NICHOLAS FINANCIAL INC - Quarter Report: 2005 December (Form 10-Q)
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31,
2005
|
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE TRANSITION PERIOD FROM ________ TO
_________.
|
Commission
file number: 0-26680
NICHOLAS
FINANCIAL, INC.
(Exact
Name of Registrant as Specified in its Charter)
|
British
Columbia, Canada
|
8736-3354
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
|
2454
McMullen Booth Road, Building C
|
|
|
Clearwater,
Florida
|
33759
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(727)
726-0763
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 and 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by checkmark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act)
Yes
o
No x
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act)
Yes
o
No x
As
of
January 31, 2006, the registrant had 9,879,631 shares of common stock
outstanding.
NICHOLAS
FINANCIAL, INC.
FORM
10-Q
Table
of Contents
| Part I. Financial Information | Page | |
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
Condensed
Consolidated Balance Sheets as of December 31, 2005 and as of March
31,
2005
|
2
|
|
|
Condensed
Consolidated Statements of Income for the three and nine months ended
December 31, 2005 and 2004
|
3
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended December
31, 2005 and 2004
|
4
|
|
|
Notes
to the Condensed Consolidated Financial Statements
|
5
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial
|
|
|
Condition
and Results of Operations
|
10
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
22
|
|
Item
4.
|
Controls
and Procedures
|
22
|
|
Part
II. Other Information
|
||
|
Item
6.
|
Exhibits
|
23
|
1
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
Nicholas
Financial, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
|
December
31,
|
March
31,
|
||||||
|
2005
|
2005
|
||||||
|
(Unaudited)
|
|||||||
|
Assets
|
|||||||
|
Cash
|
$
|
1,670,913
|
$
|
853,494
|
|||
|
Finance
receivables, net
|
133,038,643
|
113,708,122
|
|||||
|
Accounts
receivable
|
8,284
|
12,849
|
|||||
|
Assets
held for resale
|
899,877
|
530,230
|
|||||
|
Prepaid
expenses and other assets
|
563,900
|
507,952
|
|||||
|
Property
and equipment, net
|
840,583
|
763,247
|
|||||
|
Derivatives
|
1,134,571
|
740,223
|
|||||
|
Deferred
income taxes
|
3,825,097
|
3,699,324
|
|||||
|
Total
assets
|
$
|
141,981,868
|
$
|
120,815,441
|
|||
|
Liabilities
|
|||||||
|
Line
of credit
|
$
|
78,396,965
|
$
|
65,330,897
|
|||
|
Drafts
payable
|
934,611
|
973,268
|
|||||
|
Notes
payable - related party
|
600,000
|
1,000,000
|
|||||
|
Accounts
payable and accrued expenses
|
5,576,824
|
4,852,787
|
|||||
|
Income
taxes payable
|
67,577
|
540,899
|
|||||
|
Deferred
revenues
|
1,563,323
|
1,359,696
|
|||||
|
Total
liabilities
|
87,139,300
|
74,057,547
|
|||||
|
Shareholders'
equity
|
|||||||
|
Preferred
stock, no par: 5,000,000 shares authorized;
none
issued and outstanding
|
-
|
-
|
|||||
|
Common
stock, no par: 50,000,000 shares authorized; 9,879,631 and 9,840,531
shares issued and outstanding, respectively
|
15,346,777
|
15,127,922
|
|||||
|
Accumulated
other comprehensive income
|
703,434
|
458,949
|
|||||
|
Retained
earnings
|
38,792,357
|
31,171,023
|
|||||
|
Total
shareholders’ equity
|
54,842,568
|
46,757,894
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
141,981,868
|
$
|
120,815,441
|
|||
See
accompanying notes.
2
Nicholas
Financial, Inc. and Subsidiaries
Condensed
Consolidated Statements of Income
(Unaudited)
|
Three
months ended
|
Nine
months ended
|
||||||||||||
|
December
31,
|
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
|
2004
|
|||||||||
|
Revenue:
|
|||||||||||||
|
Interest
income on finance receivables
|
$
|
11,065,071
|
$
|
8,484,354
|
$
|
30,372,675
|
$
|
23,495,609
|
|||||
|
Sales
|
42,177
|
56,357
|
133,684
|
155,422
|
|||||||||
|
11,107,248
|
8,540,711
|
30,506,359
|
23,651,031
|
||||||||||
|
Expenses:
|
|||||||||||||
|
Cost
of sales
|
15,123
|
17,043
|
37,407
|
45,904
|
|||||||||
|
Marketing
|
345,277
|
227,009
|
890,126
|
642,697
|
|||||||||
|
Salaries
and employee benefits
|
2,916,558
|
2,261,867
|
8,229,528
|
6,495,515
|
|||||||||
|
Administrative
|
1,061,235
|
941,466
|
3,215,706
|
2,583,715
|
|||||||||
|
Provision
for credit losses
|
1,172,108
|
565,758
|
2,432,142
|
1,806,203
|
|||||||||
|
Depreciation
|
86,342
|
58,147
|
242,601
|
162,973
|
|||||||||
|
Interest
expense
|
1,122,358
|
909,468
|
3,161,390
|
2,719,551
|
|||||||||
|
6,719,001
|
4,980,758
|
18,208,900
|
14,456,558
|
||||||||||
|
Operating
income before income taxes
|
4,388,247
|
3,559,953
|
12,297,459
|
9,194,473
|
|||||||||
|
Income
tax expense:
|
|||||||||||||
|
Current
|
1,771,348
|
1,640,355
|
4,951,761
|
4,532,854
|
|||||||||
|
Deferred
|
(101,431
|
)
|
(294,049
|
)
|
(275,636
|
)
|
(1,050,092
|
)
|
|||||
|
1,669,917
|
1,346,306
|
4,676,125
|
3,482,762
|
||||||||||
|
Net
Income
|
$
|
2,718,330
|
$
|
2,213,647
|
$
|
7,621,334
|
$
|
5,711,711
|
|||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$
|
0.28
|
$
|
0.23
|
$
|
0.77
|
$
|
0.61
|
|||||
|
Diluted
|
$
|
0.26
|
$
|
0.21
|
$
|
0.73
|
$
|
0.57
|
|||||
|
Dividends
declared per share
|
-
|
-
|
-
|
$
|
0.07
|
||||||||
See
accompanying notes.
