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PIONEER FINANCIAL SERVICES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

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.

New Strategy to avoid RMDs

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.




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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.

New Strategy to avoid RMDs

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




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New Strategy to avoid RMDs

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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.




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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



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(1) Averages are computed using month-end balances and exclude any early allotment payments.




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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.




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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."




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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 %



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(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 %




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(1) Averages are computed using month-end balances and exclude any early allotment payments.




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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 %



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(1) Averages are computed using month-end balances and exclude and early allotment payments.




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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   $ 119,950,590

Number 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.




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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.




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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 %



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(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."




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