Forward-Looking Statements
The discussion set forth below, in the quarterly report of Pioneer Financial
Services, Inc. ("PFS"), with its wholly owned subsidiaries (collectively "we,"
"us," "our" or the "Company"), contains forward-looking statements within the
meaning of federal securities law. Words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue," "predict," or other similar
words, identify forward-looking statements. Forward-looking statements appear
in a number of places in this report and include statements regarding our
intent, belief or current expectation about, among other things, trends
affecting the markets in which we operate our business, financial condition and
growth strategies. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Actual results may differ materially from those predicted in the
forward-looking statements as a result of various factors, including, but not
limited to, those risk factors set forth in our Annual Report on Form 10-K for
the period ended September 30, 2012 under Part I- Item 1A-Risk Factors. If any
of these risk factors occur, they could have an adverse effect on our business,
financial condition and results of operation. When considering forward-looking
statements you should keep these risk factors in mind, as well as the other
cautionary statements set forth in this report. These forward-looking
statements are made as of the date of this filing. You should not place undue
reliance on any forward-looking statement. We are not obligated to update
forward-looking statements and will not update any forward-looking statements in
this quarterly report on Form 10-Q to reflect future events or developments.
Overview
We are a wholly owned subsidiary of MidCountry Financial Corp., a Georgia
corporation ("MCFC"). We purchase consumer loans, on a worldwide basis, made
primarily to active-duty, career retired U.S. military personnel or U.S.
Department of Defense employees. We purchase primarily from two different types
of sources. Our largest source of military loans is the Consumer Banking
Division ("CBD") of MidCountry Bank ("MCB"), a federally chartered stock savings
bank and wholly owned subsidiary of MCFC, an affiliate who originates military
loans through a network of loan production offices and via the Internet.
Military families use these loan proceeds to purchase goods and services. In
July 2011, we entered into an Amended and Restated Non-Recourse Loan Sale and
Master Services Agreement ("LSMS Agreement") with CBD that outlines the terms of
the sale and servicing of these loans. We also purchase retail installment
contracts from retail merchants that sell consumer goods to active-duty or
career retired U.S. military personnel or U.S. Department of Defense employees.
We plan to hold these military loans and retail installment contracts until
repaid.
Our finance receivables are effectively unsecured and consist of loans
originated by CBD or purchased from retail merchants. All finance receivables
have fixed interest rates and typically have a maturity of less than 48 months.
During the first quarter of fiscal 2013, the average size of a loan when
acquired was $3,188 and had an average term of 28 months. A large portion of
the loans we purchase were made to customers who are unable to obtain financing
from traditional sources due to factors such as their age, frequent relocations
and lack of credit history. These factors may not allow them to build
relationships with traditional sources of financing.
Improvement of our profitability is dependent upon the growth in amount and
quality of finance receivables we are able to acquire from CBD or retail
merchants.
We are not associated with, nor are we endorsed by, the U.S. military or U.S.
Department of Defense. However, we do seek to maintain a positive, supportive
relationship with the military community.
Critical Accounting Policies
In our 2012 Annual Report on Form 10-K, we identified the critical accounting
policies which affect our more significant estimates and assumptions used in
preparing our consolidated financial statements. We have not changed these
policies from those previously disclosed in our Annual Report.
17
--------------------------------------------------------------------------------
Table of Contents
Lending and Servicing Operations
Primary Supplier of Loans
We have retained CBD as our primary supplier of loans. We entered into the LSMS
Agreement with CBD whereby we purchase loans originated by CBD and CBD services
these loans on our behalf. Under the LSMS Agreement, PFS has the exclusive
right to purchase loans originated by CBD that meet our lending criteria (which
was developed from our past customer credit repayment experience and is
periodically revalidated based on current portfolio performance). These
criteria require the following:
† All borrowers are primarily active-duty or, career retired U.S.
military personnel or U.S. Department of Defense employees;
† All potential borrowers must complete standardized credit
applications either in person at one of CBD's loan production offices or online
via the Internet;
† A thorough review must be conducted on all applicants' military
service history; and
† Loan repayment terms are typically structured to repay the entire
loan prior to the customer's estimated separation from the military.
