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Index to Financial Statements

Table of Contents

As filed with the Securities and Exchange Commission on January 9, 2013

(Registration No. 333-164109)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Post-Effective Amendment No. 2 to

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



Pioneer Financial Services, Inc.
(Exact name of Registrant as specified in its charter)

MISSOURI
(State or other jurisdiction of
incorporation or organization)
  6141
(Primary Standard Industrial
Classification Code Number)
  44-0607504
(I.R.S. Employer
Identification No.)

4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MISSOURI 64112
(816) 756-2020

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

THOMAS H. HOLCOM, JR.
CHIEF EXECUTIVE OFFICER
4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MISSOURI 64112
(816) 756-2020

(Name, address, including zip code, and telephone number, including area code, of agent for service)



COPIES TO:

BETTY O. TEMPLE
WOMBLE CARLYLE SANDRIDGE & RICE, LLP
550 S. MAIN STREET, SUITE 400
GREENVILLE, SOUTH CAROLINA 29601
(864) 255-5400



Approximate date of commencement of proposed sale to public:
As soon as practicable after this registration statement becomes effective.



         If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box    ý

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý   Smaller reporting company o

         The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

   


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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION DATED JANUARY 9, 2013

LOGO

$50,000,000 Investment Notes
Minimum Investment of $10,000

        Pioneer Financial Services, Inc. ("PFS"), a Missouri corporation, is a wholly owned subsidiary of MidCountry Financial Corp., a Georgia corporation ("MCFC"). PFS, with its wholly owned subsidiaries (collectively "we," "us," "our" or the "company"), is offering up to $50,000,000 in aggregate principal amount of our investment notes ("notes" or "investment notes") on a continuous basis. This offering will terminate on January 28, 2014 unless terminated earlier at our discretion. Unless otherwise agreed upon, the notes will be offered in maturities ranging from 12 to 120 months, subject to a minimum investment of $10,000.

        We are offering the notes through our officers and employees without an underwriter and on a continuous basis. We do not have to sell any minimum amount of notes to accept and use the proceeds of this offering. There is no assurance that all or any portion of the notes we are offering will be sold. We have not made any arrangement to place any of the proceeds from this offering in an escrow, trust or similar account, and thus you will not be entitled to the return of your investment. There is no public trading market for the notes and it is very unlikely that any trading market will develop, and no assurance can be given that the notes may be resold at any price. We have the right to reject any subscription, in whole or in part.

        We will disclose the interest rates at which notes will be offered, from time to time, in supplements to this prospectus. However, any such change will not affect the interest rate of any notes purchased prior to the effective date of the change. We will pay or compound interest on the notes annually. Holders of notes may elect to receive monthly interest payments in return for a 0.5% reduction in the interest rate of the note. Qualified investors may establish individual retirement accounts, simplified employee pension accounts, Roth IRAs and Coverdell education savings accounts with us in which to hold their notes.

        You should read this prospectus and the applicable prospectus supplement carefully before you invest in the notes.

        These notes are our unsecured, subordinated obligations. Payment of the notes is not insured or guaranteed by the Federal Deposit Insurance Corporation (the "FDIC") any governmental or private insurance fund, or any other entity. We do not contribute funds to a separate account such as a sinking fund to repay the notes upon maturity. We may redeem the notes in whole or in part any time prior to maturity at a price equal to the principal amount thereof plus accrued interest to the purchase date.

        As of the date of this prospectus we have sold $25,518,976 of the $50,000,000 in Investment Notes we initially registered on Form S-1, which was declared effective on January 28, 2011 leaving us with $24,481,024 available to be sold pursuant to the Prospectus.

        See "Risk Factors" beginning on page 9 for certain factors you should consider before buying the notes.

        These securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission nor has the Securities and Exchange Commission or any state securities passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

           
 
 
  Price to Public
  Underwriting
Discount And
Commission

  Proceeds to
Company

 

Per Investment Note

  100%   None   100%
 

Total

  100%   None   $50,000,000(1)

 

(1)
We will receive all of the proceeds from the sale of the notes, which, if we sell all of the notes covered by this prospectus, we estimate will total approximately $49,200,000 after offering expenses.

   

The date of this Prospectus is January 9, 2013


Table of Contents


TABLE OF CONTENTS

 
  Page  

PROSPECTUS SUMMARY

    4  

RISK FACTORS

    9  

FORWARD-LOOKING STATEMENTS

    24  

USE OF PROCEEDS

    25  

SELECTED CONSOLIDATED FINANCIAL DATA

    26  

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    27  

BUSINESS

    42  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

    47  

COMPENSATION, DISCUSSION AND ANALYSIS

    49  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

    54  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

    54  

DESCRIPTION OF INVESTMENT NOTES

    55  

PLAN OF DISTRIBUTION

    60  

NOTICE TO MISSOURI RESIDENTS

    61  

VALIDITY OF INVESTMENT NOTES

    61  

EXPERTS

    61  

INTERESTS OF NAMED EXPERTS AND COUNSEL

    61  

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

    61  

WHERE YOU CAN FIND MORE INFORMATION

    63  

INDEX TO FINANCIAL STATEMENTS

    64  



        You should rely only upon the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell notes only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of the notes.

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PROSPECTUS SUMMARY

        This summary highlights selected information and does not contain all the information that may be important to you. You should carefully read this prospectus, any related prospectus supplement and the documents we have referred you to in "Where You Can Find More Information" on page 52 before making an investment in the notes, including the "Risk Factors" section beginning on page 8. In this prospectus, references to "Pioneer," "we," "us" and "our" refer to Pioneer Financial Services, Inc. and our subsidiaries.


Our Company

        Pioneer Financial Services, Inc. ("PFS") is a wholly owned subsidiary of MidCountry Financial Corp., a Georgia corporation ("MCFC"). PFS, with its wholly owned subsidiaries (collectively "we," "us," "our" or the "Company"), purchases consumer loans and retail installment contracts, on a worldwide basis, made exclusively to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. We plan to hold these consumer loans and retail installment contracts until repaid.

        We purchase consumer loans and retail installment contracts primarily from two different sources. Our largest source of consumer loans is the Consumer Banking Division ("CBD") (formerly known as the Military Banking Division and Pioneer Military Lending Division) of MidCountry Bank ("MCB"), a federally chartered savings bank and wholly owned subsidiary of our parent, MCFC. CBD originates these consumer loans through a network of loan production offices and via the Internet. Military customers use loan proceeds to purchase consumer goods and services. 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 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.

        Finance receivables, whether originated or purchased, are effectively unsecured and consist of loans originated by us or purchased from CBD and retail merchants. All finance receivables have fixed interest rates and typically have a maturity of less than 48 months. At acquisition, the size of the average finance receivable was approximately $3,500 during fiscal year 2012. A large portion of our customers are unable to obtain financing from traditional sources due to factors such as age, frequent relocations and lack of credit history. These factors may not allow them to build relationships with traditional sources of financing.

        We were incorporated in Missouri in 1932, and our principal corporate office is located at 4700 Belleview, Suite 300, Kansas City, Missouri 64112-1359. The telephone number at that address is (816) 756-2020. Information about us can be found at www.investpioneer.com. We do not intend for the information contained on this website to be a part of this prospectus.

 

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The Offering

Securities Offered

  We are offering up to $50,000,000 in aggregate principal amount of our investment notes. As of the date of this Prospectus, we have sold $25,518,976 of the $50,000,000 in investment notes, leaving us with $24,481,024 available to be sold pursuant to this Prospectus. The notes are governed by an indenture between us and U.S. Bank National Association, the trustee for the notes. The notes generally have maturities ranging from 12 to 120 months. Interest rates and terms on notes in a principal amount equal to or in excess of $100,000 will be negotiated on a case-by-case basis based upon our financial requirements, the term of the investment and prevailing interest rates. The notes do not have the benefit of a sinking fund. See "Description of Investment Notes—General."

Interest Rate and Payment

 

The interest rate on each note will be based upon current market conditions, our financial requirements, principal amount of the note and the term to maturity chosen by the purchaser. Interest will begin to accrue on the date we issue the note. At the option of the note holder, we will pay or compound interest annually. Holders of notes may elect to receive monthly interest payments in return for a 0.5% reduction in the interest rate of the note. Once issued, the interest rate applicable to a note will not change prior to maturity. See "Description of Investment Notes—Interest."

Maturity and Renewal

 

The notes will mature on the date specified on the investment note certificate. So long as there is an effective registration statement on file with the SEC and the securities commissions of the states in which the notes are sold, we currently intend to renew the notes upon maturity unless they are presented for payment by the holder. The principal amount of the renewed note will equal the principal amount of the note on the maturity, plus all accrued and unpaid interest. The term of a renewed note will be equal to the original term of the note, and the interest rate of the note will be equal to the interest rate we are then paying on notes of a like term and principal amount. At least 20 days prior to the maturity date of a note, we will send the note holder (a) a written notice reminding the holder of the pending maturity of the note and that it will be renewed unless the holder requests repayment in writing within 20 days after the maturity date and (b) a copy of the current prospectus for the notes setting forth the current rates. The notice will also state the place where the note may be surrendered for payment.

Redemption at Our Option

 

We may redeem the notes at our option, in whole or in part, at any time prior to maturity, at a price equal to 100% of the principal amount of the notes, plus accrued interest on a daily basis to the redemption date. We will pay no premium upon redemption of the notes. Our investors may not require us to redeem their notes prior to maturity. See "Description of Investment Notes—Redemption at the Option of Pioneer."

 

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Subordination

 

Upon the maturity of our senior indebtedness, by lapse of time, acceleration or otherwise, all of our senior indebtedness must be paid in full before any payment is made upon the notes. "Senior indebtedness" is generally defined under the indenture as any debt or liability for money borrowed, regardless of when incurred or created, that is not expressly subordinate or equal in right of payment to the notes. The notes are equal in right of payment to all of our outstanding junior subordinated debentures and investment notes purchased prior to December 31, 2006. There are no restrictions in the indenture that would prevent us from incurring additional senior indebtedness or other indebtedness. As of September 30, 2012, we had approximately $205.7 million of senior indebtedness outstanding and approximately $67.4 million of investment notes and accrued interest outstanding. See "Description of Investment Notes—Subordination."

Events of Default

 

Under the indenture, an event of default is generally defined as a default in the payment of principal or interest on the notes that is not cured after 10 days' written notice, our becoming subject to certain events of bankruptcy or insolvency, or our failure to comply with provisions of the notes or the indenture and the failure is not cured or waived within 60 days after receipt of a specific notice.

Transfer Restrictions

 

Transfer of a note is effective only upon the receipt of valid transfer instructions by the registrar from the note holder of record.

Types of Accounts

 

We are qualified to serve as custodian for IRAs, SEPs, Roth IRAs, and Coverdell education savings accounts. Qualifying investors may choose to establish one of these accounts with us to hold their notes.

Trustee

 

U.S. Bank National Association is a trust company organized and existing under the laws of the state of Missouri.

Use of Proceeds

 

If all the notes offered by this prospectus are sold we expect to receive approximately $49,200,000 in net proceeds after deducting all costs and expenses associated with this offering. We have used substantially all of the cash proceeds from the sale of the notes to date to acquire military loans from CBD and retail installment contracts from retail merchants. Additional proceeds, if any, from additional sales of notes will be used to acquire military loans from CBD, retail installment contracts from retail merchants and will be used for general corporate purposes.

Suitability

 

The notes will be sold only to investors that have a gross income of $65,000 and a net worth of $65,000 (exclusive of home, home furnishings and automobiles); or a net worth of $150,000 (exclusive of home, home furnishings and automobiles); and no more than 10% of their liquid net worth invested in the notes, unless the investor is defined as an accredited investor under Rule 501 of Regulation D under the Securities Act of 1933 in which case these requirements will not apply. See "Plan of Distribution" on page 50.

 

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Risk Factors

 

See "Risk Factors" beginning on page 8 and other information included in this prospectus and any prospectus supplement for a discussion of factors you should carefully consider before investing in the notes.

Ratio of Earnings to Fixed Charges

 

See "Summary Consolidated Financial Data" on page 7.

 

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Summary Consolidated Financial Data

        The following table summarizes the financial data of our business. You should also read "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes included elsewhere in this prospectus. The data as of, and for the fiscal years ended September 30, 2012, 2011, 2010, 2009 and 2008, has been derived from our audited consolidated financial statements and related notes.

 
  As of and for the Years Ended September 30,  
 
  2012   2011   2010   2009   2008  
 
  (dollars in thousands)
 

Consolidated balance sheet data:

                               

Net finance receivables(1)          

  $ 331,911   $ 330,705   $ 329,957   $ 313,930   $ 271,730  

Total assets

    403,479     397,328     399,104     385,325     352,643  

Amortizing term notes(2)          

    205,681     214,491     232,041     241,957     222,000  

Investment notes

    67,428     59,725     40,028     33,306     34,904  

Subordinated debt—parent

            11,900          

Total stockholder's equity

    119,935     114,737     106,532     100,487     88,544  

Consolidated statement of operations data:

                               

Interest income and fees              

  $ 113,249   $ 114,121   $ 105,460   $ 99,690   $ 83,843  

Debt protection, insurance premiums earned and other income

    4,809     7,367     6,296     4,387     3,941  

Total revenue

    118,058     121,488     111,757     104,078     87,791  

Provision for credit losses

    34,617     25,566     22,433     23,454     21,912  

Interest expense

    19,250     19,203     18,019     17,855     16,364  

Income before income taxes

    18,072     28,628     25,784     20,754     13,151  

Net income

    12,027     17,104     16,562     13,337     7,774  

Ratio of earnings to fixed charges(3)

    1.94     2.49     2.43     2.16     1.80  

(1)
Net finance receivables are presented net of unearned finance charges, unearned debt protection commissions, unearned insurance commissions, discounts on purchases of retail installment contracts and unapplied finance receivable payments.

