Summary of Significant Accounting Policies (Policies)

12 Months Ended

Mar. 31, 2013

Accounting Policies [Abstract]

Consolidation

Consolidation

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

Corrections

Error Corrections

The Company made error corrections for departures from U.S. GAAP and revised previously reported amounts.

One of the corrections is related to the accounting treatment for dealer discounts. A dealer discount represents the difference between the amount of a finance receivable, net of unearned interest, based on the terms of a Contract with the borrower, and the amount of money the Company actually pays the dealer for the Contract. Prior to the correction, based on past industry practices, Contracts were recorded at the net initial investment with the gross Contract balance recorded offset by the dealer discounts which were recorded as an allowance for credit losses for the acquired Contracts. The Company determined that this accounting treatment was incorrect as U.S. GAAP prohibits carrying over valuation allowances in the initial accounting for acquired loans. Accordingly, the Company has now applied an acceptable method under U.S. GAAP, deferring and netting dealer discounts against finance receivables as unearned discounts, and recognizing dealer discounts into income as an adjustment to yield over the life of the loan using the interest method.

As a result, the allowance for loan losses is now established solely through charges to earnings through the provision for credit losses. The Company has evaluated the significance of the departure from U.S. GAAP to the consolidated financial statements. Under both the former accounting policy and U.S. GAAP, the dealer discount remains a reduction of gross finance receivables in arriving at the carrying amount of finance receivables, net. Accordingly, finance receivables continue to be initially recorded at the net initial investment at the time of purchase. Subsequently, the allowance for credit losses is maintained at an amount that reduces the net carrying amount of finance receivables. The change in this accounting presentation does not result in a change to the net carrying amount of finance receivables or to net income as historical losses incurred, and estimated incurred losses as of the balance sheet date, are generally in excess of the original dealer discount. The removal of the dealer discount from the allowance requires an equal replacement of provision expense as that portion of the allowance is necessary to absorb probable incurred losses. This correction also did not have an impact on previously reported assets, liabilities, working capital, equity, earnings, or cash flows.

The second correction related to the accounting treatment and presentation of certain fees charged to dealers and costs incurred in purchasing loans from dealers. Such costs related principally to evaluating borrowers subject to Contracts in relation to the Company’s underwriting guidelines in making a determination to acquire Contracts. Prior to the correction, fees charged to dealers were reduced by certain costs incurred to purchase Contracts, deferred on a net basis and then amortized into income over the lives of the loans using the interest method. Under U.S. GAAP, the fees charged to dealers are considered to be a part of the unearned dealer discount as they are a determinant of the net amount of cash paid to the dealer. Further, U.S. GAAP specifies that costs incurred in connection with acquiring purchased loans or committing to purchase loans shall be charged to expense as incurred. Such costs do not qualify as origination costs to be deferred as the Contracts have already been originated by the dealers. The Company evaluated the significance of the departure from U.S. GAAP to the consolidated financial statements. After an adjustment to beginning equity and the opening balance of unearned dealer discounts, net of tax, for the initial period presented, there is a limited effect on earnings and no impact on cash flows.

The changes to consolidated financial statement captions and earnings per share, if any, are as follows.

	2012 as Reported		Correction			2012 as Corrected
Consolidated Balance Sheet
Finance receivables, net	$	242,348,521	$	(1,095,091	)	$	241,253,430
Deferred income taxes		8,704,099		419,201			9,123,300
Retained earnings, March 31, 2012		107,513,008		(675,890	)		106,837,118
	2012 as Reported		Correction			2012 as Corrected
Consolidated Statements of Income
Interest and fee income on finance receivables	$	68,122,532	$	12,348,448		$	80,470,980
Provision for credit losses		5,319		12,362,274			12,367,593
Income tax expense		13,931,809		(5,293	)		13,926,516
Operating income		36,162,101		(13,826	)		36,148,275
Net income		22,230,292		(8,533	)		22,221,759
Earnings per share - basic		1.89		—			1.89
Earnings per share - diluted		1.85		—			1.85
	2011 as Reported		Correction			2011 as Corrected
Interest and fee income on finance receivables	$	62,719,904	$	10,941,553		$	73,661,457
Provision for credit losses		4,610,221		11,001,323			15,611,544
Income tax expense		10,541,620		(22,880	)		10,518,740
Operating income		27,346,804		(59,770	)		27,287,034
Net income		16,805,184		(36,890	)		16,768,294
Earnings per share – basic		1.45		(.01	)		1.44
Earnings per share - diluted		1.41		—			1.41
	Reported		Correction			As Corrected
Consolidated Statements of Shareholders’ Equity
Retained earnings, March 31, 2010	$	72,070,553	$	(630,467	)	$	71,440,086
Retained earnings, March 31, 2011		88,875,737		(667,357	)		88,208,380
	2012 as Reported		Correction			2012 as Corrected
Consolidated Statements of Cash Flows (Operating Activities)
Net income	$	22,230,292	$	(8,533	)	$	22,221,759
Provision for credit losses		5,319		12,362,274			12,367,593
Deferred income taxes		250,566		(5,293	)		245,273
Amortization of dealer discounts		—		(12,348,448	)		(12,348,448	)
Net cash provided by operating activities		21,874,879		—			21,874,879

