, as defined. Borrowings under the Line may be under various LIBOR pricing options plus 300 basis points with a 1% floor on LIBOR or at the prime rate. Prime rate based borrowings are generally less than $5.0 million. As of September 30, 2010, the amount outstanding under the Line was approximately $117.0 million, and the amount available under the Line was approximately $23.0 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 have increased by approximately $9.7 million during the six months ended September 30, 2010. The growth of the Line is principally related to funding the purchase of Contracts and is consistent with the growth of finance receivables. 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, 2011. 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. The Company believes its lenders will continue to allow it to operate in the event of a condition of default; however no assurance can be given that this would occur.
The Company has entered into interest rate swap agreements, each of which effectively converts a portion of the Company’s floating-rate debt to a fixed-rate, thus reducing the impact of interest rate change on the Company’s interest expense. Approximately 17% and 47% of the Company’s borrowings under the Line were subject to interest rate swap agreements as of September 30, 2010 and March 31, 2010, respectively. The decrease in this percentage is attributable to the maturing of swaps along with management’s ongoing evaluation of interest rate swap agreements necessary to meet the Company’s objective to minimize the cost of borrowings in light of current and expected future interest rates under the Line. The swap agreements as of September 30, 2010 have maturities ranging from December 2, 2010 through February 2, 2011.
Future Expansion
The Company currently operates a total of fifty-four branch locations in twelve states, including nineteen in Florida, seven in Ohio, six in North Carolina, six in Georgia, three in Kentucky, three in Indiana, two in Virginia, two in Alabama, two in Michigan, two in Tennessee, and one each in Maryland and South Carolina. Each office is budgeted (size of branch, number of employees and location) to handle up to 1,000 accounts and up to $7.5 million in gross finance receivables. To date, fifteen of our branches have reached this capacity. The Company is currently developing relationships with auto dealers in both the Chicago and St. Louis metropolitan areas. The Company will determine during the remainder of this fiscal year whether it plans on opening branch locations in these new markets. The Company continues to evaluate additional markets for future branch locations, and subject to market conditions, could open additional branch locations during the remaining quarters of fiscal 2011. The Company remains open to acquisitions should an opportunity present itself.
ITEM 3. 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’s objective is to minimize the cost of borrowing through an appropriate mix of fixed and floating rate debt. Derivative financial instruments, such as interest rate swap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from ongoing business operations. The Company does not use interest rate swaps for speculative purposes. Such instruments continue to be intended for use as economic hedges.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.
Changes in internal controls. There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION | null | null | null | null | null | null | ITEM 6. EXHIBITS
See exhibit index following the signature page.
SIGNATURES
Pursuant to the requirements 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.
NICHOLAS FINANCIAL, INC.
(Registrant)
Date: November 12, 2010
/s/ Peter L. Vosotas
Peter L. Vosotas
Chairman of the Board, President, Chief Executive Officer and Director
Date: November 12, 2010
/s/ Ralph T. Finkenbrink
Ralph T. Finkenbrink
Senior Vice President, Chief Financial Officer and Director
EXHIBIT INDEX
Exhibit
No.
Description
10.9
Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements
31.1
Certification of the President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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 | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2010_0001193125-11-031933.htm | 1,000,045 | 2011-02-11 | 2010-12-31 | 6,153 | null | "ITEM 1. FINANCIAL STATEMENTS\nNicholas Financial, Inc. and Subsidiaries\nCondensed Consolidated Bal(...TRUNCATED) | null | null | null | null | null | null | "ITEM 6. EXHIBITS\nSee exhibit index following the signature page.\nSIGNATURES\nPursuant to the requ(...TRUNCATED) | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2011_0001193125-11-216128.htm | 1,000,045 | 2011-08-09 | 2011-06-30 | 6,153 | null | "ITEM 1. FINANCIAL STATEMENTS\nNicholas Financial, Inc. and Subsidiaries\nCondensed Consolidated Bal(...TRUNCATED) | null | null | null | null | null | null | "ITEM 6. EXHIBITS\nSee exhibit index following the signature page.\nSIGNATURES\nPursuant to the requ(...TRUNCATED) | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2011_0001193125-11-303673.htm | 1,000,045 | 2011-11-09 | 2011-09-30 | 6,153 | null | "ITEM 1. FINANCIAL STATEMENTS\nNicholas Financial, Inc. and Subsidiaries\nCondensed Consolidated Bal(...TRUNCATED) | null | null | null | null | null | null | "ITEM 6. EXHIBITS\nSee exhibit index following the signature page.\nSIGNATURES\nPursuant to the requ(...TRUNCATED) | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2011_0001193125-12-047920.htm | 1,000,045 | 2012-02-09 | 2011-12-31 | 6,153 | null | "ITEM 1. FINANCIAL STATEMENTS\nNicholas Financial, Inc. and Subsidiaries\nCondensed Consolidated Bal(...TRUNCATED) | null | null | null | null | null | null | "ITEM 6. EXHIBITS\nSee exhibit index following the signature page.\nSIGNATURES\nPursuant to the requ(...TRUNCATED) | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2012_0001193125-12-347645.htm | 1,000,045 | 2012-08-09 | 2012-06-30 | 6,153 | null | "ITEM 1. FINANCIAL STATEMENTS\nNicholas Financial, Inc. and Subsidiaries\nCondensed Consolidated Bal(...TRUNCATED) | null | null | null | null | null | null | "ITEM 6. EXHIBITS\nSee exhibit index following the signature page.\nSIGNATURES\nPursuant to the requ(...TRUNCATED) | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2012_0001193125-12-462945.htm | 1,000,045 | 2012-11-09 | 2012-09-30 | 6,153 | null | "ITEM 1. FINANCIAL STATEMENTS\nNicholas Financial, Inc. and Subsidiaries\nConsolidated Balance Sheet(...TRUNCATED) | null | null | null | null | null | null | "ITEM 6. EXHIBITS\nSee exhibit index following the signature page.\nSIGNATURES\nPursuant to the requ(...TRUNCATED) | null | null | null | null | null | null | null | null | null | null | null | null |
1000045_10Q_2012_0001193125-13-046001.htm | 1,000,045 | 2013-02-08 | 2012-12-31 | 6,153 | null | "ITEM 1. FINANCIAL STATEMENTS\nNicholas Financial, Inc. and Subsidiaries\nConsolidated Balance Sheet(...TRUNCATED) | null | null | null | null | null | null | "ITEM 6. EXHIBITS\nSee exhibit index following the signature page.\nSIGNATURES\nPursuant to the requ(...TRUNCATED) | null | null | null | null | null | null | null | null | null | null | null | null |
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