3
Nicholas
Financial, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
Nine
months ended
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
flows from operating activities
|
|||||||
|
Net
income
|
$
|
7,621,334
|
$
|
5,711,711
|
|||
|
Adjustments
to reconcile net income to net cash provided
|
|||||||
|
by
operating activities:
|
|||||||
|
Depreciation
|
242,601
|
162,973
|
|||||
|
Gain
on sale of property and equipment
|
(14,366
|
)
|
-
|
||||
|
Provision
for credit losses
|
2,432,142
|
1,806,203
|
|||||
|
Deferred
income taxes
|
(275,636
|
)
|
(1,050,092
|
)
|
|||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
4,565
|
1,207
|
|||||
|
Prepaid
expenses, other assets and assets held for resale
|
(425,595
|
)
|
(144,357
|
)
|
|||
|
Accounts
payable and accrued expenses
|
724,037
|
379,745
|
|||||
|
Income
taxes payable
|
(473,322
|
)
|
470,277
|
||||
|
Deferred
revenues
|
203,627
|
259,057
|
|||||
|
Net
cash provided by operating activities
|
10,039,387
|
7,596,724
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Purchase
and origination of finance contracts
|
(75,321,061
|
)
|
(58,189,372
|
)
|
|||
|
Principal
payments received
|
53,558,398
|
46,630,886
|
|||||
|
Purchase
of property and equipment
|
(319,937
|
)
|
(243,160
|
)
|
|||
|
Proceeds
from sale of property and equipment
|
14,366
|
-
|
|||||
|
Net
cash used in investing activities
|
(22,068,234
|
)
|
(11,801,646
|
)
|
|||
|
Cash
flows from financing activities
|
|||||||
|
(Repayment)
issuance of notes payable - related party
|
(400,000
|
)
|
318,470
|
||||
|
Net
proceeds from (repayment of) line of credit
|
13,066,068
|
(5,302,619
|
)
|
||||
|
Payment
of dividend
|
-
|
(324,915
|
)
|
||||
|
Decrease
in drafts payable
|
(38,657
|
)
|
(358,797
|
)
|
|||
|
Proceeds
from exercise of stock options and income tax benefit
related
thereto
|
218,855
|
377,652
|
|||||
|
Proceeds
from the issuance of common stock
|
-
|
10,416,000
|
|||||
|
Payment
of offering costs
|
-
|
(384,470
|
)
|
||||
|
Net
cash provided by financing activities
|
12,846,266
|
4,741,321
|
|||||
|
Net
increase in cash
|
817,419
|
536,399
|
|||||
|
Cash,
beginning of period
|
853,494
|
957,684
|
|||||
|
Cash,
end of period
|
$
|
1,670,913
|
$
|
1,494,083
|
|||
See
accompanying notes.
4
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, 2005, 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
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 accounting principles generally accepted in the United
States for complete financial statements. 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, 2006. For further information, refer to the consolidated
financial statements and accompanying notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended March 31, 2005 as filed with
the
Securities and Exchange Commission on June 29, 2005.
On
May
12, 2005, the Board of Directors declared a three-for-two stock split, payable
in the form of a 50% stock dividend on June 17, 2005 to shareholders of record
on June 3, 2005. All references in the condensed consolidated financial
statements and accompanying notes to the number of shares outstanding, and
per
share amounts of the Company’s common shares have been restated to reflect the
effect of the stock split for all periods presented.
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
2.
Revenue Recognition
The
Company is principally a specialized consumer finance company engaged primarily
in acquiring and servicing retail installment sales Contracts (“Contracts”) for
purchases of new and used automobiles and light trucks. To a lesser extent,
the
Company also makes direct loans and sells consumer-finance related
products.
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.
A
dealer
discount represents the difference between the finance receivable, net of
unearned interest, of a Contract and the amount of money the Company actually
pays for the Contract. The entire amount of discount is related to credit
quality and is considered to be part of the credit loss reserve. The Company
receives a commission for selling add-on services to consumer borrowers and
amortizes the commission, net of the related costs, over the term of the loan
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
amount of future unearned income is computed as the product of the Contract
rate, the Contract term, and the Contract amount. The Company aggregates the
Contracts purchased during a three-month period for each of its branch
locations. After the analysis of purchase date accounting is complete, any
uncollectable amounts would be contemplated in the allowance for credit
losses.
5
Nicholas
Financial, Inc. and Subsidiaries
Notes
to
the Condensed Consolidated Financial Statements
(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. Basic and
diluted earnings per share have been computed as follows:
|
Three
months ended
|
Nine
months ended
|
||||||||||||
|
December
31,
|
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Numerator
for earnings per share - net income
|
$
|
2,718,330
|
$
|
2,213,647
|
$
|
7,621,334
|
$
|
5,711,711
|
|||||
|
Denominator:
|
|||||||||||||
|
Denominator
for basic earnings per share -
weighted
average shares
|
9,875,864
|
9,771,950
|
9,866,288
|
9,340,694
|
|||||||||
|
Effect
of dilutive securities:
Stock
options
|
585,756
|
622,929
|
604,094
|
603,901
|
|||||||||
|
Denominator
for diluted earnings per share
|
10,461,620
|
10,394,879
|
10,470,382
|
9,944,595
|
|||||||||
|
Earnings
per share - basic
|
$
|
0.28
|
$
|
0.23
|
$
|
0.77
|
$
|
0.61
|
|||||
|
Earnings
per share - diluted
|
$
|
0.26
|
$
|
0.21
|
$
|
0.73
|
$
|
0.57
|
|||||
6
Nicholas
Financial, Inc. and Subsidiaries
Notes
to
the Condensed Consolidated Financial Statements
(Unaudited)
4.
Finance Receivables
Finance
receivables consist of automobile finance installment Contracts and direct
consumer loans and are detailed as follows:
|
December
31,
|
March
31,
|
||||||
|
2005
|
2005
|
||||||
|
Finance
receivables, gross Contract
|
$
|
211,198,167
|
$
|
182,386,735
|
|||
|
Unearned
interest
|
(55,402,704
|
)
|
(43,432,023
|
)
|
|||
|
Finance
receivables, net of unearned interest
|
155,795,463
|
138,954,712
|
|||||
|
Dealer
discounts
|
(14,758,242
|
)
|
(18,598,147
|
)
|
|||
|
Allowance
for credit losses
|
(7,998,578
|
)
|
(6,648,443
|
)
|
|||
|
Finance
receivables, net
|
$
|
133,038,643
|
$
|
113,708,122
|
|||
The
terms
of the receivables range from 12 to 72 months and bear a weighted average
interest rate of 24% for the three and nine months ended December 31,
2005.
5.
Line of Credit
At
December 31, 2005 the Company had an $85.0 million line of credit facility
(the
Line) expiring on November 30, 2008. The Company may borrow the lesser of
$85.0 million or amounts based upon formulas principally related to a percentage
of eligible finance receivables, as defined. See note 9 regarding subsequent
amendment to the Line. For the three months ended December 31, 2005, $78.0
million of borrowings under the Line used LIBOR plus 175.0 basis points pricing
options. The remainder of the borrowings under the Line used the prime rate
plus
37.5 basis points pricing option. The prime rate based borrowings are generally
less than $5.0 million. The Company’s cost of borrowed funds based upon the
interest rates charged under the Line, related party debt and the effect of
the
swaps (see note 7) amounted to 5.85% and 5.90% for the three and nine months
ended December 31, 2005, respectively, as compared to 5.69% and 5.70% for the
three and nine-month
period
ended December
31, 2004,
respectively. Pledged as collateral for this credit facility are all of the
assets of the Company’s subsidiary, Nicholas Financial, Inc. As of December 31,
2005, the amount outstanding under the Line was approximately $78.4 million
and
the amount available under the Line was approximately $6.6 million. 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 December 31, 2005, the Company was
in
full compliance with all debt covenants.