	2011 as Reported			Correction			2011 as Corrected
Net income	$	16,805,184		$	(36,890	)	$	16,768,294
Provision for credit losses		4,610,221			11,001,323			15,611,544
Deferred income taxes		(1,417,788	)		(22,880	)		(1,440,668	)
Amortization of dealer discounts		—			(10,941,553	)		(10,941,553	)
Net cash provided by operating activities		21,357,624			—			21,357,624

In addition the Company has corrected these errors in the finance receivables disclosures in Note 3 as follows:

Contracts included in finance receivables are detailed as follows:

	2012 as Reported			Correction			2012 as Corrected
Indirect finance receivables, gross contract	$	382,766,667		$	—		$	382,766,667
Unearned interest		(109,456,018	)		—			(109,456,018	)
Indirect finance receivables, net of unearned interest		273,310,649			—			273,310,649
Unearned dealer discounts		—			(17,091,567	)		(17,091,567	)
Indirect finance receivable, net of unearned interest and dealer discounts		273,310,649			(17,091,567	)		256,219,082
Allowance for credit losses		(35,495,684	)		15,996,476			(19,499,208	)
Indirect finance receivables, net	$	237,814,965		$	(1,095,091	)	$	236,719,874

	2011 as Reported			Correction			2011 as Corrected
Indirect finance receivables, gross contract	$	368,099,418		$	—		$	368,099,418
Unearned interest		(105,622,007	)		—			(105,622,007	)
Indirect finance receivables, net of unearned interest		262,477,411			—			262,477,411
Unearned dealer discounts		—			(17,024,119	)		(17,024,119	)
Indirect finance receivable, net of unearned interest and dealer discounts		262,477,411			(17,024,119	)		245,453,292
Allowance for credit losses		(35,895,449	)		15,942,854			(19,952,595	)
Indirect finance receivables, net	$	226,581,962		$	(1,081,265	)	$	225,500,697

The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts:

	2012 as Reported			Correction			2012 as Corrected
Balance at beginning of year	$	35,895,449		$	(15,942,854	)	$	19,952,595
Discounts acquired on new volume		12,415,896			(12,415,896	)		—
Provision for credit losses		(176,745	)		12,362,274			12,185,529
Losses absorbed		(14,971,422	)		—			(14,971,422	)
Recoveries		2,405,750			—			2,405,750
Discounts accreted		(73,244	)		—			(73,244	)
Balance at end of year	$	35,495,684		$	(15,996,476	)	$	19,499,208

	2011 as Reported			Correction			2011 as Corrected
Balance at beginning of year	$	30,408,578		$	(14,024,685	)	$	16,383,893
Discounts acquired on new volume		12,919,492			(12,919,492	)		—
Provision for credit losses		4,484,284			11,001,323			15,485,607
Losses absorbed		(14,036,888	)		—			(14,036,888	)
Recoveries		2,255,683			—			2,255,683
Discounts accreted		(135,700	)		—			(135,700	)
Balance at end of year	$	35,895,449		$	(15,942,854	)	$	19,952,595

Dividend

Dividend

During fiscal year 2013, four quarterly cash dividends and a one-time special cash dividend were declared. On May 2, 2012, the Company’s Board of Directors announced a quarterly cash dividend of $0.10 to be paid on June 6, 2012. On August 8, 2012, the Company’s Board of Directors announced a quarterly cash dividend of $0.12 per share of common stock paid on September 6, 2012. On November 9, 2012, the Company’s Board of Directors announced a quarterly cash dividend of $0.12 per share of common stock paid on December 6, 2012. On December 11, 2012, the Company’s Board of Directors announced a special dividend of $2.00 per share of common stock paid on December 28, 2012. On February 19, 2013, the Company’s Board of Directors declared another quarterly dividend equal to $0.12 per common share, to be paid on March 29, 2013. Subsequent to March 31, 2013 one quarterly dividend was declared. On May 7, 2013 the Board of Directors announced a quarterly cash dividend equal to $0.12 per common share, to be paid on June 28, 2013 to shareholders of record as of June 21, 2013.