(2)
Consists of bank debt outstanding under our secured senior lending agreement.

(3)
The ratio of earnings to fixed charges represents the number of times fixed charges are covered by earnings. For the purpose of this ratio, "earnings" is determined by adding pretax income to "fixed charges." for this purpose, "fixed charges" consists of interest on all indebtedness.

 

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RISK FACTORS

        Our operations and your investment in the notes are subject to a number of risks, including but not limited to those described below. If any of the following risks actually occur, our business, financial condition or operating results and our ability to repay the notes could be materially adversely affected.

Risk Factors Related to the Investment Notes

         Our investment notes are not insured or guaranteed by any third party, and we are not subject to regulatory requirements designed to protect investors.

        Our investment notes are not insured or guaranteed by the FDIC, any governmental agency or any other public or private entity as are certificates of deposit or other accounts offered by banks, savings and loan associations or credit unions. You are dependent upon our ability to effectively manage our business to generate sufficient cash flow, including cash flow from our financing activities, for the repayment of principal at maturity and the ongoing payment of interest on the investment notes. If these sources are inadequate, you could lose your entire investment.

         Because the investment notes are not secured by any collateral, you are dependent upon our successful operations to service the interest and principal payments on the investment notes.

        Substantially all of our assets have been pledged to our lenders to secure our borrowings under our Senior Secured Lending Agreement ("SSLA"). Accordingly, in the event of a default under our SSLA, it is likely that our assets would be liquidated to repay our senior debt. Therefore, repayment of the investment notes is dependent on our continued successful operations. There can be no assurance that we will continue to operate successfully in the future.

         Payment on the investment notes is subordinate to the payment of all outstanding senior indebtedness, and the investment notes do not limit the amount of senior indebtedness, additional junior subordinated indebtedness or other indebtedness we may incur.

        The investment notes are subordinate and junior to any and all senior indebtedness (defined generally as any debt or liability for money borrowed, regardless of when incurred or created, that is not expressly subordinate or equal in right of payment to the investment notes, including senior debt), and will rank equal in payment priority with all junior subordinated investment notes we issue in the future. There are no restrictions in the investment notes regarding the amount of senior indebtedness, junior subordinated indebtedness, or other indebtedness that we or our subsidiaries may incur. We intend to incur additional senior indebtedness and junior subordinated indebtedness in the future. Upon the maturity of our senior indebtedness, by lapse of time, acceleration or otherwise, the holders of our senior indebtedness have first right to receive payment in full prior to any payments being made to any note holders. Therefore, you would only be repaid if funds remain after the repayment of our senior indebtedness. As of September 30, 2012, we had approximately $205.7 million of senior indebtedness outstanding.

         Payment of interest and principal on the investment notes is effectively paid on the same terms as the unsecured creditors of our subsidiaries.

        Substantially all of the assets we use in our business are held by our subsidiaries. Some of the indebtedness of our subsidiaries may have rights upon liquidation or dissolution of the particular subsidiary prior to payment being made to any note holders. As a result, in the event of the liquidation of any of our subsidiaries, some of the creditors of our subsidiaries would be paid prior to the subsidiary distributing any amounts to us. While our senior loan agreement limits the amount of debt that our subsidiaries may incur, if our subsidiaries did not have sufficient funds to pay their debts, our ability to pay interest and principal on the investment notes may be impaired.

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         The investment notes do not contain any restrictive covenants or other provisions to protect your investment.

        The investment notes do not have the benefit of any restrictive covenants. Therefore, your investment is not protected if there is a material adverse change in our financial condition or results of operations. For example, the investment notes do not contain any restrictions on our ability to pay dividends or to create or incur senior indebtedness or indebtedness which is junior or subordinate to or has the same rights and obligations as the investment notes. In addition, the investment notes do not contain covenants specifically designed to protect note holders if we engage in a highly leveraged transaction such as a requirement that we redeem the investment notes if there is a takeover, recapitalization or similar restructuring. Furthermore, the investment notes do not contain a provision permitting an individual, unless such individual is a majority holder, to accelerate the indebtedness in the event of a default on the note.

         Your investment in the investment notes is illiquid.

        The investment notes are not listed on a national or other securities exchange. Further, it is very unlikely that any trading market for the investment notes will develop. You have no right to require redemption of the investment notes, and there is no assurance that the investment notes will be accepted as collateral for loans. Due to the lack of a market for the investment notes, we cannot assure you that you would be able to sell the investment notes.

         There is no sinking fund to ensure repayment of the investment notes on maturity.

        We do not contribute funds to a separate account, commonly known as a "sinking fund," to repay the investment notes upon maturity. Because funds are not set aside periodically for the repayment of the investment notes over their term, note holders must rely on our cash flow from operations and other sources of financing for repayment, such as funds from bank loans, the sale of investment notes and other credit facilities. To the extent cash flow from operations and other sources are not sufficient to repay the investment notes, you may lose all or a part of your investment.

         The investment notes contain a renewal feature which could result in the extension of the maturity of the notes and a lower interest rate being paid.

        The investment notes contain a renewal provision that allows us to extend the maturity date of the notes and to reset the interest rate to the then current rate unless you provide us with written notice that you want your note paid within 20 days after the maturity date of the note. The principal amount of the renewed note will equal the principal amount of the note on the most recent maturity date, plus all accrued and unpaid interest. The term of the renewed note will be equal to the original term of the note, and the interest rate on the note will be equal to the interest rate we are then paying on notes of a like term and principal amount. Therefore, if you fail to take action, you will be required to maintain your investment in us beyond the original maturity date of the note. Further, because the interest rate we pay on notes depends on a number of factors, the interest rate on a renewed note may be lower than the interest rate on the original note.

         If we redeem or fail to renew the notes, you may not be able to reinvest the proceeds at comparable rates.

        We, at our option, may at any time redeem all or a portion of the outstanding notes for payment prior to their maturity. We may, in our discretion, purchase fewer than all of the outstanding notes. The notes will be purchased at a purchase price equal to 100% of the principal amount plus any accrued but unpaid interest. We will pay no premium upon redemption of the notes. In addition, while we have the right to renew the notes if you fail to timely provide us with written notice that you want your note paid, we may elect to repay your note in full upon maturity. In the event we redeem or fail

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to renew your notes, you would have the risk of reinvesting the proceeds at the then-current market rates, which may be lower than the rates paid on the original notes.

         We, CBD, and our retail merchants are subject to extensive laws, regulations and governmental supervision by federal and state agencies in the conduct of business operations, which regulations are costly, time consuming and intended to protect borrowers and depositors. Failure to comply with regulatory policies and rules could result in further restrictions on our business, damage our reputation, and have an adverse effect on our business, results of operations, and financial condition.

        We, as a wholly owned subsidiary of a thrift holding company, and CBD, as a division of a federal savings bank, are currently supervised by the Office of the Comptroller of the Currency (the "OCC") and regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Our loan purchasing operations, CBD's lending operations and our retail merchants are also subject to regulation by federal and state finance and consumer protection authorities and various laws and judicial and administrative decisions imposing various requirements and restrictions on operations, including the requirement to obtain and maintain certain licenses and qualifications. These regulations are primarily designed to protect depositors, borrowers and the financial system as a whole. We are also regulated by state and federal securities regulators, and will continue to be as long as our investment notes are outstanding. These laws and regulations govern or affect, among other things:

    the manner in which CBD may offer and sell products and services;

    the interest rates that we may charge customers;

    terms of loans, including fees, maximum amounts, and minimum durations;

    the number of simultaneous or consecutive loans and required waiting periods between loans;

    disclosure practices;

    privacy of personal customer information;

    the types of products and services that we and CBD may offer;

    collection practices; and

    approval or granting of required licenses.

        Changes to statutes, regulations or regulatory policies, including interpretation, implementation and enforcement of statutes, regulations or policies, could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we and CBD may offer and increasing the ability of competitors to offer competing financial services and products. Compliance with these regulations is expensive and requires the time and attention of management. These costs divert capital and focus away from efforts intended to grow our business. Because these laws and regulations are complex and often subject to interpretation, or because of a result of unintended errors, we and CBD may, from time to time, inadvertently violate these laws, regulations and policies, as each are interrupted by our regulators. If we and CBD do not successfully comply with laws, regulations or policies, our compliance costs could increase, our operations could be limited and we may suffer damage to our reputation. If more restrictive laws, rules and regulations are enacted or more restrictive judicial and administrative interpretations of those laws are issued, compliance with the laws could become more expensive or difficult. Furthermore, changes in these laws and regulations could require changes in the way we and CBD conduct our business and we cannot predict the impact such changes would have on our profitability.

        CBD and the retail merchants who originate military loans and retail installment contracts purchased by us also must comply with both state and federal credit and trade practice statutes and regulations. If retail merchants fail to comply with these statutes and regulations, consumers may have

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rights of rescission and other remedies. In such cases, we have rights under our agreements with these merchants to require the merchant to repurchase the related retail installment contracts and to pay us for any damages we may incur or litigation costs, including attorney's fees and costs. However, if we are unable to enforce our agreement with the merchant, resulting consumer recession rights and remedies could have an adverse effect on our business, results of operation, financial condition and cash flow.

         As long as the investment notes are outstanding, we are subject to federal and state securities laws and regulations and failure to comply with or changes in such laws and regulations may adversely affect us or increase substantially the disclosure required by us.

        We are regulated by state and federal securities regulators. These regulations are designed to protect investors in securities (such as the investment notes) which we sell. Congress, state legislatures and foreign, federal and state regulatory agencies continually review laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation, implementation and enforcement of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of securities we may issue or increasing substantially the disclosure required by us.

         Compliance with new and existing laws and regulations may increase our costs, reduce our revenue and increase compliance challenges.

        Under the current regulatory environment, financial institutions and their non-banking affiliates are subject to significantly increased legislation oversight and regulation. We expect this oversight and regulation of our business and our affiliates' businesses to continue to expand in scope and complexity. Accordingly, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Federal Reserve, the OCC and the Consumer Financial Protection Bureau (the "CFPB") have begun their examinations of banks, holding companies and their non-banking affiliates. In connection with these examinations, regulators have begun identifying areas in which lenders could improve sales practices and disclosure to borrowers in connection with charging fees and offering financial products.

        We are working diligently to institute best practices and to improve clarity and transparency to customers. However, a wide and increasing array of banking and consumer lending laws apply to almost every aspect of our business. This coupled with the uncertainty of the meaning of regulations issued in connection with the Dodd-Frank Act and the need for additional rule making creates ambiguity as to whether the charging of fees or offering of financial products was done in a sufficiently transparent manner.

        If our primary supplier of consumer loans, CBD failed to satisfy the regulator's interpretation of these laws and regulations with respect to its historical or future practices, it could result in penalties for CBD, subject CBD to liability for prior operating activities, damage CBD's reputation or negatively impact CBD's ability to originate loans. If these consequences were to occur, it could have an adverse material impact on CBD's and our financial condition, business and results of operations.

         Changes in laws and regulations or the interpretation and enforcement of laws and regulations could negatively affect our business, results of operations and financial condition.

        The laws and regulations directly affecting our and CBD's activities are under review and are subject to change, especially as a result of current economic conditions, changes in the make-up of the current executive and legislative branches, and the political focus on issues of consumer and borrower protection. In addition, consumer advocacy groups and various other media sources continue to advocate for governmental and regulatory action to prohibit or severely restrict various financial

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products, including the loan products offered by CBD, and the manner in which such products are offered. Any changes in such laws and regulations could force us and CBD to modify, suspend or cease product offerings. It is also possible that the scope of federal regulations could change or expand in such a way as to alter what has traditionally been state law regulation of our business activities. The enactment of one or more of such regulatory changes, whether affecting us or CBD, may adversely affect our business, results of operations, and prospects.

        States and the federal government may also seek to impose new requirements or interpret or enforce existing requirements in new ways. For example, the application of general principles of equity relating to the protection of consumers and the interpretation of whether a practice is unfair or deceptive may vary in the future. Changes in current laws or regulations or the implementation of new laws or regulations in the future may restrict our or CBD's ability to continue current methods of operation or expand operations. Additionally, changes to these laws and regulations, or the enforcement thereof, could subject us or CBD to liability for prior operating activities or lower or eliminate the profitability of operations going forward by, among other things, reducing the amount of interest and fees that we may charge in connection with our loans.

        Changes in laws or regulations, and the enforcement thereof, may have an adverse effect on our overall business, results of operations, and financial condition, even in the event that the direct impact of any such change is felt only by CBD. Changes in laws or regulations, or the enforcement thereof, which impacts the ability of CBD to offer financial products or impacts the profitability of such products will have a material adverse effect on our overall business, results of operations, and financial condition.

         The Dodd-Frank Act eliminated the Office of Thrift Supervision ("OTS"), mandates increased capital requirements, created a new Consumer Financial Protection Bureau ("CFPB") and resulted in many new laws and regulations that have increased our costs of operations.

        The Dodd-Frank Act was signed into law on July 21, 2010. This financial reform law has materially changed the current bank regulatory environment and has affected the lending, deposit, investment, trading and operating activities of financial and depositary institutions and their holding companies and affiliates. Many provisions of the Dodd-Frank Act became effective on July 21, 2011 (the "Transfer Date").

        Certain provisions of the Dodd-Frank Act have had an impact on us, and such impact has been, and will continue to be significant. The Dodd-Frank Act eliminated the OTS, which was the primary federal regulator for MCB and its affiliates, including our parent, which is a thrift holding company. Oversight of federally chartered thrift institutions, like MCB, has been transferred to the OCC, the primary federal regulator for national banks. The Federal Reserve now has exclusive authority to regulate all bank and thrift holding companies and their non-bank subsidiaries. As a result, MCB and our parent are now subject to regulation and supervision by the OCC and Federal Reserve, respectively, instead of the OTS. These changes occurred on the Transfer Date. The application and administration of laws and regulations by the Federal Reserve and the OCC may vary, as compared to past application and administration by the OTS. It is possible that the OCC may rate certain activities in ways that are more restrictive than the OTS has in the past. This might cause us to incur increased costs or become more restricted in certain activities than we have been in the past.