To the extent CBD originates loans under these underwriting criteria, we have
the exclusive right to purchase such loans. Loans purchased from CBD are
referred to as "military loans." See our Annual Report under "Item 1A. Risk
Factors."
Loan Purchasing
General. We have more than 25 years of experience in underwriting, originating,
monitoring and servicing consumer loans to the military market and have
developed a deep understanding of the military and the military lifestyle.
Through this extensive knowledge of our customer base, we developed a
proprietary scoring model that focuses on the unique characteristics of the
military market, as well as traditional credit scoring variables that are
currently utilized by CBD when originating loans in this market.
For the loans we purchase, CBD uses our proprietary lending criteria and scoring
model when it originates loans. Under these guidelines, in evaluating the
creditworthiness of potential customers, CBD primarily examines the individual's
debt-to-income ratio, discretionary income, military rank, time served in the
military and prior credit experience. Loans are limited to amounts that the
customer could reasonably be expected to repay from discretionary income. Loan
repayment terms are typically structured to repay the entire loan prior to the
customer's estimated separation from the military. However, when we purchase
loans from CBD, we cannot predict when or whether a customer may unexpectedly
leave the military or when or whether other events may occur that could result
in a loan not being repaid prior to a customer's departure from the military.
The average note amount for military loans purchased from CBD in the first
quarter of 2013 was $3,335 with an average term of 28 months.
A risk in all consumer lending and retail sales financing transactions is the
customer's unwillingness or inability to repay obligations. Unwillingness to
repay is usually evidenced by a consumer's historical credit repayment record.
An inability to repay occurs after initial credit evaluation and funding and
usually results from lower income due to early separation from the military or
reduction in rank, major medical expenses, or divorce. Occasionally, these
types of events are so economically severe that the customer files for
protection under the bankruptcy laws. Underwriting guidelines are used at the
time the customer applies for a loan to help minimize the risk of unwillingness
or inability to repay. These guidelines are developed from past customer credit
repayment experience and are periodically revalidated based on current portfolio
performance. CBD uses these guidelines to predict the relative likelihood of
credit applicants repaying their obligation. We purchase loans made to
consumers who fit our lending criteria. The amount and interest rate of the
military loan or retail sales finance transaction purchased are set by CBD or
the retail merchant based upon their underwriting guidelines considering the
estimated credit risk assumed.
As a customer service, we consider purchasing a new loan from CBD for an
existing borrower who has demonstrated a positive payment history with us and
where the transaction creates an economic benefit to the customer after fully
underwriting the new loan request to ensure proper debt ratio, credit history
and payment performance. We will not purchase refinanced loans made to cure
delinquency or for the sole purpose of creating fee income. Generally, we
purchase refinanced loans when a portion of the new loan proceeds is used to
repay the balance of the existing loan and the remaining portion is advanced to
the customer. Approximately 30.6% of the amount of military loans we purchased
in the first quarter of fiscal 2013 were refinancings of outstanding loans
compared to 28.1% during the first quarter of fiscal 2012.
Military Loans Purchased from CBD. We purchase military loans from CBD if they
meet our lending criteria. We have granted CBD rights to use our lending
criteria and extensive experience with lending to the military marketplace.
Pursuant to the LSMS Agreement, we granted CBD rights to use our underwriting
model and
18
--------------------------------------------------------------------------------
Table of Contents
lending system; however, we retained ownership of this model and the lending
system. Using our model and system, CBD originates these loans directly through
its loan production offices and over the Internet.
Retail Installment Contracts. We purchase retail installment contracts that
meet our quality standards and return on investment objectives from
approximately 294 active retail merchant locations. Retail installment
contracts are finance receivable notes generated during the purchase of consumer
goods by active-duty or retired career U.S. military personnel or U.S.