6.
Notes Payable - Related Party
The
Company has unsecured notes payable to the President and Chief Executive Officer
totaling $600,000 and $1,000,000 at December 31, 2005 and March 31, 2005,
respectively. For the three and nine months ended December 31, 2005 and for
fiscal year 2005, the notes bore a variable interest rate equal to the average
cost of borrowed funds for the Company plus 25.0 basis points (6.15% at December
31, 2005 and 5.94% at March 31, 2005). The interest rate is recalculated every
three months. The notes are due upon thirty-day demand. The Company incurred
interest expense on the above notes of approximately $9,400 and $16,500 for
the
three months ended December 31, 2005 and 2004, respectively. The
Company incurred interest expense on the above notes of approximately $29,800
and $45,300 for the nine months ended December 31, 2005 and 2004,
respectively.
7
Nicholas
Financial, Inc. and Subsidiaries
Notes
to
the Condensed Consolidated Financial Statements
(Unaudited)
7.
Derivatives and Hedging
The
Company is party to interest rate swap agreements which are derivative
instruments. For derivative instruments that are designated and qualify as
a
cash flow hedge (i.e., hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk, such as interest rate
risk), the effective portion of the gain or loss on the derivative instrument
is
reported as a component of comprehensive income and reclassified into earnings
in the same period or periods during which the hedged transaction affects
earnings. The remaining gain or loss on the derivative instrument in excess
of
the cumulative change in the present value of the future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change.
At
December 31, 2005, $60.0 million of the Company’s borrowings were designated as
hedged items to interest rate swap agreements. Under the swap agreements, the
Company received an average variable rate of 4.08% and 2.06% for the three
months ended December 31, 2005 and 2004, respectively. During the same period
the Company paid an average fixed rate of 3.82% and 3.59%, respectively. Under
the swap agreements, the Company received an average variable rate of 3.58%
and
1.55% for the nine months ended December 31, 2005 and 2004, respectively. During
the same period the Company paid an average fixed rate of 3.72% and 3.75%,
respectively. A gain of $1,134,571 related to the fair value of the swaps at
December 31, 2005 has been recorded in the caption derivatives on the balance
sheet. Accumulated other comprehensive income at December 31, 2005, in the
amount of $703,434 represents the after-tax effect of the derivative income.
Amounts of net income or losses on derivative instruments expected to be
reclassified from comprehensive income to earnings in the next 12 months are
not
expected to be material. The following table summarizes the interest rate swap
agreements.
|
Date
Entered
|
Effective
Date
|
Notional
Amount
|
Fixed
Rate
Of
Interest
|
Maturity
Date
|
|
January
6, 2003
|
April
2, 2003
|
$10,000,000
|
3.350%
|
April
2, 2007
|
|
January
31, 2003
|
August
1, 2003
|
$10,000,000
|
3.200%
|
August
2, 2006
|
|
February
26, 2003
|
May
17, 2004
|
$10,000,000
|
3.910%
|
May
19, 2008
|
|
March
11, 2004
|
October
5, 2004
|
$10,000,000
|
3.640%
|
October
5, 2009
|
|
January
18, 2005
|
July
2, 2005
|
$10,000,000
|
4.380%
|
July
2, 2010
|
|
September
9, 2005
|
September
13, 2005
|
$10,000,000
|
4.458%
|
September
2, 2010
|
The
Company utilizes the above noted interest rate swaps to manage its interest
rate
exposure. The swaps effectively 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. There has historically been no
ineffectiveness associated with the Company’s hedges.
The
following table reconciles net income with comprehensive income.
|
Three
months ended
December
31,
|
Nine
months ended
December
31,
|
||||||||||||
|
2005
|
|
2004
|
2005
|
|
2004
|
||||||||
|
Net
Income
|
$
|
2,718,330
|
$
|
2,213,647
|
$
|
7,621,334
|
$
|
5,711,711
|
|||||
|
Mark
to market interest rate swaps
|
|||||||||||||
|
(net
of tax)
|
188,393
|
263,808
|
244,485
|
1,026,737
|
|||||||||
|
Comprehensive
income
|
$
|
2,906,723
|
$
|
2,477,455
|
$
|
7,865,819
|
$
|
6,738,448
|
|||||
8
Nicholas
Financial, Inc. and Subsidiaries
Notes
to
the Condensed Consolidated Financial Statements
(Unaudited)
8.
Stock Options
The
Company has an employee stock incentive plans (the SIP) for officers, directors
and key employees. The Company is authorized to grant options for up to
1,410,000 common shares under the SIP, of which 265,300 shares were remaining
available for future grants as of December 31, 2005. Of the 265,300 shares
remaining available for future grants 250,000 shares are available for directors
and 15,300 shares are available for employees. Options currently granted by
the
Company generally vest over a five-year period.
As
permitted under Statement of Financial Accounting Standards (SFAS) No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure", which
amended SFAS No. 123, "Accounting for Stock-Based Compensation", the Company
has
elected to continue to follow the intrinsic value method in accounting for
its
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in operations, as all options granted under those plans have an
exercise price equal to or above the market value of the underlying common
stock
on the date of grant.
The
fair
value method uses the Black-Scholes option-pricing model to determine
compensation expense associated with the Company’s options. The
following table illustrates the effect on net income and net income per share
if
the Company had applied the fair value recognition provisions of SFAS No.123
to
stock-based employee compensation:
|
Three
months ended
|
Nine
months ended
|
||||||||||||
|
December
31,
|
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Reported
net income
|
$
|
2,718,330
|
$
|
2,213,647
|
$
|
7,621,334
|
$
|
5,711,711
|
|||||
|
Stock
based employee compensation cost
under
the fair value method, net of tax
|
13,183
|
11,759
|
40,369
|
35,149
|
|||||||||
|
Pro
forma net income
|
$
|
2,705,147
|
$
|
2,201,888
|
$
|
7,580,965
|
$
|
5,676,562
|
|||||
|
Reported
basic earnings per share
|
$
|
0.28
|
$
|
0.23
|
$
|
0.77
|
$
|
0.61
|
|||||
|
Pro
forma basic earnings per share
|
$
|
0.27
|
$
|
0.23
|
$
|
0.77
|
$
|
0.61
|
|||||
|
Reported
diluted earnings per share
|
$
|
0.26
|
$
|
0.21
|
$
|
0.73
|
$
|
0.57
|
|||||
|
Pro
forma diluted earnings per share
|
$
|
0.26
|
$
|
0.21
|
$
|
0.72
|
$
|
0.57
|
|||||
9.