        Under prior OTS regulations, our parent was not subject to specific capital requirements; however, the Dodd-Frank Act requires the Federal Reserve to create new regulatory capital requirements that our parent must achieve and maintain. On June 7, 2012, the Federal Reserve issued a notice of proposed rulemaking (the "NPR") on increased capital requirements, portions of which would apply to our parent and MCB. Later in June 2012, the OCC and the FDIC joined the Federal Reserve in requesting comments on the notice of proposed rulemaking. The deadline for comment on the

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proposed regulations was October 22, 2012. As written in the NPR, the proposed regulations would generally become effective on January 1, 2013, with some regulations to be phased in over the course of several years. On November 9, 2012, the Federal Reserve, the FDIC and the OCC issued a joint press release stating that they do not expect that any of the proposed rules in the NPR would become effective on January 1, 2013. Currently, it is unknown when final regulations will be issued, when such regulations may become effective or whether there will be any changes to the proposed regulations as released in the NPR.

        The Dodd-Frank Act also mandates that the Federal Reserve conduct regular bank-type examinations of activities of non-bank affiliates. Accordingly, the Federal Reserve will examine our activities. The Dodd-Frank Act also created the CFPB and authorized it to promulgate and enforce consumer protection regulations relating to financial products, which will affect both bank and non-bank finance companies. We are now subject to the consumer regulations promulgated by the CFPB.

        The Dodd-Frank Act also weakens the federal preemption of state laws and regulations previously available to national banks and federal thrifts. Most importantly to us, it has eliminated federal preemption for subsidiaries, affiliates and agents of national banks and federal thrifts. Because our existing business model relied upon such federal preemption, these changes have a significant impact upon us and have required us to change some of our current business operations. Certain state laws became applicable to us on the Transfer Date and require us to become licensed and regulated in various states as a small loan lender if we purchase certain consumer loans originated by MCB.

        While the Dodd-Frank Act has been signed into law and became effective on the Transfer Date, many provisions of the law remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict what the final form of those rules will be when fully implemented by the respective regulatory agencies. Management believes that certain aspects of the new legislation, including, without limitation, the costs of compliance with disclosure and reporting requirements and examinations, will have a significant impact on our business, financial condition and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes would affect us. However, the regulatory burden and cost of compliance with the new federal regulations, and with state statutes and regulations which were previously preempted, will increase significantly.

         The Dodd-Frank Act authorizes the newly created CFPB to adopt rules and regulations that could potentially have an impact on our and CBD's ability to offer short-term consumer loans and have an adverse effect on our operations and financial performance.

        Title X of the Dodd-Frank Act establishes the CFPB, which became operational on the Transfer Date. Under the Dodd-Frank Act, the CFPB has regulatory, supervisory, and enforcement powers over providers of consumer financial products, including explicit supervisory authority to examine and require registration of installment lenders. Included in the powers afforded to the CFPB is the authority to adopt rules describing specified acts and practices as being "unfair," "deceptive," or "abusive," and hence unlawful. Specifically, the CFPB has the authority to declare an act or practice abusive if it, among other things, materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or takes unreasonable advantage of a lack of understanding on the part of the consumer of the product or service. Although the Dodd-Frank Act expressly provides that the CFPB has no authority to establish usury limits, some consumer advocacy groups have suggested that certain forms of alternative consumer finance products, such as installment loans, should be a regulatory priority, and it is possible that at some time in the future the CFPB could propose and adopt rules making such lending or other products less profitable or impractical. The

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CFPB may target specific features of loans or loan practices, such as refinancings, by rulemaking that could cause us to cease offering certain products or engaging in certain practices. Any such rules may have an adverse effect on our business, results of operations, and financial condition.

        In addition to the Dodd-Frank Act's grant of regulatory powers to the CFPB, the Dodd-Frank Act gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws. In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for minor violations of federal consumer financial laws (including the CFPB's own rules) to $25,000 per day for reckless violations and $1 million per day for knowing violations. The CFPB has this examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. However, institutions that have assets of $10 billion or less, such as MCFC and MCB, will continue to be supervised in this area by their primary federal regulators (in the case of MCFC, the Federal Reserve, and in the case of MCB, the OCC). Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations under Title X, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or one or more state or federal officials find that we or MCB have violated the foregoing or other laws, they could exercise their enforcement powers in ways that would have a material adverse effect on us. Any exercise by a state or federal regulator or other official of its enforcement powers against MCB would also have an indirect material adverse effect on us by limiting the amount of loan products which we may be able to purchase from CBD in the future.

        In January 2012, President Obama appointed Richard Cordray as director of the CFPB. On January 5, 2012, the CFPB launched a federal supervision program for nonbanks that offer or provide consumer financial products or services. Under the CFPB's nonbank supervision program, the CFPB will conduct individual examinations and may also require reports from businesses to determine what businesses require greater focus by the CFPB. The frequency and scope of any such examinations will depend on the CFPB's analysis of risks posed to consumers based on factors such as a particular nonbank's volume of business, types of products or services, and the extent of state oversight.

         State regulators may take actions that adversely affect our business.

        As a division of a federal saving bank, the CBD is exempt from state licensing and most state regulatory requirements. However, as a result of regulatory changes resulting from the Dodd- Frank Act, as an assignee of certain consumer loans originated by our affiliate, the CBD, we are subject to various state licensing requirements and certain state consumer protection laws. State regulators may assert that certain state statutes or regulations apply to us or to loans purchased by us from the CBD. State regulators may take actions against us seeking to enforce state statutes and regulations that we believe do not apply to us or our business based upon constitutional grounds or federal preemption. We plan to defend our legal position and constitutional rights, but such actions by state regulators could adversely affect our business (including reduced loan volume and damage to our reputation), results of operations, financial condition and cash flow.

         Each of MCFC and MCB are operating under confidential Memoranda of Understanding.

        MCFC and MCB have each been separately notified by their respective primary federal regulators that the prior examinations of MCFC and MCB noted certain concerns as reflected in the corresponding Reports of Examination. As a result of the concerns, separate confidential Memoranda of Understanding (collectively, the "MOUs") were entered into by MCFC and MCB with their respective primary federal regulators. The MOUs require MCFC and MCB, through each of their boards of directors, to comply with the requirements of the MOUs. The MOUs are informal agreements and are not available to the public. The provisions of the MOUs may limit the funds

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available to MCB to originate loans. Our primary vendor, CBD, is a division of MCB. Non-compliance with the MOUs could result in formal enforcement actions and could limit CBD's ability to originate military loans. This would have a material adverse impact on our business, results of operations, financial condition and cash flow and would require us to change our business model. See "Management Discussion and Analysis of Financial Conditions and Results of Operations—Loan Acquisition / Origination."

         Continued or worsening general business and economic conditions could have a material adverse effect on our business, financial position, results of operations, and cash flows, and may increase loan defaults and affect the value and liquidity of your investment.

        Over the past few years, the global economy has experienced a significant recession, as well as a severe, ongoing disruption in the credit markets, downgrade of US Treasury by Standard and Poor's Financial Services LLC ("S&P") in connection with the United States debt levels, and a material and adverse effect on the jobs market and individual borrowers. While the United States economy may technically have come out of the recession, the recovery is fragile and may not be sustainable for any specific period of time, and could slip into an even more significant recession. Our financial performance generally, and in particular the ability of our borrowers to make payments on outstanding loans, is highly dependent upon the business and economic environments in the markets where we operate and in the United States as a whole.

        During an economic downturn or recession, credit losses in the financial services industry generally increase and demand for credit products often decreases. Declining asset values, defaults on consumer loans, and the lack of market and investor confidence, as well as other factors, have all combined to decrease liquidity. As a result of these factors, some banks and other lenders have suffered significant losses, and the strength and liquidity of many financial institutions worldwide has weakened. Additionally, our loan servicing costs and collection costs may increase as we may have to expend greater time and resources on these activities. Our underwriting criteria, policies and procedures, and product offerings may not sufficiently protect our growth and profitability during a sustained period of economic downturn or recession. Any continued or further economic downturn will adversely affect the financial resources of our customers and may result in the inability of our customers to make principal and interest payments on, or refinance, the outstanding debt when due.

        Conditions in the marketplace remain historically weak, and there can be no assurance that they will improve in the near term. Should such conditions worsen or continue to remain weak, they may continue to adversely affect the credit quality of our loans. In the event of increased default by borrowers under the loans, holders of the investment notes may suffer a partial or total loss of their investment.

         A reduction in demand for our products and our failure to adapt to such reduction could adversely affect our business and results of operations.

        The demand for the products we and CBD offer may be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences or financial conditions, regulatory restrictions that decrease customer access to particular products, or the availability of competing products. Should we or CBD fail to adapt to significant changes in customer demand for, or access to, our or CBD's products, our revenues could decrease significantly and our operations could be harmed. Even if we and CBD do make changes to existing products or introduce new products to fulfill customer demand, customers may resist or may reject such products. Moreover, the effect of any product change on the results of our business may not be fully ascertainable until the change has been in effect for some time, and by that time, it may be too late to make further modifications to such product without causing further harm to our business, results of operations, and financial condition.

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         Changes in government priorities may affect military spending, the size of the military, and laws regulating loans to military personnel, and our financial condition and results of operations could suffer as a result.

        We purchase and own loans made to active duty United States military and Department of Defense employees. Changes in priorities may affect the amount that the United States government spends on defense and could cause the size of the United States military to contract. In such an event, our customer base may suffer a corresponding contraction and our current military customers may face increased difficulties in repaying outstanding obligations. Further, any announced military drawdown, or even the perception by military personnel that a drawdown may in the future occur, may cause an immediate decrease in demand for our and CBD's products. The occurrence of any of these events may have a material adverse impact on our business, financial condition, and results of operations.

        In addition, certain federal laws and regulations impose limitations on loans made to active duty military personnel, active duty reservists, and members of the National Guard and their immediate families. Further regulation of lending to members of the military and their families may impact our business, results of operations, and financial condition.

         We face significant risks in implementing our growth strategy, some of which are outside of our control.

        We and our primary vendor, CBD, intend to continue our growth strategy, which is based on introducing new products and channels. Our and CBD's ability to execute this growth strategy is subject to significant risks, some of which are beyond our control, including:

    the ability to retain existing customers and to attract new customers;

    the reluctance or inability of existing customers to incur or increase their levels of indebtedness;

    the prevailing laws and regulatory environment of each state in which we operate or seek to operate, and, to the extent applicable, federal laws and regulations, which are subject to change at any time;

    the degree of competition in new markets and its effect on our ability to attract new customers;

    the ability to recruit and retain qualified personnel; and

    the ability to obtain adequate financing for expansion plans.

        Difficulties or delays in the development, testing, and marketing of new financial products or services will affect the success of those products or services and can cause losses associated with the costs to develop unsuccessful products and services. These difficulties could include:

    failure to implement new product or service programs on time;

    failure of customers to accept these products or services;

    operational difficulties or delays; and

    losses arising from the testing of new products or services.

        In addition, we and CBD may not achieve our projected financial results in connection with any new products and services that we and CBD offer or new branches that CBD opens.

         We may attempt to pursue acquisitions or strategic alliances which may be unsuccessful.

        We may attempt to achieve our business objectives through acquisitions and strategic alliances. We compete with other companies for these opportunities, including companies with greater financial resources, and we cannot be certain that we will be able to effect acquisitions or strategic alliances on

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commercially reasonable terms, or at all. In pursuing these transactions, we may experience, among other things:

    overvaluing potential targets due to limitations on our due diligence efforts;

    difficulties in integrating any acquired companies or products into our existing business, including integration of account data into our information systems;

    inability to realize the benefits we anticipate in a timely fashion, or at all;

    attrition of key personnel from acquired businesses;

    unexpected losses due to the acquisition of existing loan portfolios with loans originated using less stringent underwriting criteria;

    significant costs, charges, or writedowns; or

    unforeseen operating difficulties that require significant financial and managerial resources that would otherwise be available for the ongoing development and expansion of our existing operations.

         We face intense competition from financial institutions, financial services companies, and other organizations offering products and services similar to those offered by us and CBD, which could prevent us from sustaining or growing our businesses.

        The financial services industry, including consumer lending and consumer finance, is highly competitive, and we encounter strong competition for loans and other financial services in all of our market areas and distribution channels. Our principal competitors include commercial banks, savings banks, savings and loan associations, and consumer finance companies, including those that lend exclusively to military personnel, as well as a wide range of other financial institutions, such as credit card companies. Many of our competitors are larger than us and have greater access to capital and other resources. If we and CBD are unable to compete effectively, we will lose market share and our income from loans and other products may diminish.

        Our ability to compete successfully depends on a number of factors, including, among other things:

    the ability to adapt successfully to regulatory and technological changes within the financial services industry generally;

    the ability to develop, maintain, and build upon long-term customer relationships based on top quality service and high ethical standards;

    the scope, relevance, and pricing of products and services offered to meet customer needs and demands;

    the rate at which CBD introduces new products and services relative to our competitors;

    customer satisfaction with our level of service; and

    industry and general economic trends.

        Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

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         We may be limited in our ability to collect on our loan portfolio, all of which is unsecured.

        Legal and practical limitations may limit our ability to collect on our loan portfolio, resulting in increased loan losses, decreased revenues, and decreased earnings. State and federal laws and regulations restrict our collection efforts. In addition, the consumer loans that we hold are not secured by collateral or guaranteed or insured by any third party, making it more difficult for us to collect on our loan portfolio. Since the loans are unsecured, borrowers may choose to repay obligations under other indebtedness before repaying loans to us because our borrowers have no collateral at risk. Further, given the relatively small size of some of our loans, the costs of collecting a loan may be high relative to the amount of the loan. These factors may increase our loan losses, which would have a material adverse effect on our results of operations and financial condition.