Department of Defense employees. These customers have demonstrated an apparent
need to finance a retail purchase and a willingness to use credit. We generally
acquire these contracts without recourse to the originating merchant. However,
reserve agreements with many retail merchants allow us to withhold funds from
the merchant's proceeds to create reserves to be used in the event a customer
defaults and the loan is deemed uncollectible. Retail installment contracts
typically have maximum terms of 48 months.
Management and Recordkeeping Services
We have retained CBD to provide management and recordkeeping services in
accordance with the LSMS Agreement. CBD services our finance receivables. For
these management and recordkeeping services, we pay CBD a monthly fee in an
amount equal to 0.7% (8.4% annually) of the outstanding principal balance of the
military loans and retail installment contracts serviced as of the last day of
each month. The fee can be adjusted annually on the basis of the annual increase
or decrease in the Consumer Price Index. Also, as part of its compensation for
performing these management and record keeping services, CBD retains all
ancillary revenue, including late charges and insufficient funds fees,
associated with these loans and retail installment contracts. For these
services, we also pay CBD an annual fee of $33.86 for each military loan and
retail installment contract owned by us at the end of the prior fiscal year. The
annual fee is paid in monthly installments. This fee can be adjusted annually on
the basis of the annual increase or decrease in the Consumer Price Index. In
addition, this quarter, we paid CBD $1.0 million in fees connected with CBD
origination of the military loans, as compared with $0.9 million in the same
quarter last year.
To facilitate CBD's servicing of the military loans and retail installment
contracts, we have granted CBD (i) the non-exclusive rights to use certain
intellectual properties, including our trade names and service marks, and
(ii) the right to use our Daybreak loan processing system and related hardware
and software. We have also granted CBD non-exclusive rights to market additional
products and services to our U.S. military borrowers. We retain all other
borrower relationships.
Sources of Income
We generate revenues primarily from interest income earned on the military loans
purchased from CBD, loans previously originated by us and retail installment
contracts purchased from retail merchants. We also earn revenues from debt
protection fees and credit reinsurance premiums. For purposes of the following
discussion, "revenues" means the sum of our finance income, debt protection,
reinsurance premiums and fees.
The liability we establish for possible losses related to our debt protection
and reinsurance operations and the corresponding charges to our income to
maintain this amount are actuarially evaluated annually and we consider this
amount adequate. If our customers are killed, injured, divorced, unexpectedly
discharged or have not received their pay, we will have payment obligations.
19
--------------------------------------------------------------------------------
Table of Contents
Finance Receivables
Our finance receivables are comprised of loans purchased from CBD (collectively
referred to below as "military loans") and retail installment contracts. The
following table sets forth certain information about the components of our
finance receivables as of the end of the periods presented:
December 31, September 30,
2012 2012
Finance receivables:
Total finance receivables balance $ 396,446,104 $ 396,803,008
Average note balance $ 2,713 $ 2,767
Total number of notes 146,113 143,419
Military loans:
Total military loans $ 367,967,303 $ 369,361,165
Percent of total finance receivables 92.82 % 93.08 %
Average note balance $ 2,889 $ 2,949
Number of notes 127,386 125,267
Retail installment contracts:
Total retail installment contract $ 28,478,801$ 27,441,843
Percent of total finance receivables
7.18 % 6.92 %
Average note balance $ 1,521 $ 1,512
Number of notes 18,727 18,152
Net Interest Margin
The principal component of our profitability is net interest margin, which is
the difference between the interest earned on our finance receivables and the
interest paid on borrowed funds. Some state and federal statutes regulate the
interest rates that may be charged to our customers. In addition, competitive
market conditions also impact the interest rates.
Our interest expense is sensitive to general market interest rate fluctuations.
These general market fluctuations directly impact our cost of funds. General
inability to increase the interest rates earned on new and existing finance
receivables restricts our ability to react to increases in cost of funds.
Accordingly, increases in market interest rates generally will narrow interest
rate spreads and lower profitability, while decreases in market interest rates
generally will widen interest rate spreads and increase profitability.