Subsequent Events
On
February 1, 2006 the Company executed Amendment No. 7 to its Line increasing
the
total Line from $85.0 million to $100.0 million. All other terms and conditions
of Amendment No. 6, dated September 14, 2005 remain in effect.
9
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 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-KSB, 10-Q, 8-K and annual reports to
shareholders.
Critical
Accounting Policy
The
Company’s critical accounting policy relates to the allowance for losses on
loans. 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, which includes a review of all loans on which
full
collectibility 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.
Introduction
Consolidated
net income increased to $2.7 million for the three-month period ended December
31, 2005 as compared to $2.2 million for the three-month period ended
December
31, 2004.
Consolidated net income increased to $7.6 million for the nine-month period
ended December 31, 2005 as compared to $5.7 million for the nine-month period
ended December
31, 2004.
Earnings were favorably impacted by an increase in the outstanding loan
portfolio and a reduction in the charge-off rate. The Company’s software
subsidiary, Nicholas Data Services (NDS), did not contribute significantly
to
consolidated operations in the three or nine-month periods ended December 31,
2005 or 2004.
10
|
Portfolio
Summary
|
Three
months ended
December
31,
|
Nine
months ended
December
31,
|
|||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Average
finance receivables, net of unearned interest (1)
|
$
|
153,011,496
|
$
|
130,157,442
|
$
|
146,526,954
|
$
|
127,149,953
|
|||||
|
Average
indebtedness (2)
|
$
|
76,791,186
|
$
|
63,908,352
|
$
|
71,499,601
|
$
|
63,564,709
|
|||||
|
Finance
revenue (3)
|
$
|
11,065,071
|
$
|
8,484,354
|
$
|
30,372,375
|
$
|
23,495,609
|
|||||
|
Interest
expense
|
1,122,358
|
909,468
|
3,161,390
|
2,719,551
|
|||||||||
|
Net
finance revenue
|
$
|
9,942,713
|
$
|
7,574,886
|
$
|
27,210,985
|
$
|
20,776,058
|
|||||
|
Weighted
average contractual rate (4)
|
23.99
|
%
|
23.80
|
%
|
24.01
|
%
|
24.03
|
%
|
|||||
|
Average
cost of borrowed funds (2)
|
5.85
|
%
|
5.69
|
%
|
5.90
|
%
|
5.70
|
%
|
|||||
|
Gross
portfolio yield (5)
|
28.93
|
%
|
26.07
|
%
|
27.64
|
%
|
24.63
|
%
|
|||||
|
Interest
expense as a percentage of average finance receivables, net of unearned
interest
|
2.93
|
%
|
2.79
|
%
|
2.88
|
%
|
2.85
|
%
|
|||||
|
Provision
for credit losses as a percentage of average finance receivables,
net of
unearned interest
|
3.06
|
%
|
1.74
|
%
|
2.21
|
%
|
1.89
|
%
|
|||||
|
Net
portfolio yield (5)
|
22.94
|
%
|
21.54
|
%
|
22.55
|
%
|
19.89
|
%
|
|||||
|
Operating
expenses as a percentage of average finance receivables, net of unearned
interest (6)
|
11.41
|
%
|
10.54
|
%
|
11.27
|
%
|
10.18
|
%
|
|||||
|
Pre-tax
yield as a percentage of average finance receivables, net of unearned
interest (7)
|
11.53
|
%
|
11.00
|
%
|
11.28
|
%
|
9.71
|
%
|
|||||
|
Write-off
to liquidation (8)
|
6.19
|
%
|
7.45
|
%
|
5.92
|
%
|
6.99
|
%
|
|||||
|
Net
charge-off percentage (9)
|
5.47
|
%
|
6.52
|
%
|
5.28
|
%
|
6.03
|
%
|
|||||
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
and notes payable-related party. Average cost of borrowed funds represents
interest expense as a percentage of average
indebtedness.
|
| (3) |
Finance
revenue does not include revenue generated by NDS. See pages 12 and
13 for
details on NDS revenue during the
period.
|
|
(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)
|
Operating
expenses represent total expenses, less interest expense, the provision
for credit losses and operating costs associated with NDS. See pages
12
and 13 for details on NDS operating expenses during the
period.
|
|
(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.
|
11
Three
months ended December 31, 2005 compared to three months ended December 31,
2004
Interest
Income and Loan Portfolio
Interest
income on finance receivables, predominately finance charge income, increased
30% to $11.1 million for the three-month period ended December 31, 2005, from
$8.5 million for the corresponding period ended December 31, 2004. Average
finance receivables, net of unearned interest equaled $153.0 million for the
three-month period ended December 31, 2005, an increase of 18% from $130.2
million for the corresponding period ended December 31, 2004. The primary reason
average finance receivables, net of unearned interest increased was the increase
in the receivable base of several existing branches and the opening of
additional branch locations. The gross finance receivable balance increased
23%
to $211.2 million at December 31, 2005 from $171.2 million at December 31,
2004.
The primary reason interest income increased was the increase in the outstanding
loan portfolio. The gross portfolio yield increased from 26.07% for the
three-month period ended December 31, 2004 to 28.93% for the three-month period
ended December 31, 2005. The net portfolio yield increased from 21.54% for
the
three-month period ended December 31, 2004 to 22.94% for the corresponding
period ended December 31, 2005. The primary reason for the increase in the
net
portfolio yield was a decrease in charge-offs for the period ended December
31,
2005. Reserves
accreted into income for the three months ended December 31, 2005 were
approximately $2,091,000 as compared to $1,557,000 for the three months ended
December 31, 2004. There were no provisions reversed for the three months ended
December 31, 2005 or December 31, 2004. The primary reasons for the increase
in
reserves accreted during the three months ended December 31, 2005 as compared
to
the three months ended December 31, 2004 was a decrease in the net charge-off
percentage from 6.52% to 5.47% and an increase in the size of the
portfolio.
Computer
Software Business
Sales
for
the three-month period ended December 31, 2005 were approximately $42,000 as
compared to $56,000 for the corresponding period ended December 31, 2004, a
decrease of 25%. This decrease was primarily due to lower revenue from the
existing customer base during the period ended December 31, 2005. Cost of sales
and operating expenses decreased from approximately $77,000 for the three-month
period ended December 31, 2004 to $61,000 for the corresponding period ended
December 31, 2005. The primary reason for the decrease was a reduction in
personnel associated with NDS.
Operating
Expenses
Operating
expenses, excluding provision for credit losses and interest expense and costs
associated with NDS, increased to $4.4 million for the three-month period ended
December 31, 2005 from $3.4 million for the corresponding period ended December
31, 2004. This increase of 27% was primarily attributable to the additional
staffing of several existing branches, increased general operating expenses
and
the opening of additional branch offices. Operating expenses as a percentage
of
finance receivables, net of unearned interest increased from 10.54% for the
three-month period ended December 31, 2004 to 11.41% for the corresponding
period ended December 31, 2005.