         There is a risk of default on the retail installment contracts that we purchase.

        There is an inherent risk that a portion of the retail installment contracts that we hold will be in default or be subject to certain claims or defenses that the borrower may assert against the originator of the contract, or us as the holder of the contract. We face the risk that if high unemployment or adverse economic developments occur or continue in one or more of our markets, a large number of retail installment contracts will become defaulted. In addition, most of the borrowers under these contracts have some negative credit history. There can be no assurance that our allowance for credit losses will prove sufficient to cover actual losses in the future on these contracts.

         Our allowance for loan losses may not be adequate to cover actual loan losses, which may require us to take additional charges to our earnings and adversely impact our financial condition and results of operations.

        Management determines our provision for loan losses based upon an analysis of general market conditions, the credit quality of our loan investment portfolio, and the performance of our customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating, and other conditions, which may be beyond our control, and such losses may exceed our allowance for estimated loan losses. There can be no assurance that the allowance will prove sufficient to cover actual loan losses in the future. Significant increases to the provision for loan losses may be necessary if material adverse changes in general economic conditions occur or the performance of our loan investment portfolio further deteriorates.

         We are dependent on our key officers and the loss of services of any member of our team may have an adverse effect on our operations.

        Our success depends in large part on the retention of a limited number of key officers, including: Thomas H. Holcom, Jr., our Chief Executive Officer and Chairman of the Board, Joseph B. Freeman, our President and Chief Operating Officer, and Laura V. Stack, our Chief Financial Officer. The loss of the services of any of our key officers may have a material adverse effect on us. Each of these key personnel also has a key role with CBD, and the loss of one or more of such persons and our ability to find suitable successors for such individuals could have a material adverse impact on us and could cause us to undergo a difficult transition period. There is no assurance that we will be able to retain our current key officers or attract additional officers as needed.

         We may experience limited availability of financing and fluctuation in our funding costs, which may materially impact our results of operations, profits and ability to grow.

        Over the past few years, events in the debt markets and the economy generally have caused significant dislocations, illiquidity and volatility in the domestic and wider global financial markets. The downturn in the general economy has affected the financial strength of many banks and retailers. Any

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further economic downturn may adversely affect the financial resources of such banks and may result in further reduced liquidity. We currently fund our operations through bank debt. The profitability and growth of our business and our ability to purchase loans currently depends on our ability to access bank debt at competitive rates, and we cannot guarantee that such financing will be available in the future. Our bank debt is comprised of individual loans from lenders, which are party to our Secured Senior Lending Agreement (the "SSLA"). The SSLA is an uncommitted credit facility that provides common terms and conditions pursuant to which individual banks that are a party to this agreement may choose to make loans to us in the future. No lender has an obligation to make any additional future loans to us. As of September 30, 2012, we could request up to $102.7 million in additional funds and remain in compliance with the terms of the SSLA. No lender has a contractual obligation to lend us these additional funds. In addition, we have borrowings of $16.5 million from withdrawing banks who previously participated in our credit facility. With the ongoing strains in the financial markets, including downgrading of U.S. Treasury by S&P in connection with U.S. debt levels, we see liquidity, capital and earnings challenges for some banks in our credit group that may reduce their ability to participate in the credit facility or may cause a decrease in their willingness to lend at the current levels. If our existing sources of liquidity become insufficient to satisfy our financial needs or our access to these sources become further restricted, we will need to raise capital from other sources, if needed. If such an event were to occur, we can give no assurance that such alternate sources of liquidity would be available to us.

         We face risks of interest rate fluctuations, and if we are not able to adequately protect our portfolio from changes in interest rates, our results of operations could be adversely affected and impair our ability to pay interest and principal on the investment notes.

        Our earnings are significantly dependent on our net interest income, as we realize income primarily from the difference between the rate of interest we receive on the loans we own and the interest rate we must pay on our outstanding bank debt and investment notes. We may be unable to predict future fluctuations in market interest rates, which are affected by many factors, including inflation, economic growth, employment rates, fiscal and monetary policy and disorder and instability in domestic and foreign financial markets. Sustained, significant increases in market rates could unfavorably impact our liquidity and profitability. Any significant reduction in our profitability would have a material adverse impact on our business, results of operation, financial condition and cash flow. This would also diminish our ability to pay interest and principal on our outstanding investment notes.

         Fluctuations in our expenses and other costs may hurt our financial results.

        Our expenses and other costs, such as human resources and marketing expenses, will directly affect our earnings. Many factors can influence the amount of our expenses. As our business develops, changes, or expands, additional expenses can arise from asset purchases, structural reorganization, or a reevaluation of business strategies. Other factors that can affect the amount of our expenses include those related to legal and administrative cases and proceedings, which can be expensive to pursue or defend. In addition, changes in accounting policies can significantly affect how we calculate expenses and earnings.

         CBD and other vendors from which we purchase consumer loans and retail installment contracts have in place policies and procedures for underwriting, processing, and servicing loans and retail installment contracts which are subject to potential failure or circumvention, which may lead to greater loan delinquencies and charge-offs.

        Much of CBD's underwriting activities and credit extension decisions are made at local branches. CBD trains their employees to make loans that conform to our underwriting standards. Such training includes critical aspects of state and federal regulatory compliance, cash handling, account

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management, and customer relations. Although CBD has standardized employee manuals, CBD primarily relies on supervisors to train and supervise employees, rather than centralized or standardized training programs. Therefore, the quality of training and supervision may vary from branch to branch depending upon the amount of time apportioned to training and supervision and individual interpretations of operations policies and procedures. CBD cannot be certain that every loan is made in accordance with our underwriting standards and rules. CBD has in the past experienced some instances of loans extended that varied from our underwriting standards. Variances in underwriting standards and lack of supervision could expose us to greater delinquencies and charge-offs than we have historically experienced.

        In addition, underwriting decisions are based on information provided by customers and counterparties, the inaccuracy or incompleteness of which may adversely affect our results of operations. In deciding whether to extend credit or enter into other transactions with customers and counterparties, CBD and retail merchants rely on information furnished to them by or on behalf of customers and counterparties, including financial information. CBD and retail merchants also rely on representations of customers and counterparties as to the accuracy and completeness of that information. Our earnings and our financial condition could be negatively impacted to the extent the information furnished to our vendors by and on behalf of customers and counterparties is not correct or complete.

         CBD may modify underwriting and servicing standards and does not have to lend to the traditional customers who meet our business model and lending criteria, which may have a material adverse effect on our business operations, cash flow, results of operations, financial condition and profitability.

        Except as permitted by the SSLA, we have the exclusive rights to purchase all the loans made to U.S. active duty military, retired military and U.S. Department of Defense employees that are originated by CBD and that meet our business model and systems and our lending criteria. In addition, we have retained CBD to service all loans we own. However, CBD is not obligated to continue to use these lending criteria or business models indefinitely. CBD does have the right to modify these criteria, systems and models. CBD may also originate for its own account loans that are not deemed to be military loans made in the ordinary course of business as previously conducted by us. If CBD does modify the models significantly, we may not be willing to purchase such loans. No assurance can be given that if CBD does modify the lending criteria and business models and systems that these modifications would be successful, and such modifications may have a material adverse impact on our business, financial condition and results of operations.

         A significant portion of CBD's loan customers are active-duty military or federal government employees who could be instructed not to do business with CBD or us, our access to the Government Allotment System could be denied or the federal government could significantly reduce active duty forces.

        When they deem it to be in the best interest of their personnel, military commanders and supervisors of federal employees may instruct their personnel, formally or informally, not to patronize a business. If military commanders or federal employee supervisors at any given level determine one or more of CBD's loan production offices or its Internet site to be off limits, we and CBD would be unable to do new business with the potential customers they command or supervise. Additionally, approximately 44% of our borrowers make their monthly loan payments through the Government Allotment System. Military commanders or federal employee supervisors could deny those they command or supervise access to these programs, increasing our credit risk on the loans we own. The federal government also establishes troop levels for our active duty military customers and we could be adversely affected if these levels were significantly reduced. Without access to sufficient new customers or to the Government Allotment System, CBD may be forced to discontinue lending to the U.S.

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military and we may be forced to liquidate our portfolio of military loans and retail installment contracts.

         If a customer leaves the military prior to repaying the military loan, there is an increased risk that the loan will not be repaid.

        The terms of repayment on the loans we purchase are generally structured so the entire loan amount is repaid prior to the customer's estimated separation from the military. If, however, a customer unexpectedly leaves the military or other events occur that result in the loan not being repaid prior to the customer's departure from the military, there is an increased chance that the loan will not be repaid. Because we do not know whether or when a customer will leave the military early, we cannot institute policies or procedures to ensure that the entire loan is repaid before the customer leaves the military. Further, as military personnel anticipate not being able to reenlist, many may become more financially conservative, potentially resulting in them stopping payment on current loans and/or resulting in a reduction of demand for future loans. As of September 30, 2012 we had approximately $9.8 million, or 2.5% of our total portfolio, from customers who had advised us of their separation from the military prior to repaying their loan If that amount increases or the number of customers who separate from the military prior to their scheduled separation date materially increases, our charge-offs may increase. This would have a material adverse effect on our business, cash flow, results of operations and financial condition.

         We have restrictions on the payments we may make to our parent, MCFC. Our ability to disperse our working capital could reduce our profitability and diminish our ability to pay interest and principal on the investment notes.

        As of September 30, 2012, our sole shareholder, MCFC, owned the outstanding share of our common stock. Accordingly, MCFC is able to exercise significant control over our affairs including, but not limited to, the election of directors, operational decisions and decisions regarding the investment notes. The SSLA, among other things, limits the amounts that we can pay to MCFC each year. In fiscal 2012, the SSLA prohibited us from paying MCFC more than $750,000 for strategic planning services, professional services, product identification and branding and service charges. Other than the covenants contained in the SSLA, there are no significant contractual limits on the amounts we can pay to our parent or other affiliates.

         We purchase loans that were made exclusively to the military market, which traditionally has higher delinquencies than customers in other markets, resulting in higher charge-offs, a reduction in profitability and impairment of our ability to pay interest and principal on the investment notes.

        A large portion of our loan customers are unable to obtain financing from traditional sources, due to factors such as their age, frequent relocations and lack of credit history. Historically, we have experienced higher delinquency rates than traditional financial institutions. When we purchase loans, we depend on underwriting standards and collection procedures designed to mitigate the higher credit risk associated with lending to these borrowers. However, these standards and procedures may not offer adequate protection against risks of default. Higher than anticipated delinquencies, foreclosures or losses on the loans we own could reduce our profitability and have a material adverse impact on our business, financial condition and results of operations. Such adverse effects could also restrict our ability to pay interest and principal on our outstanding investment notes.

         If a large number of borrowers are wounded in combat, our profits may be adversely affected.

        Our debt protection product will cancel the outstanding debt of our customer's loan in the event of accidental loss of life or disability for loans originated by CBD with this product. Our debt protection product includes additional covered events such as unforeseen military discharge, divorce

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and in certain instances where our customers do not, under no fault of the customer, receive pay ("no-pay-due"). These events trigger payment of the loan as they become due during a customer's disability due to illness or injury, including war-related injuries, and pay the balance in the event of death, including war-related fatalities. Therefore, if a large number of borrowers are injured and disabled in combat, our profitability would be impaired, which could have a material adverse impact on our business, results of operation, financial condition and cash flow and may impair our ability to pay interest and principal on our outstanding investment notes.

         Failure of third-party service providers upon which we rely could adversely affect our business.

        We rely on certain third-party service providers, and such reliance can expose us to risks. Specifically, if any of our third-party service providers are unable to provide their services timely and effectively, or at all, it could have an adverse effect on our business, financial condition, results of operations and cash flows.

         Our business is dependent on technology and our ability to invest in technological improvements, the failure of which may adversely affect our business, financial condition, and results of operations.

        The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. We depend in part upon our ability to address the needs of our customers by using technology to provide products and services that satisfy their operational needs. Many of our competitors have substantially greater resources to invest in technological improvements and third-party support. There can be no assurance that we will continue to effectively implement new technology-driven products and services or successfully market these products and services to our customers. For example, in an effort to further enhance our information technology capabilities, we have engaged a third party to provide assistance with the evaluation of our existing Daybreak lending system, which may ultimately result in the conversion to a new lending system. Converting to a new lending system will cause us to incur a significant expense, and if the conversion is unsuccessful, our business, financial condition, and results of operations may be adversely affected.

        We also rely on our computer systems and the technology of online and third-party service providers. Our daily operations depend on the operational effectiveness of their technology. For example, we rely on these computer systems to accurately track and record our assets and liabilities. If our computer systems or outside technology sources become unreliable, fail, or experience a breach of security, our ability to maintain accurate financial records may be impaired, which could affect our business, financial condition, and results of operations.

         Security breaches, cyber attacks, or fraudulent activity could result in damage to our operations or lead to reputational damage.

        Security breaches or cyber attacks with respect to our or CBD's facilities, computer networks, and databases could cause harm to our business and reputation and result in a loss of customers. We have instituted security measures to protect our systems and to assure our customers that these systems are secure. However, we may still be vulnerable to theft and unauthorized entry to our facilities, computer viruses, attacks by hackers, or similar disruptive problems. Our third-party contractors and vendors also may experience security breaches involving the storage and transmission of proprietary and customer information. If unauthorized persons gain access to our databases, they may be able to steal, publish, delete, or modify confidential and customer information (including personal financial information) that is stored or transmitted on our networks. If a third party were to misappropriate this information, we potentially could be subject to both private and public legal actions, as we are subject to extensive laws and regulations concerning our use and safeguarding of this information. Any security or privacy breach

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could adversely affect our business, financial condition, and results of operations, including in the following ways:

    deterring customers from using our products and services;

    decreasing our revenue and income as a result of system downtime caused by a breach or attack;

    deterring third parties (such as other financial institutions) from supplying us with information or entering into relationships with us;

    harming our reputation generally and in the markets we serve;

    exposing us to financial liability, legal proceedings (such as class action lawsuits), or regulatory action; or

    increasing our operating expenses to respond to and correct problems caused by any breach of security, including in connection with potential legal proceedings or responding to regulatory action.