The following table presents important data relating to our net interest margin
as of the end of the periods presented:
Three Months Ended
December 31,
2012 2011
Total finance receivables balance $ 396,446,104$ 416,638,487
Average total finance receivables (1) 395,298,341 412,417,873
Average interest bearing liabilities (1) 263,300,872 287,125,407
Total interest income and fees
28,630,198 29,405,437
Total interest expense 4,761,189 4,985,004
--------------------------------------------------------------------------------
(1) Averages are computed using month-end balances and exclude any early
allotment payments.
20
--------------------------------------------------------------------------------
Table of Contents
Results of Operations and Financial Condition
Three Months Ended December 31, 2012 Compared to Three Months Ended December 31,
2011
Total Finance Receivables. Our aggregate finance receivables decreased 4.8% or
$20.2 million, to $396.4 million on December 31, 2012 from $416.6 million on
December 31, 2011. Lower demand for military loans led to a decline in
originations for the first quarter of fiscal 2013 compared to the first quarter
of fiscal 2012. Demand has been impacted by the fragile state of the United
States' economic recovery and uncertainty among our military customers regarding
the future size of the United States Military. Our primary supplier of loans,
CBD, saw a 5.0% or $5.6 million decrease in military loan originations during
the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012.
Our acquisition of retail installment contracts increased during the first
quarter of fiscal 2013 by $0.3 million or 3.3% compared to the first quarter of
fiscal 2012. See further discussion in the sections entitled "Loan Acquisition"
and "Liquidity and Capital Resources."
Interest Income and Fees. Interest income and fees represented 97.5% of our
total revenue for the first quarter of fiscal 2013 compared to 95.2% for the
first quarter of fiscal 2012. Interest income and fees decreased to $28.6
million in the first quarter of fiscal 2013 from $29.4 million for the first
quarter of fiscal 2012, a decrease of $0.8 million or 2.7%. The decrease was
due primarily due to a decline in aggregate average finance receivables of 4.2%.
Interest Expense. Interest expense in the first quarter of fiscal 2013
decreased to $4.8 million compared to $5.0 million or 4.0% for the first quarter
of fiscal 2012. This decrease is due to a decrease in amortizing notes to
$187.8 million as of December 31, 2012 compared to $218.2 million as of
December 31, 2011, a decrease of $30.4 million or 13.9%, The decrease is
partially offset by an increase in our junior subordinated investment notes to
$64.4 million as of December 31, 2012, compared to $61.5 million as of
December 31, 2011, an increase of $2.9 million or 4.7%.
Provision for Credit Losses. The provision for credit losses in the first
quarter of fiscal 2013 increased to $9.0 million from $7.6 million in the first
quarter of fiscal 2012, an increase of $1.4 million or 18.4%. Net charge- offs
increased to $8.9 million in the first quarter of fiscal 2013 from $6.7 million
in the first quarter of fiscal 2012, an increase of $2.2 million or 32.8%. The
net charge-off ratio increased to 9.0% for the first quarter of fiscal 2013
compared to 6.5% for the first quarter of fiscal 2012. See further discussion in
"Credit Loss Experience and Provision for Credit Losses."
Non-interest income, net. Non-interest income, net consists of revenue from
debt protection income, credit reinsurance premiums and the claims benefits,
which were $0.7 million in the first quarter of fiscal 2013 compared to $1.5
million in the first quarter of fiscal 2012, a decrease of $0.8 million or
53.3%. This decrease is due to a $0.5 million decline in debt protection income
and a $0.3 million increase in claims benefits. The decline in debt protection
income is due primarily to an October 2012 change in our sales processes.
Non-interest expense. Non-interest expense in the first quarter of fiscal 2013
was $11.4 million compared to $11.7 million for the first quarter of fiscal
2012, a decrease of $0.3 million or 2.6%. Non-interest expenses decreased
during the first quarter of fiscal 2013 due primarily to a $0.4 million decrease
in management fees, the result of a 4.2% decline in average finance receivables.
Provision for Income Taxes. The Company's effective tax rate was 39.4% in the
first quarter of fiscal 2013 compared to 39.1% in the first quarter of fiscal
2012, or an increase of 0.3%. This increase is primarily due to an increase in
the valuation allowance related to the deferred tax asset for certain state net
operating losses.