Interest
Expense
Interest
expense increased from approximately $909,000 for the three-month period ended
December 31, 2004 to $1,122,000 for the corresponding period ended December
31,
2005. The average indebtedness for the three-month period ended December 31,
2005 increased to $76.8 million as compared to $63.9 million for the
corresponding period ended December 31, 2004. The Company’s average cost of
borrowed funds increased to 5.85% for the three months ended December 31, 2005
as compared to 5.69% for the corresponding period ended December 31, 2004.
12
Nine
months
ended December 31, 2005 compared to nine months ended December 31,
2004
Interest
Income and Loan Portfolio
Interest
income on finance receivables, predominately finance charge income, increased
29% to $30.4 million for the nine-month period ended December 31, 2005, from
$23.5 million for the corresponding period ended December 31, 2004. Average
finance receivables, net of unearned interest equaled $146.5 million for the
nine-month period ended December 31, 2005, an increase of 15% from $127.1
million for the corresponding period ended December 31, 2004. The primary reason
average finance receivables, net of unearned interest increased was the increase
in the receivable base of several existing branches and the opening of
additional branch locations. The gross finance receivable balance increased
23%
to $211.2 million at December 31, 2005 from $171.2 million at December 31,
2004.
The primary reason interest income increased was the increase in the outstanding
loan portfolio. The gross portfolio yield increased from 24.63% for the
nine-month period ended December 31, 2004 to 27.64% for the nine-month period
ended December 31, 2005. The net portfolio yield increased from 19.89% for
the
nine-month period ended December 31, 2004 to 22.55% for the corresponding period
ended December 31, 2005. The primary reason for the increase in the net
portfolio yield was a decrease in charge-offs for the period ended December
31,
2005. Reserves
accreted into income for the nine months ended December 31, 2005 were
approximately $5,651,000 as compared to $3,498,000 for the nine months ended
December 31, 2004. There were no provisions reversed for the nine months ended
December 31, 2005 or December 31, 2004. The primary reasons for the increase
in
reserves accreted during the nine months ended December 31, 2005 as compared
to
the nine months ended December 31, 2004 was a decrease in the net charge-off
percentage from 6.03% to 5.28% and an increase in the size of the
portfolio.
Computer
Software Business
Sales
for
the nine-month period ended December 31, 2005 were approximately $134,000 as
compared to $155,000 for the corresponding period ended December 31, 2004,
a
decrease of 14%. This decrease was primarily due to lower revenue from the
existing customer base during the nine-months ended December 31, 2005. Cost
of
sales and operating expenses increased from approximately $221,000 for the
nine-month period ended December 31, 2004 to $231,000 for the corresponding
period ended December 31, 2005.
Operating
Expenses
Operating
expenses, excluding provision for credit losses and interest expense and costs
associated with NDS, increased to $12.4 million for the nine-month period ended
December 31, 2005 from $9.7 million for the corresponding period ended December
31, 2004. This increase of 28% was primarily attributable to the additional
staffing of several existing branches, increased general operating expenses
and
the opening of additional branch offices. Operating expenses as a percentage
of
finance receivables, net of unearned interest increased from 10.18% for the
nine-month period ended December 31, 2004 to 11.27% for the corresponding period
ended December 31, 2005.
Interest
Expense
Interest
expense increased from approximately $2,720,000 for the nine-month period ended
December 31, 2004 to $3,161,000 for the corresponding period ended December
31,
2005. The average indebtedness for the nine-month period ended December 31,
2005
increased to $71.5 million as compared to $63.6 million for the corresponding
period ended December 31, 2004. The Company’s average cost of borrowed funds
increased to 5.90% for the nine
months
ended
December 31, 2005 as compared to 5.70% for the corresponding period ended
December 31, 2004.
13
Contract
Procurement
The
Company purchases Contracts in the ten states listed in the table below. The
Company has been expanding its Contract procurement in Kentucky, Maryland,
Virginia and Indiana. See “Future Expansion” below. The Contracts purchased by
the Company are predominately for used vehicles; for the three and nine-month
periods ended December 31, 2005 and 2004, less than 3% were new. As of December
31, 2005, the average model year of vehicles collateralizing the portfolio
was
2000.
The
amounts shown in the tables below represent information on finance receivables,
net of unearned interest of Contracts purchased.
|
Three
months ended
December
31,
|
Nine
months ended
December
31,
|
||||||||||||
|
State
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
FL
|
$
|
11,691,315
|
$
|
10,121,741
|
$
|
36,522,349
|
$
|
30,643,243
|
|||||
|
GA
|
2,500,377
|
1,238,711
|
7,252,928
|
5,547,869
|
|||||||||
|
NC
|
3,069,148
|
2,081,482
|
8,971,810
|
6,577,416
|
|||||||||
|
SC
|
957,810
|
781,675
|
2,823,183
|
2,847,066
|
|||||||||
|
OH
|
3,195,775
|
2,064,868
|
9,642,396
|
8,635,938
|
|||||||||
|
MI
|
727,318
|
412,137
|
1,727,396
|
2,225,223
|
|||||||||
|
VA
|
1,793,698
|
1,400,228
|
5,463,363
|
4,270,114
|
|||||||||
|
IN
|
774,614
|
-
|
2,026,819
|
-
|
|||||||||
|
KY
|
1,162,032
|
234,820
|
2,278,537
|
234,820
|
|||||||||
|
MD
|
826,508
|
414,908
|
1,477,224
|
414,908
|
|||||||||
|
Total
|
$
|
26,698,595
|
$
|
18,750,570
|
$
|
78,186,005
|
$
|
61,396,597
|
|||||
|
Three
months ended
December
31,
|
Nine
months ended
December
31,
|
||||||||||||
|
Contracts
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
Purchases
|
$
|
26,698,595
|
$
|
18,750,570
|
$
|
78,186,005
|
$
|
61,396,597
|
|||||
|
Weighted
APR
|
23.86
|
%
|
23.65
|
%
|
23.88
|
%
|
23.90
|
%
|
|||||
|
Average
discount
|
8.90
|
%
|
8.73
|
%
|
8.72
|
%
|
8.72
|
%
|
|||||
|
Weighted
average
term
(months)
|
45
|
45
|
45
|
44
|
|||||||||
|
Average
loan
|
$
|
8,829
|
$
|
8,504
|
$
|
8,811
|
$
|
8,382
|
|||||
|
Number
of Contracts
|
3,024
|
2,205
|
8,874
|
7,325
|
|||||||||
Loan
Origination
The
following table presents information on direct loans originated by the Company,
net of unearned interest.
|
Direct
Loans
|
Three
months ended
December
31,
|
Nine
months ended
December
31,
|
|||||||||||
|
Originated
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
Originations
|
$
|
2,206,382
|
$
|
1,446,259
|
$
|
5,958,249
|
$
|
3,910,700
|
|||||
|
Weighted
APR
|
25.57
|
%
|
25.80
|
%
|
25.77
|
%
|
26.01
|
%
|
|||||
|
Weighted
average
term
(months)
|
28
|
26
|
28
|
26
|
|||||||||
|
Average
loan
|
$
|
3,274
|
$
|
3,158
|
$
|
3,319
|
$
|
3,065
|
|||||
|
Number
of loans
|
674
|
458
|
1,795
|
1,276
|
|||||||||
14
Analysis
of Credit Losses
Because
of the nature of the customers under the Company’s Contracts, 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 Company branch office
during a fiscal quarter. As of December 31, 2005, the Company had 658 active
static pools. The average pool upon inception consisted of 72 Contracts with
aggregate finance receivables, net of unearned interest, of approximately
$611,000.