        Any failure, interruption, or breach in security of our information systems, including any failure of our back-up systems, may also result in failures or disruptions in our customer relationship management, general ledger, loan, and other systems and could subject us to additional regulatory scrutiny, any of which could have a material adverse effect on our financial condition and results of operations. Furthermore, we may not be able to immediately detect any such failure or breach, which may increase the losses that we would suffer.


FORWARD-LOOKING STATEMENTS

        This prospectus and related prospectus supplements 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 prospectus 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, results of operations, cash flow 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 those set forth in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of this prospectus. If any of the events described in "Risk Factors" occur, they could have an adverse effect on our business, financial condition and results of operation, cash flow, and growth strategies. When considering forward-looking statements, you should keep these factors in mind as well as the other cautionary statements in this prospectus. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements, except as required by federal securities laws.

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USE OF PROCEEDS

        If we sell all of the notes offered by this prospectus, we estimate that the net proceeds will be approximately $49,200,000 after deduction of estimated offering expenses of $800,000. We will pay all of the expenses related to this offering. Some of the notes covered by this prospectus will be issued to renew notes which mature within 12 months of the date of this prospectus, and we will not receive any additional cash proceeds upon the issuance of those notes.

        The following table sets forth information regarding the estimated use of proceeds from the Offering.

 
  Minimum Offering  
 
  Amount   Percentage of
Gross Proceeds
 

Gross offering

  $ 50,000,000     100.0 %

Less estimated offering expenses

  $ 800,000     1.6 %
           

Amount available for purchase of loans

  $ 49,200,000     98.4 %
           

Planned uses:

             

Loans purchased from CBD and retail installment contracts

  $ 43,200,000     86.4 %

Working capital

  $ 6,000,000     12.0 %
           

Total application of proceeds

  $ 49,200,000     98.4 %
           

        The cash proceeds of this offering will be received in varying amounts from time to time over the remaining life of the offering. We expect to use the net cash proceeds from the sale of the notes first to fund the purchase of military loans, second to fund the purchase of retail installment contracts, and third for working capital and other general corporate purposes. While the precise amounts and timing of the application of such proceeds depend upon many factors, including, but not limited to, the amount of any such proceeds and actual funding requirements, we do not anticipate using more than 15% of the aggregate net proceeds from the offering for working capital and other general corporate purposes.

        There is no minimum number or amount of notes that we must sell to receive and use the proceeds from the sale of any notes, and there can be no assurance that the total principal amount of the notes will be sold. If we receive substantially less than the estimated amount of net proceeds, we will pursue alternative sources of capital, including the securitization of our finance receivable portfolio or a private placement of debt. If we are unable to find alternative sources of capital, we will not be able to grow our business in accordance with our business plan. Currently our management believes that our business will not be materially and adversely affected if we do not sell any of the notes offered by this prospectus for approximately the next 12 months.

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SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and the related notes, with other financial data included in this report and with "Management's Discussion and Analysis of Financial Condition and Results of Operations." The data is as of and for the five fiscal years ended September 30, 2012, 2011, 2010, 2009 and 2008.

 
  As of and for the Years Ended September 30,  
 
  2012   2011   2010   2009   2008  
 
  (dollars in thousands, except per share amounts)
 

Consolidated balance sheet data:

                               

Gross finance receivables

  $ 396,803   $ 405,234   $ 387,041   $ 364,786   $ 319,290  

Allowance for credit losses

    (29,000 )   (25,396 )   (24,496 )   (24,621 )   (22,982 )

Total assets

    403,479     397,328     399,104     385,325     352,643  

Senior indebtedness:

                               

Revolving credit line—banks

    19,450         21,373     20,770     23,586  

Amortizing term notes

    186,231     214,491     210,668     221,187     198,414  

Junior indebtedness:

                               

Investment notes

    67,428     59,725     40,028     33,306     34,904  

Subordinated debt—parent

            11,900          

Total stockholder's equity

    119,935     114,737     106,532     100,487     88,544  

Consolidated statement of operations data:

                               

Revenue:

                               

Interest income and fees

  $ 113,249   $ 114,121   $ 105,460   $ 99,690   $ 83,843  

Interest expense

    19,250     19,203     18,019     17,855     16,364  
                       

Net interest income before provision for credit losses

  $ 93,999   $ 94,918   $ 87,441   $ 81,835   $ 67,479  

Provision for credit losses

    34,617     25,566     22,433     23,454     21,912  
                       

Net interest income

  $ 59,382   $ 69,352   $ 65,008   $ 58,380   $ 45,567  

Net non-interest income

    4,809     7,367     6,296     4,388     3,949  

Non-interest expense

    46,119     48,091     45,521     42,014     36,365  
                       

Income before income taxes

    18,072     28,628     25,784     20,754     13,151  

Provision for income taxes

    6,045     11,524     9,221     7,418     5,377  
                       

Net income:

  $ 12,027   $ 17,104   $ 16,563   $ 13,337   $ 7,774  
                       

Net income per share:

                               

Basic and diluted

  $ 12,027,303   $ 17,103,813   $ 16,562,227   $ 13,336,552   $ 7,774,111  
                       

Cash dividends per common share(1)

  $ 6,773,313   $ 8,845,387   $ 10,560,722   $ 3,517,834   $ 2,507,177  
                       

(1)
Number of shares outstanding is one.

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        On a worldwide basis, we purchase consumer loans made exclusively to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. Our largest source of military loans is CBD, an affiliate who originates direct loans through a network of loan production offices and via the Internet. Military personnel use these loan proceeds to purchase goods and services. We also purchase retail installment contracts from retail merchants that sell consumer goods to active-duty or retired career U.S. military personnel or U.S. Department of Defense employees. We plan to hold these military loans and retail installment contracts until repaid.

        Finance receivables, whether originated by CBD or purchased directly from retail merchants, are effectively unsecured and may consist of loans previously originated by us or purchased from CBD and retail merchants. All finance receivables have fixed interest rates and typically have a maturity of less than 48 months. During fiscal year 2012, the size of the average finance receivable at acquisition was approximately $3,500. A large portion of our customers are unable to obtain financing from traditional sources due to factors such as 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 of aggregate finance receivables we are able to acquire from CBD and retail merchants, as well as the maintenance of loan quality.

Sources of Income

        We generate revenues primarily from interest 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 our debt protection product and credit reinsurance premiums. For purposes of the following discussion, "revenues" means the sum of our finance income, debt protection income and reinsurance premiums.

        Interest income and fees.    Interest income and fees consists of interest and origination revenue earned on the military loans and retail installment contracts we own (referred to throughout individually as "loan" or collectively as "loans" or "finance receivables"). Our interest revenue is based on the risk adjusted interest rates charged customers for loans that we purchase. Interest rates vary by loan and are based on many factors, including the overall degree of credit risk assumed and the interest rates allowed in the state where the loan is originated. Our finance income comprised approximately 96.0% of our total revenues in fiscal 2012.

        Non-interest income, net.    Non-interest income, net consists of revenue from debt protection income, credit reinsurance premiums and the claim benefits expense. Prior to the second quarter of fiscal 2010, one of our wholly owned subsidiaries reinsured substantially all of the credit life, credit accident and health insurance sold by CBD on behalf of Assurant Group, an unaffiliated insurance carrier. During the second quarter of fiscal 2010, CBD began offering a debt protection product to our customers. During the third quarter of fiscal 2010, our subsidiary ceased assuming the reinsurance policies. Debt protection fee income and credit reinsurance premiums comprised approximately 4.0% of our total revenues in fiscal 2012. Our internet marketing of our debt protection product was changed in October 2012, where the customer now must affirmatively select the product rather than declining the coverage. This marketing change will have some impact on future results of operations, albeit unknown at this time.

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Finance Receivables

        Our finance receivables are comprised of loans purchased from CBD (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:

 
  As of and for the Years Ended
September 30,
 
 
  2012   2011   2010  
 
  (dollars in thousands, except average
note balance and number of notes)

 

Finance receivables:

                   

Total finance receivables balance

  $ 396,803   $ 405,234   $ 387,041  

Average note balance

  $ 2,767   $ 2,699   $ 2,533  

Total interest income and fees

  $ 113,249   $ 114,121   $ 105,460  

Total number of notes

    143,419     150,155     152,788  

Military loans:

                   

Total military receivables

  $ 369,361   $ 370,602   $ 344,108  

Percent of total finance receivables

    93.08 %   91.45 %   88.91 %

Average note balance

  $ 2,949   $ 2,898   $ 2,700  

Number of notes

    125,267     127,878     127,448  

Retail installment contracts:

                   

Total retail installment contract receivables

  $ 27,442   $ 34,632   $ 42,933  

Percent of total finance receivables

    6.92 %   8.55 %   11.09 %

Average note balance

  $ 1,512   $ 1,555   $ 1,694  

Number of notes

    18,152     22,277     25,340  

        In the normal course of business, we receive customer payments through the Federal Government Allotment System on the first day of each month. If the first day of the month falls on a weekend or holiday, our customer payments are posted on the last business day of the preceding month. On September 30, 2011, we collected $14.1 million in customer loan payments in advance of the payment due date, October 1, 2011. This payment and use of cash is reflected on the balance sheet as a reduction of "Net finance receivables" in the amount of $11.2 million and corresponding "Accrued interest receivable" in the amount of $2.9 million. The above table does not reflect the October 1, 2011 payment received on September 30, 2011. There were no Federal Government Allotment System payments received in advance of the payment due dates on September 30, 2012 or September 30, 2010.

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 states 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 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

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increase profitability. The following table presents a three-year history of data relating to our net interest margin as of and for the fiscal years presented.

 
  As of and for the Years Ended
September 30,
 
 
  2012   2011   2010  
 
  (dollars in thousands)
 

Total finance receivables balance

  $ 396,803   $ 405,234   $ 387,041  

Average total finance receivables(1)

    397,901     396,999     369,261  

Average interest bearing liabilities(1)

    272,719     281,790     274,740  

Total interest income and fees

    113,249     114,121     105,460  

Total interest expense

    19,250     19,203     18,019  

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

Results of Operations

    Year Ended September 30, 2012 Compared to Year Ended September 30, 2011.

        Total Finance Receivables.    Our aggregate finance receivables decreased 2.1% to $396.8 million on September 30, 2012 from $405.2 million on September 30, 2011. Lower than expected demand for military loans and retail installment contracts led to a decline in originations during fiscal 2012 compared to fiscal 2011. Demand has been impacted by the fragile state of the United States' economic recovery and uncertainty amongst our military customers regarding the future size of the United States military. Our primary supplier of loans, CBD, saw a $27.3 million or 6.4% decrease in military loan originations during fiscal 2012 from $425.6 million during fiscal 2011. Our acquisition of retail installment contracts decreased during fiscal 2012 by $5.4 million or 17.5% compared to fiscal 2011. Our aggregate average finance receivables increased slightly during this period to $398.0 million in fiscal 2012 from $397.0 million in fiscal 2011, an increase of $1.0 million or 0.3%.

        Total Interest Income and Fees.    Total interest income and fees in fiscal 2012 represented 96.0% of our revenue compared to 93.9% in fiscal 2011. Interest income and fees decreased to $113.2 million from $114.1 million in fiscal 2011, a decrease of $0.9 million or 0.8%. This decrease is primarily due to the 7.2% overall decline in originations from fiscal 2011 and a decline in the corresponding origination fee income.

        Interest Expense.    Interest expense in fiscal 2012 increased to $19.3 million from $19.2 million in fiscal 2011, an increase of $0.1 million or 0.5%. While our average interest bearing liabilities decreased by $9.1 million or 3.2%, our junior subordinated investment notes increased to $67.4 million at September 30, 2012 compared to $59.7 million at September 30, 2011. The weighted average interest rate of our junior subordinated investment notes was 9.06% at September 30, 2012 compared to 6.25% of our amortizing term notes at September 30, 2012. The weighted average interest rates for the junior subordinated investment notes and amortizing term notes at September 30, 2011 were 9.12% and 6.19%, respectively.

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        Provision for Credit Losses.    The provision for credit losses increased to $34.6 million in fiscal 2012 from $25.6 million in fiscal 2011, an increase of $9.0 million or 35.2%. Net charge-offs increased to $31.0 million in fiscal 2012 compared to $24.7 million in fiscal 2011, an increase of $6.3 million or 25.5%. The net charge-off ratio increased to 7.8% in fiscal 2012 compared to 6.2% in fiscal 2011. Our increase in net charge-offs in fiscal 2012 compared to fiscal 2011 was due primarily to an increase in customers who separated from the military prior to repaying their loan. 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. Combined net debt protection income and credit reinsurance premiums totaled $4.8 million in fiscal 2012 compared to $7.4 million in fiscal 2011, a decrease of $2.6 million or 35.1%. The decrease in non-interest income, net is due to the decline in our military loan originations of 6.4% and an increase in the claims benefits of the debt protection product in fiscal 2012 compared to fiscal 2011.

        Non-interest Expenses.    Non-interest expenses in fiscal 2012 decreased to $46.1 million compared to $48.1 million in fiscal 2011, a decrease of $2.0 million or 4.2%. The decrease was due primarily to declines in professional and regulatory fees, amortization of intangibles and other operating expenses in fiscal 2012 compared to fiscal 2011.