21
--------------------------------------------------------------------------------
Table of Contents
Delinquency Experience
Our customers are required to make monthly payments of interest and principal.
Our servicer, CBD, under our supervision, analyzes our delinquencies on a
recency delinquency basis utilizing our guidelines. A loan is delinquent under
the recency method when a full payment (95% or more of the contracted payment
amount) has not been received for 30 days after the last full payment.
The following table sets forth our delinquency experience as of the end of the
periods presented for accounts for which payments are 60 days or more past due.
December 31, September 30, December 31,
2012 2012 2011
Total finance receivables $ 396,446,104 $ 396,803,008 $ 416,638,487
Total finance receivables balances 60
days or more past due 16,267,686 15,227,343 17,526,392
Total finance receivables balances 60
days or more past due as a percent of
total finance receivables 4.10 % 3.84 % 4.21 %
Credit Loss Experience and Provision for Credit Losses
General. The allowance for credit losses is maintained at an amount that
management considers sufficient to cover losses inherent in the outstanding
finance receivable portfolio. We utilize a statistical model based on potential
credit risk trends incorporating historical factors to estimate losses. These
results and management's judgment are used to estimate inherent losses and in
establishing the current provision and allowance for credit losses. These
estimates are influenced by factors outside our control, such as economic
conditions, current or future military deployments and completion of military
service prior to repayment of loan. There is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. See our Annual Report "Item 1A. Risk Factors."
Military Loans. Our charge-off policy is to charge off military loans at 180
days past due, on a recency delinquency basis, or earlier if management deems it
appropriate. Charge-offs can occur when a customer leaves the military prior to
repaying the finance receivable or is subject to longer term and more frequent
deployments. Generally, loans purchased or originated by us are structured so
that the entire amount is repaid prior to a customer's estimated separation from
the military. When purchasing loans, however, we cannot predict when or whether
a customer may depart from the military early. Accordingly, we cannot implement
policies or procedures for CBD to follow to ensure that we will be repaid in
full prior to a customer leaving the military, nor can we predict when a
customer may be subject to deployment at a duration or frequency that causes a
default on their loans. Another source of loss is when a customer declares
bankruptcy. As of December 31, 2012 and September 30, 2012, we had
approximately $10.1 million, or 2.6% of our total portfolio, and $9.8 million,
or 2.5% of our total portfolio, respectively, from customers who had advised us
of their separation from the military prior to repaying their loan. As of
December 31, 2011 and September 30, 2011, we had approximately $9.5 million, or
2.3% of our total portfolio, and $9.0 million, or 2.2% of our total portfolio,
respectively, from customers who had advised us of their separation from the
military prior to repaying their loan. Military loans net charge-offs, from
customers who had advised us of their separation from the military, were $5.2
million and represented 58.4% of net charge-offs in the first quarter of fiscal
2013 compared to $3.9 million and 58.9% in the first quarter of fiscal 2012.
See our Annual Report "Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations - Nonperforming Assets."
22
--------------------------------------------------------------------------------
Table of Contents
The following table presents net charge-offs on military loans and net
charge-offs as a percentage of military loans as of the end of the periods
presented:
Three Months Ended
December 31,
2012 2011
Military loans:
Military loans charged-off $ 9,255,845 $ 7,083,751
Less recoveries 647,042 715,361
Net charge-offs $ 8,608,803 $ 6,368,390
Average military receivables (1) $ 367,258,296 $ 377,921,161
Percentage of net charge-offs to average military
receivables (annualized) 9.38 % 6.74 %
--------------------------------------------------------------------------------
(1) Averages are computed using month-end balances and exclude any early
allotment payments.