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

Payment of cash dividends results in a 5% withholding tax payable by the Company under the Canada-United States Income Tax Convention which is included in earnings under the caption of dividend tax.

Use of Estimates

Use of Estimates

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

Finance Receivables

Finance Receivables

Finance receivables are recorded at cost, net of unearned interest, unearned dealer discounts and the allowance for credit losses. The amount of unearned interest, discounts and allowance for credit losses as of March 31, 2013 and March 31, 2012 are approximately $143,627,000 and $146,047,000, respectively.

Allowance for Credit Losses

Allowance for Credit Losses

The allowance for credit losses is increased by charges against earnings and decreased by charge-offs (net of recoveries). The Company aggregates Contracts into static pools consisting of Contracts purchased during a three-month period for each branch location as management considers these pools to have similar risk characteristics. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. The Company also considers the remaining level of unearned dealer discounts. As conditions change, the Company’s level of provisioning and allowance may change as well.

Assets Held for Resale

Assets Held for Resale

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

Property and Equipment

Property and Equipment

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

Automobiles	3 years
Equipment	5 years
Furniture and fixtures	7 years
Leasehold improvements	Lesser of lease term or useful life (generally 6 - 7 years)

Drafts Payable

Drafts Payable

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

Income Taxes

Income Taxes

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

The Company recognizes tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from any such position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. It is the Company’s policy to recognize interest and penalties accrued on any uncertain tax benefits as a component of income tax expense. The Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor has the Company recognized any related interest or penalties during the three years ended March 31, 2013.

The Company files income tax returns in the U.S. Federal jurisdiction and various State jurisdictions. The Company is no longer subject to U.S. Federal tax examinations for years before 2011. State jurisdictions that remain subject to examination range from 2008 to 2012. The Company does not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Revenue Recognition

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 March 31, 2013, 2012 and 2011 the amount of gross finance receivables not accruing interest was approximately $4,132,000, $2,572,000 and $2,035,000, respectively.

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 lender, the wholesale value of the vehicle, and competition in any given market. In making decisions regarding the purchase of a particular Contract the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the purchase price and the term of the Contract. The entire amount of discount is amortized as an adjustment to yield using the interest method over the life of the loan. The average dealer discount associated with new volume for the fiscal years ended March 31, 2013, 2012, and 2011 was 8.54%, 9.23%, and 9.55%, 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 costs for originating direct loans are recognized as an adjustment to the yield and are amortized over the life of the loan using the interest method.

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

Earnings Per Share

Earnings Per Share

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

	Fiscal Year ended March 31,
	2013		2012		2011
Numerator for earnings per share – net income	$	19,940,946	$	22,221,759	$	16,768,294
Denominator:
Denominator for basic earnings per share – weighted average shares		11,977,174		11,747,160		11,607,341
Effect of dilutive securities:
Stock options and other share awards		241,242		285,971		286,177
Denominator for diluted earnings per share		12,218,416		12,033,131		11,893,518
Earnings per share – basic	$	1.66	$	1.89	$	1.44
Earnings per share – diluted	$	1.63	$	1.85	$	1.41

Diluted earnings per share does not include the effect of certain stock options as their impact would be anti-dilutive. Approximately 120,200, 53,500 and 28,500 stock options were not included in the computation of diluted earnings per share for the years ended March 31, 2013, 2012 and 2011 respectively, because their effect would have been anti-dilutive.

Share-Based Payments

Share-Based Payments

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

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

Fair Value Measurements

Fair Value Measurements

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

Financial Instruments and Concentrations

Financial Instruments and Concentrations

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

The Company operates in fifteen states through its sixty-four branch locations. Florida represents 33% of the finance receivables total as of March 31, 2013. Ohio represents 14%, Georgia represents 10% and North Carolina represents 8% of the finance receivables total as of March 31, 2013. Of the remaining eleven states, no one state represents more than 7% of the total finance receivables. The Company provides credit during the normal course of business and performs ongoing credit evaluations of its customers.

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

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

Interest Rate Swaps

Interest Rate Swaps

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

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)

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

Statements of Cash Flows

Statements of Cash Flows

Cash paid for income taxes for the years ended March 31, 2013, 2012 and 2011 was approximately $11,273,000, $13,764,000 and $12,068,000, respectively. Cash paid for interest for the years ended March 31, 2013, 2012 and 2011 was approximately $5,043,000, $4,878,000 and $5,720,000, respectively.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

During the year, the Company adopted the Financial Accounting Standards Board’s issued Accounting Standards Update (“ASU”) 2011-04 Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 did not extend the use of fair value accounting, but provides clarification of existing guidance and additional disclosures. The adoption did not have an impact on the Company’s financial condition, results of operations and cash flows.

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