        Provision for Income Taxes.    Our effective tax rate ("ETR") was 33.5% in fiscal 2012, compared to 40.3% in fiscal 2011. The decrease in the ETR in fiscal 2012 compared to fiscal 2011 is primarily due to the Company recording a $0.5 million net decrease in the reserve for uncertain tax positions related to the expiration of tax statutes of limitations in fiscal 2012 compared to fiscal 2011 including the impact of various state filing corrections. In addition, the decrease is due to the redetermination of state apportionment factors related to previously filed state tax returns, favorable state audit settlement, and a change in state apportionment factors driven by a shift in business mix as a result of the mix of product revenue during fiscal 2012.

    Year Ended September 30, 2011 Compared to September 30, 2010.

        Total Finance Receivables.    Our aggregate finance receivables increased 4.7% to $405.2 million on September 30, 2011 from $387.0 million on September 30, 2010. We increased our loan acquisitions from CBD and retailers by 8.9% to $456.5 million during fiscal 2011 from $419.1 during fiscal 2010. Our aggregate average finance receivables also increased during this period to $397.0 million in fiscal 2011 from $369.3 million in fiscal 2010, an increase of $27.7 million or 7.5%.

        Total Interest Income and Fees.    Total interest income and fees in fiscal 2011 represented 93.9% of our revenue compared to 94.4% in fiscal 2010. Interest income and fees increased to $114.1 million in fiscal 2011 from $105.5 million in fiscal 2010, an increase of $8.6 million or 8.2%. This increase is primarily due to an increase in aggregate average finance receivables of 7.5%.

        Interest Expense.    Interest expense in fiscal 2011 increased to $19.2 million from $18.0 million in fiscal 2010, an increase of $1.2 million or 6.7%. While our average interest bearing liabilities increased by $7.0 million or 2.6%, our weighted average interest rate on our amortizing note debt decreased to 6.19% in fiscal 2011 compared to 6.38% in fiscal 2010. We pay our lenders a minimum interest rate per annum of 5.00% for our revolving facility and 6.25% per annum for our amortizing notes. In addition, we pay our lenders a quarterly uncommitted availability fee in an amount equal to ten basis points multiplied by the average aggregate outstanding principal amount of all amortizing notes held by the lenders. We paid our lenders $0.6 million in uncommitted availability fees during fiscal 2011, the same as fiscal 2010. Also, during fiscal 2011, we paid off our promissory note made available by MCFC.

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        Provision for Credit Losses.    The provision for credit losses in fiscal 2011 increased to $25.6 million from $22.4 million in fiscal 2010, an increase of $3.2 million or 14.3%. This increase is due to an increase in our average finance receivables of $27.7 million or 7.5%. We also saw an increase in our net charge-offs as a percentage of our average total finance receivables to 6.21% in fiscal 2011 compared to 6.11% in fiscal 2010. With our consistent net charge-off ratio over the past three years we have reduced our allowance for credit losses as percent of average finance receivables for fiscal year 2011 to 6.40% compared to 6.63% in fiscal 2010. See further discussion in "Credit Loss Experience and Provision for Credit Losses" section.

        Non-interest Income, net.    Non-interest income, net consists of revenue from debt protection income and credit reinsurance premiums. Combined debt protection income and credit reinsurance premiums totaled $7.4 million in fiscal 2011 compared to $6.3 million in fiscal 2010, an increase of $1.1 million or 17.5%. The increase in non-interest income is related to the increase in our loan acquisitions from CBD of $37.4 million or 8.9% and partially due to continued development of the debt protection product.

        Non-interest Expenses.    Non-interest expenses in fiscal 2011 increased to $48.1 million compared to $45.5 million in fiscal 2010, an increase of $2.6 million or 5.7%. The increase was primarily due to the increase in our management and record keeping services fees for the year. Management and record keeping services fees in fiscal 2011 increased by $2.5 million from fiscal 2010 due to a 7.5% increase in our average aggregate finance receivables.

        Provision for Income Taxes.    Our ETR was 40.3% in fiscal 2011, compared to 35.8% in fiscal 2010. The increase in the ETR in fiscal 2011compared to 2010 was primarily due to the impact of state filings corrections for prior periods, a change in the unitary state tax apportionment factors driven by a shift in business mix as a result of the mix product revenue, as well as the rate change to deferred tax assets for the change in apportionment factors.

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 criteria. 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. We rarely grant extensions or deferments, or allow account revision, rewriting, renewal or rescheduling in order to bring otherwise delinquent accounts current. The increase in delinquency for fiscal 2012, when compared to fiscal 2011, is primarily due to the increase in repayments via electric funds transfer ("EFT"). A greater portion of our customers using our internet channel choose to use EFT, compared to customers using CBD's other channels of origination, than utilize the Federal Government Allotment System. Payments received from the Federal Government Allotment System are deducted directly from the customer's paycheck. An EFT payment from a customer's bank account can be rejected due to insufficient funds in the customer's bank account, making payments received from the Federal Government Allotment System more reliable than EFT payments.

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        The following table sets forth the three-year history of our delinquency experience for accounts of which payments are 60 days or more past due.

 
  As of and for the Years Ended
September 30,
 
 
  2012   2011   2010  
 
  (dollars in thousands)
 

Total finance receivables

  $ 396,803   $ 405,234   $ 387,041  

Total finance receivables balances 60 days or more past due

    15,227     13,954     11,857  

Total finance receivables balances 60 days or more past due as a percent of total finance receivables

    3.84 %   3.44 %   3.06 %

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 "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 buying 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. As of September 30, 2012 and September 30, 2011, we had approximately $9.8 million, or 2.5% 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. Another source of loss is when a customer declares bankruptcy. See "Non-performing Assets." below.

        Our net charge-offs as a percentage of average finance receivables has increased due primarily to an increase in customers who separated from the military prior to repaying their loan. Military loan net charge-offs, from customers who had advised us of their separation from the military, were $17.1 million and represented 55.2% of net charge-offs in fiscal 2012 compared to $11.9 million and 48.2% in fiscal 2011. Unemployment after the customer's separation from the military and a subsequent halt in loan payments has contributed to higher delinquencies and net charge-offs. Our allowance for credit losses on military loans increased $4.5 million to $27.5 million at September 30, 2012 compared to $23.0 million at September 20, 2011 due primarily to the $5.2 million increase in net-charge offs from customers who had advised us of their separation from the military.

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        The following table shows a three-year historical picture of net charge-offs on military loans and net charge-offs as a percentage of military loans:

 
  As of and for the Years Ended
September 30,
 
 
  2012   2011   2010  
 
  (dollars in thousands)
 

Military loans:

                   

Military loans charged-off

  $ 32,611   $ 26,349   $ 25,096  

Less recoveries

    3,125     3,693     3,206  
               

Net charge-offs

  $ 29,486   $ 22,656   $ 21,890  
               

Average military receivables(1)

  $ 366,816   $ 358,242   $ 322,995  

Percentage of net charge-offs to average military receivables

    8.04 %   6.32 %   6.78 %

(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 typically 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. As of September 30, 2012, the aggregate amount of retail merchant reserves totaled $1.4 million, a decrease of $0.6 million, or 30%, from the same period last year. The decrease is due to reduced acquisitions of retail installment contracts as well as increased utilization of the dealer reserves for non-performing contracts. This represents a 4.5% reserve as a percentage of average retail installment contract receivables. Any losses incurred on the retail installment contracts purchased from that retail merchant are charged against its specific reserve account. Upon the retail merchant's request, and no more often than annually, we will pay the retail merchant the amount by which its specific 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. In fiscal year 2011, we had instances where we had extinguished a portion of our merchant reserves and sustained additional charge offs as these merchants' portfolios were liquidated.

        The following table shows a three-year historical picture of net charge-offs on retail installment contracts and net charge-offs as a percentage of retail installment contracts

 
  As of and for the Years Ended
September 30,
 
 
  2012   2011   2010  
 
  (dollars in thousands)
 

Retail installment contracts:

                   

Contracts charged-off

  $ 1,923   $ 2,516   $ 1,127  

Less recoveries

    396     506     459  
               

Net charge-offs

  $ 1,527   $ 2,010   $ 668  
               

Average retail installment contract receivables(1)

  $ 31,085   $ 38,757   $ 46,265  

Percentage of net charge-offs to average retail installment contracts receivable

    4.91 %   5.19 %   1.44 %

(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 sets forth the three-year history of our allowance for credit losses:

 
  As of and for the Years Ended
September 30,
 
 
  2012   2011   2010  
 
  (dollars in thousands)
 

Average total finance receivables(1)

  $ 397,901   $ 396,999   $ 369,260  

Provision for credit losses

    34,617     25,566     22,433  

Net charge-offs

    31,013     24,666     22,558  

Net charge-offs as a percentage of average total finance receivables

    7.79 %   6.21 %   6.11 %

Allowance for credit losses

  $ 29,000   $ 25,396   $ 24,496  

Allowance as a percentage of average total finance receivables

    7.29 %   6.40 %   6.63 %

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

        The allowance for credit losses in fiscal 2012 increased to $29.0 million from $25.4 million at the end of fiscal 2011 and was due primarily to the increase in net charge-offs from customers who had advised us of their separation from the military. See further discussion in "Credit Loss Experience and Provision for Credit Losses."

        The following table sets forth the three year history of the components of our allowance for credit losses:

 
  As of and for the Years Ended
September 30,
 
 
  2012   2011   2010  
 
  (dollars in thousands)
 

Balance, beginning of period

  $ 25,396   $ 24,496   $ 24,621  

Finance receivables charged-off

    (34,534 )   (28,865 )   (26,223 )

Less recoveries

    3,521     4,199     3,665  
               

Net charge-offs

    (31,013 )   (24,666 )   (22,558 )

Provision for credit losses

    34,617     25,566     22,433  
               

Balance, end of period

  $ 29,000   $ 25,396   $ 24,496  
               

Nonperforming Assets

        The accrual of interest income is suspended when a full payment has not been received for 90 days or more, on a recency basis, and the interest due exceeds an amount equal to 60 days of interest charges. The accrual is resumed when a full payment (95% or more of the contracted payment amount) is received. Non-performing assets represent those finance receivables on which both the accrual of interest income has been suspended and for which no full payment of principal or interest has been received for more than 90 days. Non-performing assets increased to $11.3 million at September 30, 2012 from $8.7 million at September 30, 2011.

Loan Acquisition / Origination

        Asset growth is an important factor in determining our future revenues. We are dependent upon CBD and retail merchants to increase their originations for our future growth. In connection with purchasing the loans, we pay CBD a fee in the amount of $30.00 for each military consumer loan

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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. For fiscal 2012, loans purchased from CBD and retail merchants decreased to $423.8 million from $456.5 million in fiscal 2011, a decrease of $32.7 million or 7.2%. The primary reason for this decrease is due to lower than expected demand for military loans. Demand has been impacted by the fragile state of the United States economic recovery and uncertainty amongst our military customers regarding the future size of the United States military.

        The following table sets forth the three-year history of overall loan acquisitions / originations and lending activities:

 
  For the Year Ended September 30,  
 
  2012   2011   2010  
 
  (dollars in thousands, except average
note balance)

 

Total loans acquired/originated:

                   

Gross balance

  $ 423,764   $ 456,476   $ 419,098  

Number of finance receivable notes

    120,931     129,899     126,141  

Average note amount

  $ 3,504   $ 3,514   $ 3,322  

Military loans:

                   

Gross balance

  $ 398,286   $ 425,588   $ 379,702  

Number of finance receivable notes

    109,218     116,834     110,913  

Average note amount

  $ 3,647   $ 3,643   $ 3,423  

Retail installment contracts:

                   

Gross balance

  $ 25,478   $ 30,888   $ 39,396  

Number of finance receivable notes

    11,713     13,065     15,228  

Average note amount

  $ 2,175   $ 2,364   $ 2,587  

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 operations, and the cash generated from loan repayments and operations. Cash used in investing activities in fiscal 2012 was approximately $36.6 million and cash used in financing activities was $10.2 million which was funded from operating activities of $47.6 million. Cash used in investing activities in fiscal 2011 was approximately $27.9 million and cash used in financing activities was $20.6 million which was funded from $47.8 million of cash from operating activities.

        The majority of our liquidity requirements are secured by our funding through the SSLA. Additional sources of funds are generated through our sales of investment notes and borrowings with MCFC. We increased our liquidity position in fiscal 2012 with additional senior funding of $29.5 million under the SSLA. In addition, we must repay borrowings of $16.5 million from withdrawing banks who previously participated in the SSLA. Further, we have increased our investment notes to $67.4 million in 2012 from $59.7 million in 2011, an increase of $7.7 million or 12.9%. During 2011, we repaid $13.9 million in subordinated borrowings from MCFC. As of September 30, 2012, the outstanding balance on the MCFC debt was zero. This increase in available funds has offset the diminished capacity from our withdrawing banks and provided us with additional liquidity in fiscal 2012, allowing us the liquidity necessary to grow our finance receivables. We plan to continue to attract new banks to the SSLA and sell additional investment notes to fund our growth in fiscal 2013.

        As required under the Dodd-Frank Act, the Federal Reserve, the OCC and the CFPB have begun their examinations of banks, holding companies and their non-banking affiliates. In connection with

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these examinations, these regulators have begun identifying areas in which lenders could improve disclosure to borrowers in connection with charging fees and offering financial products. We are working diligently to institute best practices and to improve clarity and transparency to our customers. If CBD failed to satisfy the regulator's interpretation of these laws and regulations with respect to its historical practices, it could result in civil money penalties, a requirement that CBD refund significant fees to its customers, damage to CBD's reputation or CBD's ability to originate loans. The amount of these penalties or refunds, and other of these consequences, could have a material adverse impact on CBD's and our financial condition, business and results of operations.

    Senior Indebtedness-Bank Debt.