Retail Installment Contracts. Under many of our arrangements with retail
merchants, we may withhold a percentage (usually between five and ten percent)
of the principal amount of the retail installment contract purchased. The
amounts withheld from a particular retail merchant are recorded in a specific
reserve account. Any losses incurred on the retail installment contracts
purchased from that retail merchant are charged against its reserve account, as
specified in the agreement with such retail merchant. Upon the retail merchant's
request, and no more often than annually, we will pay the retail merchant the
amount by which its reserve account exceeds 15% of the aggregate outstanding
balance on all retail installment contracts purchased from them, less losses we
have sustained, or reasonably could sustain, due to debtor defaults, collection
expenses, delinquencies and breaches of our agreement with the retail merchant.
Our allowance for credit losses is utilized to the extent that the loss on any
individual retail installment contract exceeds the retail merchant's aggregate
reserve account at the time of the loss.
The following table presents net charge-offs on retail installment contracts and
net charge-offs as a percentage of retail installment contracts as of the end of
the periods presented:
Three Months Ended
December 31,
2012 2011
Retail installment contracts:
Retail installment contracts charged-off $ 421,639 $ 379,259
Less recoveries 91,220 89,544
Net charge-offs $ 330,419 $ 289,715
Average retail installment contract receivables (1) $ 28,040,045$ 34,496,712
Percentage of net charge-offs to average retail
installment contract receivables (annualized)
4.71 % 3.36 %
--------------------------------------------------------------------------------
(1) Averages are computed using month-end balances and exclude any early
allotment payments.
23
--------------------------------------------------------------------------------
Table of Contents
Allowance for Credit Losses. The following table presents our allowance for
credit losses on finance receivables as of the end of the periods presented:
Three Months Ended
December 31,
2012 2011
Balance, beginning of period $ 29,000,000 $ 25,396,255
Finance receivables charged-off (9,677,484 ) (7,463,010 )
Recoveries 738,262 804,905
Net charge-offs (8,939,222 ) (6,658,105 )
Provision for credit losses 8,989,222 7,558,105
Balance, end of period $ 29,050,000 $ 26,296,255
We maintain an allowance for credit losses, which represents management's best
estimate of future losses inherent in the outstanding finance receivable
portfolio. The allowance for credit losses is reduced by actual credit losses
and is increased by the provision for credit losses and recoveries of previous
credit losses. The provision for credit losses is charged to earnings to bring
the total allowance to a level considered necessary by management. As the
portfolio of finance receivables consists of a large number of relatively small,
homogenous accounts, the finance receivables are evaluated for impairment as two
separate components: military loans and retail installment contracts.
Management considers numerous factors in estimating losses in our credit
portfolio, including the following:
† prior credit losses and recovery experience;
† current economic conditions;
† current finance receivable delinquency trends; and
† demographics of the current finance receivable portfolio.
The following table sets forth changes in the components of our allowance for
credit losses on finance receivables as of the end of the periods presented:
Three Months Ended
December 31,
2012 2011
Average total finance receivables (1) $ 395,298,341 $ 412,417,873
Provision for credit losses
8,989,222 7,558,105
Net charge-offs 8,939,222 6,658,105
Net charge-offs as a percentage of
average total finance receivables
(annualized) 9.05 % 6.46 %
Allowance for credit losses $ 29,050,000 $ 26,296,255
Allowance as a percentage of average
total finance receivables 7.35 % 6.38 %
--------------------------------------------------------------------------------
(1) Averages are computed using month-end balances and exclude and early
allotment payments.
24
--------------------------------------------------------------------------------
Table of Contents
Loan Acquisition
Asset growth is the most important factor in determining our future revenues.
In connection with purchasing the loans, we pay CBD a fee in the amount of
$30.00 for each military consumer loan originated by CBD and purchased by us.
This fee is adjusted annually on the basis of the annual increase or decrease in
CBD's deferred acquisition cost analysis. Our loan acquisitions decreased for
the first three months of fiscal 2013 to $114.7 million from $120.0 million in
the first three months of fiscal 2012 due to lower demand for military loans.