Contracts
are purchased from many different dealers and all are purchased on an individual
Contract by Contract basis. Individual Contract pricing is determined by the
automobile dealerships and is generally the lesser of the applicable state
maximum interest rate or the maximum interest rate at which the customer will
accept. In certain markets, competitive forces will drive down Contract rates
from the maximum allowable 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
does consider portfolio acquisitions as part of its growth
strategy.
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. In evaluating the adequacy
of
the credit loss reserve the Company utilizes a static pool approach to track
portfolio performance.
Prior
to
the April 1, 2005 in situations where, at the date of purchase, the dealer
discount was determined to be insufficient to absorb all potential credit losses
associated with a static pool, a portion of unearned income associated with
the
static pool was allocated to the reserve for dealer discounts. For loans
purchased prior to April 1, 2005 the Company recognized revenue on the basis
of
interest expected to be collected, which was the gross contractual interest
less
amounts allocated to the reserve for dealer discounts.
Effective
with loans purchased after March 31, 2005, the Company discontinued the practice
of allocating a portion of unearned income to the reserve for dealer discounts.
This change was made to reflect the predominate practice in the industry and
improve comparability with other companies within the finance industry.
Effective with loans purchased after March 31, 2005 the Company began
recognizing interest income based upon the contractual rate of the loan.
In
situations where, at the date of purchase, the discount is determined to be
insufficient to absorb all potential losses associated with the static pool,
a
charge to income is calculated and amortized into provision for credit losses
over the life of the pool.
The
change in the practice of allocating a portion of the unearned income to
reserves for dealer discounts did not have a significant effect on the periodic
net operating results, but rather resulted in differences in the classification
of amounts within the statement of income. Both interest income and provisions
for credit losses were higher for those pools acquired during the nine-month
period ended December 31, 2005 than those pools acquired prior to such period.
In addition, while this change has not significantly changed the net finance
receivables as reported, the components of net finance receivables have changed
as unearned interest as a percentage of gross Contracts has increased as a
result of the change and will be followed in subsequent periods by increases
in
the allowance for credit losses.
15
Certain
tabular information and the discussions pertaining to credit losses presented
herein address the change in the methodology. The table below, which is
reflective of the change in allocation, presents net finance receivables as
a
percentage of gross Contracts as of December 31, 2005 and 2004.
|
December
31, 2005
|
December
31, 2004
|
||||||||||||
|
%
of Gross
|
%
of Gross
|
||||||||||||
|
Amount
|
Contracts
|
Amount
|
Contracts
|
||||||||||
|
Finance
receivables, gross Contract
|
$
|
211,198,167
|
100.00
|
$
|
171,166,964
|
100.00
|
|||||||
|
Unearned
interest
|
(55,402,704
|
)
|
(26.23
|
)
|
(40,310,612
|
)
|
(23.55
|
)
|
|||||
|
Finance
receivables, net of unearned interest
|
155,795,463
|
73.77
|
130,856,352
|
76.45
|
|||||||||
|
Dealer
discounts
|
(14,758,242
|
)
|
(6.99
|
)
|
(17,306,489
|
)
|
(10.11
|
)
|
|||||
|
Allowance
for credit losses
|
(7,998,578
|
)
|
(3.79
|
)
|
(6,561,064
|
)
|
(3.83
|
)
|
|||||
|
Finance
receivables, net
|
$
|
133,038,643
|
62.99
|
$
|
106,988,799
|
62.51
|
|||||||
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. Reserves
accreted into income for the three months ended December 31, 2005 were
approximately $2,091,000 as compared to $1,557,000 for the three months ended
December 31, 2004. Reserves accreted into income for the nine-months ended
December 31, 2005 were approximately $5,651,000 as compared to $3,498,000 for
the nine-months ended December 31, 2004. There were no provisions reversed
for
the three and nine months ended December 31, 2005 or December 31, 2004. The
primary reasons for the increase in reserves accreted during the nine months
ended December 31, 2005 as compared to the nine months ended December 31, 2004
was a decrease in the net charge-off percentage from 6.03% to 5.28% and an
increase in the size of the portfolio.
The
Company experienced a lower net charge-off percentage during the nine
months
ended
December 31, 2005 as compared to the nine
months
ended
December 31, 2004. This resulted in static pools having reserves in excess
of
estimates currently needed to liquidate these pools. The Company is in the
process of accreting these excess reserves from these more mature static pools
over their remaining life. Static pools originated during the fiscal year ended
March 31, 2005 have seen losses lower than their most recent predecessors;
however, there can be no assurances that this trend will continue.
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.
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.
16
The
following table sets forth a reconciliation of the changes in dealer discount
on
Contracts.
|
Three
months ended
|
Nine
months ended
|
||||||||||||
|
December
31,
|
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Balance
at beginning of period
|
$
|
16,355,319
|
$
|
17,432,841
|
$
|
18,598,147
|
$
|
15,377,582
|
|||||
|
Discounts
acquired on new volume
|
2,356,995
|
3,101,373
|
6,741,659
|
10,132,595
|
|||||||||
|
Losses
absorbed
|
(2,215,649
|
)
|
(1,976,361
|
)
|
(5,966,904
|
)
|
(5,644,300
|
)
|
|||||
|
Recoveries
|
353,071
|
305,387
|
1,036,325
|
938,337
|
|||||||||
|
Discounts
accreted
|
(2,091,494
|
)
|
(1,556,751
|
)
|
(5,650,985
|
)
|
(3,497,725
|
)
|
|||||
|
Balance
at end of period
|
$
|
14,758,242
|
$
|
17,306,489
|
$
|
14,758,242
|
$
|
17,306,489
|
|||||
|
Dealer
discounts as a percent of
|
|||||||||||||
|
gross
indirect Contracts
|
7.26
|
%
|
10.45
|
%
|
7.26
|
%
|
10.45
|
%
|
|||||
The
following table sets forth a reconciliation of the changes in the allowance
for
credit losses on Contracts
|
Three
months ended
|
Nine
months ended
|
||||||||||||
|
December
31,
|
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Balance
at beginning of period
|
$
|
6,914,361
|
$
|
6,312,213
|
$
|
6,448,790
|
$
|
5,787,764
|
|||||
|
Current
period provision
|
1,106,958
|
514,119
|
2,259,590
|
1,680,596
|
|||||||||
|
Losses
absorbed
|
(275,901
|
)
|
(467,770
|
)
|
(962,962
|
)
|
(1,109,798
|
)
|
|||||
|
Balance
at end of period
|
$
|
7,745,418
|
$
|
6,358,562
|
$
|
7,745,418
|
$
|
6,358,562
|
|||||
|
Allowance
as a percent of gross
|
|||||||||||||
|
indirect
Contracts
|
3.81
|
%
|
3.84
|
%
|
3.81
|
%
|
3.84
|
%
|
|||||
The
following table sets forth a reconciliation of the changes in the allowance
for
credit losses on direct loans.