        On June 12, 2009, we entered into the SSLA with the lenders listed in the SSLA ("the lenders") and UMB Bank, N.A. (the "Agent"). The SSLA replaces and supersedes the Senior Lending Agreement, dated as of June 9, 1993, as subsequently amended and restated (the "SLA"). 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. Our assets secure the loans extended under the SSLA for the benefit of the lenders and other holders of the notes issued pursuant to the SSLA or the SLA (the "Senior Debt"). The facility is an uncommitted facility that provides common terms and conditions pursuant to which the 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. As of September 30, 2012, we could request up to $102.7 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 September 30, 2012, the lenders have indicated a willingness to participate in fundings up to an aggregate of $342.3 million during the next 12 months, including $205.7 million which is currently outstanding. In addition, we have borrowings of $16.5 million which need to be repaid from withdrawing banks who had previously participated in the SLA.

        The aggregate notional balance outstanding under amortizing notes was $186.2 million and $214.5 million at September 30, 2012 and 2011, respectively. Interest on the amortizing notes is fixed at 270 basis points over the 90-day moving average of like-term treasury notes when issued. The interest rate for notes created after June 12, 2009 may not be less than 6.25%; prior to June 12, 2009 the interest rate was variable. All amortizing notes have terms not to exceed 48 months, payable in equal monthly principal and interest payments. There were 374 and 370 amortizing term notes outstanding at September 30, 2012 and 2011, respectively, with a weighted-average interest rate of 6.25% and 6.19%, respectively. In addition, we are paying our lenders a quarterly uncommitted availability fee in an amount equal to ten basis points multiplied by the quarterly average aggregate outstanding principal amount of all amortizing notes held by the lenders. We paid our lenders $0.5 million in uncommitted availability fees for both fiscal 2012 and 2011.

        Advances outstanding under the revolving credit line were $19.5 million and zero at September 30, 2012 and 2011, respectively. 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 5.00%, whichever is greater. Interest on borrowings was 5.00% at September 30, 2012 and 2011.

        Substantially all of our assets secure this debt under the SSLA. The SSLA also limits, among other things, our ability to (1) incur additional debt from the lenders beyond that allowed by specific financial ratios and tests, (2) borrow or incur other additional debt except as permitted in the SSLA, (3) pledge assets, (4) pay dividends, (5) consummate certain asset sales and dispositions, (6) merge, consolidate or enter into a business combination with any other person, (7) pay fees to MCFC each year except as

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provided in the SSLA, (8) purchase, redeem, retire or otherwise acquire any of our outstanding equity interests, (9) issue additional equity interests, (10) guarantee the debt of others without reasonable compensation and only in the ordinary course of business or (11) enter into agreements with our affiliates.

        Under the SSLA, we are subject to certain financial covenants that require that we, among other things, maintain specific financial ratios and satisfy certain financial tests. In part, these covenants require us to: (1) maintain an allowance for credit losses equal to or greater than the allowance for credit losses shown on our audited financial statements as of the end of our most recent fiscal year and at no time less than 5.25% of our consolidated net receivables, unless otherwise required by GAAP, (2) limit our senior indebtedness as of the end of each quarter to not greater than four times our tangible net worth, (3) maintain a positive net income in each fiscal year, (4) limit our senior indebtedness as of the end of each quarter to not greater than 80% of our consolidated receivables, and (5) maintain a consolidated total required capital of at least $75 million plus 50% of the cumulative positive net income earned by us during each of our fiscal years ending after September 30, 2008, which is approximately $104.5 million as of September 30, 2012. Any part of the 50% of positive net income not distributed by us as a dividend for any fiscal year within 120 days after the last day of such fiscal year must be added to our consolidated total required capital and may not be distributed as a dividend or otherwise. No part of the consolidated total required may be distributed as a dividend.

        We may not make any payment to MCFC in any fiscal year for services performed or reasonable expenses incurred in an aggregate amount greater than $750,000 plus reimbursable expenses. Such amount may be increased on each anniversary of the SSLA by the percentage increase in the CPI published by the United States Bureau of Labor for the calendar year than most recently ended. The breach of any of these covenants could result in a default under the SSLA, in which event the lenders could seek to declare all amounts outstanding to be immediately due and payable. As of September 30, 2012, we were in compliance with all loan covenants.

        Once an event of default has occurred, the Agent has the right, on behalf of all holders of the Senior Debt, to immediately take possession and control of the collateral. When the Agent notifies us of an event of default, the interest rate on all Senior Debt will automatically increase to a default rate equal to 2% above the interest rate otherwise payable on such Senior Debt. The default rate will remain in effect so long as any event of default has not been cured.

        In connection with the execution of the SSLA, MCFC entered into an Unlimited Continuing Guaranty. MCFC guaranteed the Senior Debt and accrued interest in accordance with the terms of the Unlimited Continuing Guaranty. Under the Unlimited Continuing Guaranty, MCFC also agreed to indemnify the lenders and the Agent for all reasonable costs and expenses (including reasonable fees of counsel) incurred by the lenders or the Agent for payments made under the Senior Debt that are rescinded or must be repaid by lenders to us. If MCFC is required to satisfy any of borrowers' obligations under the Senior Debt, the lenders and the Agent will assign without recourse the related Senior Debt to MCFC.

        Concurrently, in connection with the execution of the SSLA, MCFC entered into a Negative Pledge Agreement in favor of the Agent. Under the Negative Pledge Agreement, MCFC represented that it will not pledge, sell, assign or transfer its ownership of all or any part of the issued and outstanding capital stock of PFS and will not otherwise or further encumber any of such capital stock beyond the currently existing negative pledge thereof in favor of Branch Banking and Trust Company, a North Carolina banking corporation headquartered in Winston-Salem, North Carolina ("BB&T"). Once the pledge of the capital stock of PFS to BB&T is terminated, MCFC will pledge all of its capital stock in PFS to the Agent for the benefit of the lenders to secure payment of all Senior Debt.

        In the third quarter of fiscal 2010, we amended the SSLA to allow additional banks to become parties to the SSLA under a modified non-voting role. We have identified each lender that has voting

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rights under the SSLA as "voting bank(s)" and lenders that do not have voting rights under the SSLA, as "non-voting bank(s)". While all voting and non-voting banks have the same rights to the collateral and are 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 hinder any action by us, or the voting banks. As of September 30, 2012, we had 25 non-voting banks from which we initially borrowed $47.5 million compared to 22 non-voting banks and initial borrowings of $44.5 as of September 30, 2011. The amortized balance of these notes as of September 30, 2012 and 2011 was $28.8 million and $36.8 million, respectively.

        The following table sets forth a three-year history of the total borrowings and availability under the SSLA and the former Senior Lending Agreement:

 
  As of and for the Years Ended September 30,  
 
  September 30,
2012
  Actual
September 30,
2011
  Pro forma(1)
September 30,
2011
  September 30,
2010
 
 
  (dollars in thousands)
 

Revolving credit line:

                         

Total facility

  $ 45,250   $ 40,000   $ 40,000   $ 30,500  

Balance at end of period

    19,450         14,100     21,373  

Maximum available credit(2)

    25,800     40,000     25,900     9,127  

Term notes(3):

                         

Voting banks

  $ 251,750   $ 227,500   $ 227,500   $ 183,000  

Withdrawing banks

    16,500     14,852     14,852     34,314  

Non-voting banks

    28,785     36,823     36,823     19,391  
                   

Total facility

  $ 297,035   $ 279,175   $ 279,175   $ 236,705  

Balance at end of period

    186,231     214,491     214,491     210,668  

Maximum available credit(2)

    110,804     64,684     64,684     26,037  

Total revolving and term notes(3):

                         

Voting banks

  $ 297,000   $ 267,500   $ 267,500   $ 213,500  

Withdrawing banks

    16,500     14,852     14,852     34,314  

Non-voting banks

    28,785     36,823     36,823     19,391  
                   

Total facility

  $ 342,285   $ 319,175   $ 319,175   $ 267,205  

Balance at end of period

    205,681     214,491     228,591     232,041  

Maximum available credit(2)

    102,715     102,714     90,584     35,164  

Credit facility available(4)

    136,604     104,684     90,584     35,164  

Percent utilization of voting banks

    65.42 %   61.60 %   66.14 %   83.53 %

Percent utilization of the total facility

    60.09 %   67.20 %   71.62 %   86.84 %

(1)
Total facility pro forma assumes the early allotment payments received September 30, 2011 were not received until due on October 1, 2011.

(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 available is based on the existing asset borrowing base and maintaining a senior indebtedness to consolidated net notes receivable ratio of not more than 80%. Does not include withdrawing banks.

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        Subordinated Debt—Parent.    Our SSLA allows for a revolving line of credit with MCFC. Funding on this line of credit is provided as needed at our discretion and dependent upon the availability of MCFC and is due upon demand. The maximum principal balance on this facility is $25.0 million. Interest is payable monthly and is based on prime or 5.0%, whichever is greater. As of September 30, 2012 and 2011, the outstanding balance under this facility was zero.

        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. On January 6, 2012, the Securities and Exchange Commission ("SEC") declared effective our post-effective amendment to our amended registration statement originally filed with the SEC in January 2010 (File No. 333-164109) ("2012 Registration Statement"). Pursuant to this 2012 Registration Statement, along with the accompanying prospectus, we registered an offering of our investment notes, with a maximum offering price of $50 million, on a continuous basis with an expected termination date of January 28, 2013. If declared effective by the SEC, this 2013 post-effective amendment will result in a new offering termination date of January 28, 2014, unless terminated earlier at our discretion.

        As of September 30, 2012, we had outstanding $67.4 million (with accrued interest), of which $24.0 million is from our recent offering. These notes had a weighted average interest rate of 9.06% as of September 30, 2012.

        Dividends From Subsidiaries.    Our reinsurance subsidiary is subject to the laws and regulations of the state of Nevada that limit the amount of dividends our reinsurance subsidiary can pay to us and require us to maintain a certain capital structure. In the past, these regulations have not had a material impact on our reinsurance subsidiary or its ability to pay dividends to us. We do not expect these regulations will have a material impact on our business or the business of our reinsurance subsidiary in the future.

        Commitments for Capital Expenditures.    To further enhance our information technology capabilities, we have engaged a third party to provide assistance with the evaluation of our existing Daybreak lending system, which may ultimately result in the conversion to a new lending system. The system evaluation commenced in April 2012, with future capital expenditures expected throughout fiscal year 2013.

Impact of Inflation and General Economic Conditions

        Although inflation has not had a material adverse effect on our financial condition or results of operations, increases in the inflation rate generally are associated with increased interest rates. A significant and sustained increase in interest rates could unfavorably impact our profitability by reducing the interest rate spread between the rate of interest we receive on military loans and retail installment contracts and interest rates paid under our SSLA and investment notes. Inflation also may negatively affect our operating expenses. With the ongoing strains in the financial markets, we see liquidity, capital and earnings challenges for some lenders in our credit group which may reduce their ability to participate in the credit or may cause a decrease in their willingness to lend at the current levels. In addition, we have borrowings of $16.5 million from withdrawing banks who previously participated in the SSLA. See "Liquidity and Capital Resources."

Critical Accounting Policies

        General.    Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the finance company industry. The significant accounting policies used in the preparation of the consolidated financial statements are discussed in Note 1 to the Consolidated Financial Statements. Critical accounting policies require management to make estimates and

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assumptions, which affect the reported amounts of assets, liabilities, income and expenses. As a result, changes in these estimates and assumptions could significantly affect our financial position and results of operations.

        Allowance for Credit Losses and Provision for Credit Losses.    We consider our policy regarding the allowance and resulting provision for credit losses to be our most important accounting policy due to the significant degree of management judgment applied in establishing the allowance and the provision.

        We utilize a statistical model which incorporates historical factors to forecast probable losses or credit risk trends to determine the appropriate amount of allowance for credit losses.

        We evaluate the finance receivable portfolio quarterly. Our portfolio consists of a large number of relatively small, homogenous accounts. No account is large enough to warrant individual evaluation for impairment. We consider numerous qualitative and quantitative factors in estimating losses in our finance receivable 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.

        We also use several ratios to aid in the process of evaluating prior finance receivable loss and delinquency experience. Each ratio is useful, but each has its limitations. These ratios include:

    Delinquency ratio—finance receivables 60 days or more past due, on a recency basis, as a percentage of finance receivables;

    Allowance ratio—allowance for finance receivable losses as a percentage of finance receivables;

    Charge-off ratio—net charge-offs as a percentage of the average of finance receivables at the beginning of each month during the period; and

    Charge-off coverage—allowance for finance receivable losses to net charge-offs.

        In addition to these models, we exercise our judgment, based on our experience in the consumer finance industry, when determining the amount of the allowance for credit losses. We consider this estimate to be a critical accounting estimate that affects our net income in total and the pretax operating income of our business. See "Credit Loss Experience and Provision for Credit Losses."

        Goodwill and Other Intangible Assets.    Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as acquisitions. Other intangible assets represent other identifiable assets. Goodwill is not amortized over an estimated useful life, but rather tested at least annually for impairment. Intangible assets other than goodwill, which are determined to have finite lives, continue to be amortized on straight-line or accelerated bases over their estimated useful lives. Recoverability of these assets is assessed only when events have occurred that may give rise to impairment.

        The provisions of Accounting Standard Codification ("ASC") 350 require that a two-step impairment test be performed on goodwill. We have one reporting unit. In the first step, we compare the fair value of our reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to the reporting unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If upon completing the second step of the impairment test the carrying value of a reporting unit's

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goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

        The fair value of our reporting unit was determined using the income approach and the market approach. The income approach is a valuation technique whereby we calculate the fair value the reporting unit based on the present value of estimated future cash flows, which are formed by evaluating historical trends, current budgets, operating plans and industry data. The market approach is a valuation technique whereby we calculate the fair value the reporting unit by comparing it to publicly traded companies in similar lines of business or to comparable transactions or assets.