The following table sets forth our overall purchases of military loans and
retail installment contracts, including those refinanced, as of the end of the
periods presented:
Three Months Ended
December 31,
2012 2011
Total loans acquired:
Gross balance $ 114,662,470 $ 119,950,590Number of finance receivable notes 35,970 34,992
Average note amount
$ 3,188 $ 3,428
Military loans:
Gross balance $ 106,230,018 $ 111,791,282
Number of finance receivable notes 31,849 31,216
Average note amount
$ 3,335 $ 3,581
Retail installment contracts:
Gross balance $ 8,432,452 $ 8,159,308
Number of finance receivable notes 4,121 3,776
Average note amount $ 2,046 $ 2,161
Liquidity and Capital Resources
A relatively high ratio of borrowings to invested capital is customary in the
consumer finance industry. Our principal use of cash is to purchase military
loans and retail installment contracts. We use borrowings to fund the
difference, if any, between the cash used to purchase military loans and retail
installment contracts and the cash generated from loan repayments and
operations. This amount is generally cash used in investing activities. Cash
used in investing activities in the first three months of fiscal 2013 was
approximately $0.3 million and cash used in financing activities was $14.3
million, which was funded from $15.7 million in operating activities. Cash used
in investing activities in the first three months of fiscal 2012 was
approximately $17.5 million and cash provided from financing activities was $3.3
million, which was funded by operating activities of $14.2 million.
Financing activities primarily consist of borrowing and repayments of debt
incurred under our Secured Senior Lending Agreement, dated June 12, 2009 (the
"SSLA"). With the ongoing uncertainty in the financial markets and the economic
conditions generally, some lenders within our credit group, at their discretion,
may reduce their willingness to lend at the current levels. We have borrowings
as of December 31, 2012 of $13.0 million from withdrawing banks who previously
participated in the Senior Lending Agreement ("SLA") or SSLA.
On January 11, 2013, the SEC declared effective our post-effective amendment to
our registration statement originally filed with the Securities and Exchange
Commission in January 2011 ("2013 Registration Statement"). Pursuant to this
2013 Registration Statement, along with the accompanying prospectus, we
registered an offering of our investment notes, with a maximum aggregate
offering price of $50 million, on a continuous basis with an expected
termination date of January 28, 2014, unless terminated earlier at our
discretion. As of December 31, 2012, we have issued 407 investment notes in
conjunction with this offering since 2011 with an aggregate value of $25.5
million.
25
--------------------------------------------------------------------------------
Table of Contents
Senior Indebtedness - Bank Debt.
On June 12, 2009, we entered into the SSLA with certain lenders. The SSLA
replaced and superseded the SLA, dated as of June 9, 1993, as subsequently
amended and restated.
As of December 31, 2012, we had $196.2 million of senior debt outstanding,
compared to $205.7 million at September 30, 2012, a decrease of $9.5 million, or
4.6%. The SSLA is an uncommitted facility that provides common terms and
conditions pursuant to which individual lenders that are a party to the SSLA may
choose to make loans to us in the future. Any lender may elect not to
participate in any future fundings at any time without penalty. The term of the
current SSLA ends on March 31, 2013 and is automatically extended annually
unless any lender gives written notice of its objection by March 1 of each
calendar year. As of December 31, 2012, we could request up to $112.0 million
in additional funds and remain in compliance with the terms of the SSLA. No
lender, however, has any contractual obligation to lend us these additional
funds. As of December 31, 2012 we were in compliance with all covenants under
the SSLA.
Advances outstanding under the revolving credit line were $8.4 million as of
December 31, 2012, compared to $19.5 million at September 30, 2012, a decrease
of $11.1 million, or 56.9%. This decrease is the result of the $13.2 million
early allotment payment received on December 31, 2012. When a lender elects not
to participate in future fundings, any existing borrowings from that lender
under the revolving credit line are payable in 12 equal monthly installments.
Interest on borrowings under the revolving credit line is payable monthly and is
based on prime or 5.0%, whichever is greater. Interest on borrowings was 5.0%
at December 31, 2012 and 2011.
As of December 31, 2012, the lenders have indicated a willingness to participate
in fundings up to an aggregate of $335.9 million during the next 12 months, a
decrease of $6.4 million from September 30, 2012, of which $187.8 million is
currently outstanding. Included in this amount are borrowings of $13.0 million
from withdrawing banks who previously participated in the SLA or SSLA.