|
Three
months ended
|
Nine
months ended
|
||||||||||||
|
December
31,
|
December
31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Balance
at beginning of period
|
$
|
227,225
|
$
|
180,239
|
$
|
199,653
|
$
|
184,334
|
|||||
|
Current
period provision
|
53,532
|
41,476
|
142,340
|
94,258
|
|||||||||
|
Losses
absorbed
|
(36,685
|
)
|
(24,744
|
)
|
(113,047
|
)
|
(98,939
|
)
|
|||||
|
Recoveries
|
9,088
|
5,531
|
24,214
|
22,849
|
|||||||||
|
Balance
at end of period
|
$
|
253,160
|
$
|
202,502
|
$
|
253,160
|
$
|
202,502
|
|||||
|
Allowance
as a percent of gross
|
|||||||||||||
|
direct
loan receivables
|
3.20
|
%
|
3.63
|
%
|
3.20
|
%
|
3.63
|
%
|
|||||
The
average dealer discount associated with new volume for the three months ended
December 31, 2005 and 2004 were 8.90% and 8.73%, respectively. The average
dealer discount associated with new volume for the nine months ended December
31, 2005 and 2004 were 8.72% and 8.72%, respectively. The Company believes
the
average dealer discount may decrease in future pools as the result of
competition in the markets the Company is currently operating in.
17
The
provision for credit losses increased from approximately $566,000 for the three
months ended December 31, 2004 to $1,172,000 for the three months ended December
31, 2005. The provision for credit losses increased from approximately
$1,806,000 for the nine months ended December 31, 2004 to $2,432,000 for the
nine months ended December 31, 2005. The Company’s losses as a percentage of
liquidation decreased from 7.45% for the three months ended December 31, 2004
to
6.19% for the three months ended December 31, 2005. The Company’s losses as a
percentage of liquidation decreased from 6.99% for the nine months ended
December 31, 2004 to 5.92% for the nine months ended December 31, 2005. The
Company anticipates losses as a percentage of liquidation will be in the 5-7%
range during the remainder of the current fiscal year. The longer term outlook
for portfolio performance will depend on the overall economic conditions, the
unemployment rate and the Company’s ability to monitor, manage and implement its
underwriting philosophy in additional geographic areas as it strives to continue
its expansion. The Company does not believe there have been any significant
changes in loan concentrations, terms or quality of Contracts purchased during
the nine months ended December 31, 2005 that would have contributed to the
decrease in losses.
Recoveries
as a percentage of charge-offs were 17.3% and 14.1% for the three months ended
December 31, 2005 and 2004, respectively. Recoveries as a percentage of
charge-offs were 17.7% and 16.1% for the nine months ended December 31, 2005
and
2004, respectively. The Company believes that as it continues to expand its
operations, it will become more difficult to implement its loss recovery model
in geographic areas further away from its Corporate headquarters, and as a
result, the Company will likely experience declining recovery rates over the
long term.
Reserves
accreted into income for the three months ended December 31, 2005 and 2004
were
approximately $2,091,000 and $1,557,000, respectively. Reserves
accreted into income for the nine months ended December 31, 2005 and 2004 were
approximately $5,651,000 and $3,498,000, respectively. The amount and timing
of
reserves accreted into income is a function of individual static pool
performance. The Company has seen improvement in the performance of its Contract
portfolio, more specifically, newer static pools have seen a slight decrease
in
the default rate when compared to the preceding year pool performance during
their same liquidation cycle. The Company attributes this decrease to an
improvement in overall general economic conditions.
The
Company believes there is a correlation between the unemployment rate and future
portfolio performance. The Company does not expect the U.S. unemployment rate
to
rise or fall significantly in the foreseeable future. Therefore the Company
does
not plan on increasing or decreasing reserves based on the current U.S.
unemployment rate. The Company believes its percentage of voluntary
repossessions will stabilize in the current fiscal year, and as a result,
management believes that the Company’s current reserve levels are adequate for
the foreseeable future. The number of bankruptcy filings by customers increased
slightly during the three and nine months ended December 31, 2005 as compared
to
the corresponding period last year. However, the Company believes the percentage
of bankruptcy filings as a percentage of active receivables will stabilize
in
the current fiscal year, and as a result, management believes that the Company’s
current reserve levels are adequate for the foreseeable future.
18
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:
|
At
December 31, 2005
|
At
December 31, 2004
|
||||||||||||
|
Contracts
|
|||||||||||||
|
Gross
balance outstanding
|
$
|
203,293,741
|
$
|
165,583,890
|
|||||||||
|
Delinquencies
|
|||||||||||||
|
30
to 59 days
|
$
|
3,438,414
|
1.70
|
%
|
$
|
3,056,372
|
1.85
|
%
|
|||||
|
60
to 89 days
|
1,144,851
|
0.56
|
%
|
706,221
|
0.43
|
%
|
|||||||
|
90
+ days
|
409,335
|
0.20
|
%
|
327,077
|
0.19
|
%
|
|||||||
|
Total
delinquencies
|
$
|
4,992,600
|
2.46
|
%
|
$
|
4,089,670
|
2.47
|
%
|
|||||
|
Direct
Loans
|
|||||||||||||
|
Gross
balance outstanding
|
$
|
7,904,426
|
$
|
5,583,074
|
|||||||||
|
Delinquencies
|
|||||||||||||
|
30
to 59 days
|
$
|
89,224
|
1.13
|
%
|
$
|
61,980
|
1.11
|
%
|
|||||
|
60
to 89 days
|
35,969
|
0.46
|
%
|
16,758
|
0.30
|
%
|
|||||||
|
90
+ days
|
28,087
|
0.35
|
%
|
27,475
|
0.49
|
%
|
|||||||
|
Total
delinquencies
|
$
|
153,280
|
1.94
|
%
|
$
|
106,213
|
1.90
|
%
|
|||||
The
delinquency percentage for Contracts more than thirty days past at December
31,
2005 was 2.46% as compared to 2.47% at December 31, 2004. The delinquency
percentage for direct loans more than thirty days past due at December 31,
2005
was 1.94% as compared to 1.90% at December 31, 2004.
The
Company does not give significant consideration to short-term trends in
delinquency percentages when evaluating reserve levels. Delinquency percentages
tend to be very volatile and often are not necessarily an indication of future
losses. The Company 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. 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
The
provision for income taxes increased 24% to approximately $1,670,000 for the
three months ended December 31, 2005 from $1,346,000 for the three months ended
December 31, 2004, primarily as a result of higher pre-tax income. The provision
for income taxes increased 34% to approximately $4,676,000 for the nine months
ended December 31, 2005 from $3,483,000 for the nine months ended December
31,
2004, primarily as a result of higher pre-tax income. The Company's effective
tax rate increased from 37.82% for the three months ended December 31, 2004
to
38.05% for the three months ended December 31, 2005. The
Company's effective tax rate increased from 37.88% for the nine months ended
December 31, 2004 to 38.03% for the nine months ended December 31, 2005.
19
Liquidity
and Capital Resources
The
Company's cash flows are summarized as follows:
|
Nine
months ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
provided by (used in):
|
|||||||
|
Operating
activities -
|
$
|
10,039,387
|
$
|
7,596,724
|
|||
|
Investing
activities -
|
|||||||
|
(primarily
purchase of Contracts)
|
(22,068,234
|
)
|
(11,801,646
|
)
|
|||
|
Financing
activities
|
12,846,266
|
4,741,321
|
|||||
|
Net
increase in cash
|
$
|
817,419
|
$
|
536,399
|
|||
The
Company's primary use of working capital for the nine months ended December
31,
2005 was the funding of the purchase of Contracts. The Contracts were financed
substantially through borrowings under the Company’s $85.0 million Line. The
Line is secured by all of the assets of the Company’s Nicholas Financial, Inc.
subsidiary. At December 31, 2005 the Company
could
borrow
the lesser of $85.0 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 175.0 basis points
or
at the prime rate plus 37.5 basis points. Prime
rate
based borrowings are generally less than $1.0 million. As of December 31, 2005,
the amount outstanding under the Line
was
approximately $78.4 million and the amount available under the Line was
approximately $6.6 million.
On
February 1, 2006 the Company executed Amendment No. 7 to its Line increasing
the
total Line from $85.0 million to $100.0 million. All other terms and conditions
of Amendment No. 6, dated September 14, 2005 remain in effect.
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. At December 31, 2005, approximately 77% of the Company’s
borrowings under the Line were subject to interest rate swap agreements. These
swap agreements have maturities ranging from August 2, 2006 through September
2,
2010.
The
self-liquidating nature of Contracts and other loans enables the Company to
assume a higher debt-to-equity ratio than in most businesses. 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.
20
Future
Expansion
The
Company currently operates a total of forty-two branch locations in ten states,
including seventeen in Florida, five in Ohio, five in North Carolina, four
in
Georgia, three in Virginia, three in Kentucky, two in South Carolina and one
in
each of Michigan, Maryland and Indiana. 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
none of our branches has reached this capacity.
The
Company currently intends to continue its expansion through the purchase of
additional Contracts and the expansion of its direct consumer loan program.
In
order to increase the size of the Company’s portfolio of Contracts, it will be
necessary for the Company to open additional branch offices and increase the
size of its Line, either with its current lender or another lender. The Company,
from time to time, has and will meet with investment bankers and financial
institutions discussing various strategies to meet the future needs of the
Company. The Company believes opportunities for growth continue to exist in
states where it currently operates branches and plans to continue its expansion
activities in those states. No assurances can be given, however, that the
Company will be able to continue to expand or, if it does continue to expand,
that it will be able to do so profitably. The Company is also analyzing other
markets in states the Company does not currently operate in, however, no
assurance can be given that any expansion will occur in these new
markets.
Recently
Issued Accounting Standards
In
October 2003, the AICPA issued Statement of Position (SOP) No. 03-3,
“Accounting for Loans or Certain Debt Securities Acquired in a
Transfer.” SOP
No.
03-3 applies to a loan with evidence of deterioration in credit quality
subsequent to its origination that is acquired by completion of a transfer
(as
defined in SOP No. 03-3), for which it is probable at acquisition of such loan,
that the acquirer will be unable to collect all contractually required payments
receivable. The Company’s finance receivables are acquired shortly after
origination and there is no credit deterioration during the time between
origination of the finance receivable and the purchase by the Company.
As
a
result, the Company does not expect any impact on the Company’s consolidated
financial statements.
In
December 2004, the FASB issued SFAS No. 123(R), “Accounting for Stock-Based
Compensation.” SFAS No. 123(R) establishes standards for the accounting for a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchases plans. SFAS No. 123(R) replaces SFAS No. 123,
“Accounting for Stock-Based Compensation,” and supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R)
will be applicable for the quarter ending June 30, 2006. Thus, the Company’s
consolidated financial statements will reflect an expense for (1) all
share-based compensation arrangements granted after March 31, 2006 and for
any
such arrangements modified, cancelled, or repurchased after that date, and
(2)
the portion of previous share-based awards for which the requisite service
has
not been rendered as of that date, based on the grant-date estimated fair value
of those awards. Prior to SFAS No. 123(R), only certain pro forma disclosures
of
the fair-value method were required and the Company was allowed to continue
using the intrinsic-value-based model of Opinion 25. The Company does not
believe the adoption of this statement will have a material impact on the
Company’s consolidated financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), 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.
21
Item
3. Quantitative And Qualitative Disclosures About Market
Risk
Note:
Pursuant to Instruction 1 to Paragraph (c) of Item 305 of Regulation S-K,
information is not required under Item 305(c) of Regulation S-K until after
the
first fiscal year end in which Item 305 is applicable, which for the Company
will be the fiscal year ending March 31, 2006.
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-Finance 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-Finance 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
was no change in the Company’s internal control over financial reporting that
occurred during the Company’s last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
22
PART
II - OTHER INFORMATION
ITEM
6. EXHIBITS
See
exhibit index following the signature page.
23
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 14, 2006 | /s/ Peter L. Vosotas | |
|
Peter L. Vosotas |
||
|
Chairman
of the Board, President,
Chief
Executive Officer and Director
|
||
| |
|
|
| Date: February 14, 2006 | /s/ Ralph T. Finkenbrink | |
|
Ralph T. Finkenbrink |
||
|
Sr.
Vice President -Finance
Chief
Financial Officer and
Director
|
||
24
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
31.1
|
Certification
of President and Chief Executive Officer Pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1
|
Written
Statement of the Chief Executive Officer Pursuant to 18 U.S.C. §
1350
|
|
32.2
|
Written
Statement of the Chief Financial Officer Pursuant to 18 U.S.C. §
1350
|