Our SSLA allows additional banks to become parties to the SSLA in a modified
non-voting role. We have identified each lender that has voting rights under
the SSLA as a "voting bank." and each lender that does not have voting rights
under the SSLA as a "non-voting bank." While all voting and non-voting banks
have the same rights to the collateral and are a party to the same terms and
conditions of the SSLA, all of the non-voting banks acknowledge and agree that
they have no right to vote on any matter nor to prohibit or restrict any action
by us, or the voting banks.
26
--------------------------------------------------------------------------------
Table of Contents
Senior Indebtedness Table - Bank Debt.
As of December 31, 2012 and September 30, 2012, the total borrowings and
availability under the SSLA consisted of the following amounts for the end of
the periods presented:
Pro forma (1)
December 31, December 31, September 30,
2012 2012 2012
Revolving credit line:
Total facility $ 45,250,000 $ 45,250,000 $ 45,250,000
Balance, end of period 8,420,000 21,620,000 19,450,000
Maximum available credit (2) 36,830,000 23,630,000 25,800,000
Term notes: (3)
Voting banks $ 251,750,000 $ 251,750,000 $ 251,750,000
Withdrawing banks 13,039,791 13,039,791 16,500,354
Non-voting banks 25,855,323 25,855,323 28,784,604
Total facility $ 290,645,114 $ 290,645,114 $ 297,034,958
Balance, end of period 187,786,557 187,786,557 186,230,677
Maximum available credit (2) 102,858,557 102,858,557 110,804,281
Total revolving and term notes:
(3)
Voting banks $ 297,000,000 $ 297,000,000 $ 297,000,000
Withdrawing banks 13,039,791 13,039,791 16,500,354
Non-voting banks 25,855,323 25,855,323 28,784,604
Total facility $ 335,895,114 $ 335,895,114 $ 342,284,958
Balance, end of period 196,206,557 209,406,557 205,680,677
Maximum available credit (2) 111,946,234 98,746,234 102,714,990
Credit facility available (4) 139,688,557 126,488,557 136,604,281
Percent utilization of voting
banks 62.3 % 66.8 % 65.4 %
Percent utilization of the
total facility 58.4 % 62.3 % 60.1 %
--------------------------------------------------------------------------------
(1) Total facility pro forma assumes the early allotment payments received
December 31, 2012 were not received until due on January 1, 2013.
(2) Maximum available credit assumes proceeds in excess of the amounts shown
below under "Credit facility available" are used to increase qualifying finance
receivables and all terms of the SSLA are met, including maintaining a senior
indebtedness to consolidated net receivable ratio of not more than 80.0%.
(3) Includes 48-month amortizing term notes.
(4) Credit facility available is equal to the total facility less the total end
of period balance. Does not include
withdrawing banks.
Subordinated Debt - Parent. Our SSLA allows for a revolving line of credit with
our parent. Funding on this line of credit is provided as needed at our
discretion and dependent upon the availability of our parent with a maximum
principal balance of $25.0 million. Interest is payable monthly and is based on
prime or 5.0%, whichever is greater. During the first quarter of fiscal 2013,
there were no borrowings or repayments on this debt. As of December 31, 2012
and September 30, 2012, there was no outstanding balance.
Outstanding Investment Notes. We fund certain capital and financial needs
through the sale of investment notes. These notes have varying fixed interest
rates and are subordinate to all senior indebtedness. We can redeem these notes
at any time upon 30 days written notice. As of December 31, 2012, we had
outstanding $64.4 million of these notes (with accrued interest), which includes
a $0.3 million purchase adjustment. The purchase adjustments relate to fair
value adjustments recorded as part of the Transaction. These notes had a
weighted average interest rate of 9.02%. Included in the $64.4 million is
approximately $25.5 million of funds from our most recent offering. See
discussion in "Item No.1 Notes to Condensed Consolidated Financial Statements."
27
--------------------------------------------------------------------------------
Table of Contents