        Management evaluated our goodwill at September 30, 2012, and determined that there was no impairment, as the estimated fair value substantially exceeded the carrying value.

Contractual Obligations

        We have the following payment obligations under current financing arrangements as of September 30, 2012:

 
   
  Payments Due By Period  
 
  Total   Less than
1 year
  1 - 3 years   4 - 5 years   After 5 years  

Contractual obligations:

                               

Debt

  $ 253,368   $ 89,577   $ 145,115   $ 4,899   $ 13,777  

Interest on Debt(1)

    18,102     5,932     10,372     472     1,326  
                       

Total contractual cash obligations

  $ 271,470   $ 95,509   $ 155,487   $ 5,371   $ 15,103  
                       

(1)
Interest on long term debt is calculated using the weighted average interest rate of 6.25% for amortizing term notes and 9.06% for investment notes as of September 30, 2012.

 
   
  Amount of Commitment Expiration Per Period  
 
  Total Amounts
Committed
  Less than
1 year
  1 - 3 years   4 - 5 years   Over 5 years  

Other commercial commitments:

                               

Lines of credit

  $ 19,450   $ 19,450   $   $   $  

Interest on lines of credit(1)

    973     973                    
                       

Total lines of credit

  $ 20,423   $ 20,423   $   $   $  
                       

(1)
Interest on lines of credit is calculated using the fixed rate of 5.00% as of September 30, 2012.

Impact of New and Emerging Accounting Pronouncements Not Yet Adopted

        In December 2011, the Financial Accounting Standards Board ("FASB") issued the FASB ASU 2011-11 "Balance Sheet disclosures about Offsetting Assets and Liabilities". The update requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare financial statements on the basis of U.S. Generally Accepted Accounting Principals ("U.S. GAAP") and those entities that prepare the financial statements on the basis of IFRS. The amended guidance is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. We are currently evaluating the impact this update will have on our consolidated financial statements.

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        In July 2012, the FASB issued ASU 2012-02, which provides entities an option to perform a qualitative assessment to determine whether further impairment testing on indefinite-lived intangible assets is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. We believe that the adoption of this guidance will not have a material impact on our financial condition or results of operations.


BUSINESS

General

        Pioneer Financial Services, Inc. ("PFS") is a wholly owned subsidiary of MidCountry Financial Corp., a Georgia corporation ("MCFC"). PFS, with its wholly owned subsidiaries (collectively "we," "us," "our" or the "Company"), purchases consumer loans and retail installment contracts, on a worldwide basis, made exclusively to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. We plan to hold these consumer loans and retail installment contracts until repaid.

        We purchase consumer loans and retail installment contracts primarily from two different sources. Our largest source of consumer loans is the Consumer Banking Division ("CBD") (formerly known as the Military Banking Division and Pioneer Military Lending Division) of MidCountry Bank ("MCB"), a federally chartered savings bank and wholly owned subsidiary of our parent, MCFC. CBD originates these consumer loans through a network of loan production offices and via the Internet. Military customers use loan proceeds to purchase consumer goods and services. 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 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.

        As of January 9, 2013, Thomas H. Holcom, Jr., Chairman of the Board of Directors (the "Board") and Chief Executive Officer, Laura V. Stack, Chief Financial Officer and Joseph B. Freeman, President and Chief Operating Officer were our executive officers and are responsible for our policy-making decisions. None of these officers are compensated by us. Each of these officers (other than Mr. Holcom) is an employee of CBD. Mr. Holcom is employed by MCFC. CBD and MCFC provide compensation and remuneration for services to these executive officers and all the employees of CBD. We pay fees to CBD and MCFC for management and record keeping services.

Lending and Servicing Operations

    Primary Supplier of Loans

        We have retained CBD as a primary supplier of loans. We entered into a Loan Sale and Master Services Agreement ("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

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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 "Risk Factors."

    Loan Purchasing

        Generally.    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 majority of finance receivables we own are for amounts under $3,500, repayable in equal monthly installments and have terms no longer than 48 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

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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 29.0% of military loans we purchased in fiscal 2012 were refinanced loans.

        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 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. Military loans typically have maximum terms of 48 months and an average origination amount of approximately $3,600.

        Retail Installment Contracts.    We purchase retail installment contracts that meet our quality standards and return on investment objectives from approximately 300 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 and an average origination amount of approximately $2,200.

    Management and Record Keeping Services

        CBD provides management and record keeping services in accordance with the LSMS Agreement. For these management and record keeping 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 may be adjusted annually on the basis of the annual increase or decrease in the Consumer Price Index ("CPI"). Also, as part of its compensation for performing these management and record keeping services, CBD retains ancillary revenue, including late charges and insufficient fund 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 CPI.

        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 ("Daybreak") 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.

Credit Loss Experience

        We closely monitor portfolio delinquency and loss rates in measuring the quality of our portfolio and the potential for ultimate credit losses. We attempt to control customer delinquencies through careful evaluation of the loans we purchase and credit history at the time the loan is originated and we continue this evaluation during the time CBD services the loan, including through collection efforts after charge-off has occurred.

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Debt Protection Product

        In June of 2010, CBD began offering a debt protection product to customers. This product replaced the credit insurance products previously offered to customers. If our customers are killed, injured, divorced, unexpectedly discharged or have not received their pay, we will have payment obligations. The liability we establish for possible claims related to debt protection operations and the corresponding charges to noninterest income, net to maintain this amount are evaluated annually. See "Management Discussion and Analysis of Financial Condition and Results of Operations—Sources of Income—Non- interest income, net."

Reinsurance Operations

        Prior to June 2010, one of our subsidiaries reinsured substantially all of the credit life, credit accident and health insurance policies sold by CBD on behalf of Assurant Group, an unaffiliated insurance carrier. This line of business provided us with an additional source of income from the earned reinsurance premiums. If a customer is killed, injured or becomes ill, including during war, our subsidiary will have payment obligations. The liability we may have for possible losses related to our reinsurance operations and the corresponding charges to our income to maintain this amount are immaterial to our overall business. See "Management Discussion and Analysis of Financial Condition and Results of Operations—Sources of Income—Non- interest income, net." In June 2010, CBD ceased selling reinsurance products.

Regulation

    General

        CBD and retail merchants who originate military loans and retail installment contracts are subject to extensive regulation, supervision and licensing by the Office of the Comptroller of the Currency ("OCC"), Board of Governors of the Federal Reserve System (the "Federal Reserve") and other state and federal agencies. Failure to comply with these requirements can lead to, among other sanctions, termination or suspension of licenses, consumer litigation and administrative enforcement actions. If CBD cannot make loans or dealers are unable to finance active-duty or career retired U.S. military personnel and U.S. Department of Defense employees, this will have a material adverse impact on our business, results of operations and cash flow. See "Risk Factors."

    Financial Reform Regulations

        The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010 and many provisions became effective on July 21, 2011. This financial reform law has changed the current bank regulatory environment and has affected the lending, deposit, investment, trading and operating activities of financial and depositary institutions and their holding companies and affiliates. See "Risk Factors."

    Reinsurance Regulations

        Our reinsurance subsidiary is subject to laws and regulations of the insurance authorities in the State of Nevada. These regulations cover such matters as its capitalization, reserve requirements, affiliate transactions, and permitted investments. They also place restrictions on the amount of dividends that the reinsurance subsidiary can pay to us and requires us to maintain a certain capital structure. As of September 30, 2012, the reinsurance subsidiary had the ability to pay us up to $4.3 million in dividends pursuant to these laws and regulations.

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    Other Regulations

        Once we purchase finance receivables, we are obligated to comply with the Gramm-Leach-Bliley Act (the "GLB Act"), which was signed into law at the end of 1999 and contains comprehensive consumer financial privacy restrictions. Various federal enforcement agencies, including the Federal Trade Commission ("FTC"), have issued final regulations to implement the GLB Act. These restrictions fall into two basic categories. First, we must provide various notices to customers about privacy policies and practices. Second, the GLB Act restricts us from disclosing non-public personal information about the customer to non-affiliated third parties, with certain exceptions. If we violate this law, regulators may require us to discontinue disclosing information improperly and, in certain circumstances, customers may have a private right of action if such disclosure is made without the consent of the customer. We are also subject to federal and state securities and disclosure laws and regulations.

    Compliance

        We have procedures and controls in place to monitor compliance with numerous federal and state laws and regulations and believe we are in compliance with such laws and regulations. However, because these laws and regulations are complex and often subject to interpretation, or because of a result of unintended errors, we may, from time to time, inadvertently violate these laws and regulations. If more restrictive laws, rules and regulations are enacted or more restrictive judicial and administrative interpretations of those laws are issued, compliance with the laws could become more expensive or difficult. Furthermore, changes in these laws and regulations could require changes in the way we conduct our business, and we cannot predict the impact such changes would have on our profitability, if at all.

        CBD and the retail merchants who originate military loans and retail installment contracts purchased by us also must comply with both state and federal credit and trade practice statutes and regulations. If retail merchants fail to comply with these statutes and regulations, consumers may have rights of rescission and other remedies. In such cases, we have rights under our agreements with these merchants to require the merchant to repurchase the related retail installment contracts and to pay us for any damages we may incur or litigation costs, including attorney's fees and costs. However, if we are unable to enforce our agreement with the merchant, resulting consumer recession rights and remedies could have an adverse effect on our business, results of operation, financial condition and cash flow.

Competition

        We, along with our primary vendor, CBD, compete with independent finance companies, banks, thrift institutions, credit unions, credit card issuers, leasing companies, manufacturers, and vendors. Among our competitors are larger consumer finance companies that operate on a nationwide basis, as well as numerous regional and local consumer finance companies. We are also in direct competition with some companies that, like us, exclusively market products to military personnel. Some of these competitors are large companies that have greater capital, technological resources, and marketing resources than us. These competitors may also have access to additional capital at a lower cost.

        Competition also varies by delivery system and geographic region. For example, some competitors deliver their services exclusively via the Internet, while others exclusively through a branch network. CBD distributes its products using both delivery channels. In addition, CBD competes with other banks and consumer finance companies on the basis of overall pricing of loans, including interest rates and fees, and general convenience of obtaining the loan, including the proximity of its loan production offices to military bases.

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Employee Relations

        CBD employees perform services for us and we pay management and record keeping services fees to CBD. We had no employees as of September 30, 2012. We do engage certain consultants on a contract basis.

Properties

        As of September 30, 2012, we did not own or lease any real property.

Legal Proceedings

        We are subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on our financial position or results of operations.

Mine Safety Disclosures

        Not applicable.

Availability of Reports, Certain Committee Charters and Other Information

        We make our Securities and Exchange Commission ("SEC") public filings available on our website, www.investpioneer.com. We have this information available in an extensible business reporting language ("XBRL").

        The SEC maintains an internet site at www.sec.gov that contains reports and other information regarding us. We will also provide printed copies of all our SEC filings to any investors upon request to Pioneer Financial Services, Inc., 4700 Belleview Ave, Suite 300, Kansas City, Missouri 64112, Attention: Investments.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers

        The following table sets forth information regarding directors and executive officers as of January 9, 2013:

Name
  Age   Position

Thomas H. Holcom, Jr. 

    66   Chief Executive Officer and Chairman

Laura V. Stack

    50   Chief Financial Officer, Treasurer, Asst. Secretary and Director

Joseph B. Freeman

    42   President, Chief Operating Officer and Director

Robert F. Hatcher

    71   Director

        For each member of our executive team and our Board, we set forth below information regarding such member's business experience and the specific experience, qualifications, attributes and/or skills which, in the opinion of our Board, qualifies this person to serve as a director and are likely to enhance our Board's ability to manage and direct our business and affairs. The information in this section should not be understood to mean that any of the directors is an "expert" within the meaning of the federal securities laws.

        Since June 2007, Thomas H. Holcom, Jr. has served as our Chief Executive Officer, and as of December 2011, he became the chairman of our Board. Mr. Holcom joined us in 1985 when he became our Chief Financial Officer. He was named Chief Operating Officer in September 2000 and promoted to Chief Executive Officer in May 2007. Prior to joining us, Mr. Holcom spent 19 years with

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a regional bank with assets over $1 billion and rose to the level of Executive Vice President. His career has encompassed strategic planning, corporate finance, consulting, investments, risk management and marketing. He serves in leadership positions on the boards of numerous professional and civic organizations. As such, Mr. Holcom has a deep knowledge and understanding of the industry and market in which we operate, our goals and objectives and related strategies to achieve such goals and objectives, and the financial concerns and challenges we face and he has significant experience in the management and operations of finance companies.

        Since June 2007, Laura V. Stack has served as our Chief Financial Officer, Treasurer and Asst. Secretary. She has been a member of the Board since January 12, 2010 and a member of our audit committee and the audit committee financial expert since December 2010. Prior to December 2010, Ms. Stack was our Director of Corporate Finance and previously held the position of Controller. Ms. Stack joined us in 1999, after serving as Vice President for a financial services firm with responsibilities for accounting, cash management, financial/regulatory reporting, consolidating-corporation budget and auditing. Ms. Stack serves on the board of directors for the charitable organization, Friends of Alvin Ailey. Ms. Stack has accounting experience and knowledge about public companies, the concerns and challenges faced in our industry, our regulatory environment and significant experience in financial reporting of finance companies to the SEC and our lenders.

        Joseph B. Freeman is our President and Chief Operating Officer. He was named to that position in 2010, succeeding Mr. Holcom. He also became the Chief Operating Officer, succeeding Mr. Holcom, in July 2007 when Mr. Holcom became Chief Executive Officer in connection with the Transaction. Prior to that Mr. Freeman held the dual role of Chief Strategy Officer and Chief Lending Officer. Since 2010, Mr. Freeman has served on the Board and our audit committee. He joined us in 2002 after serving as President of a successful Internet Marketing Company that helped clients align their marketing efforts with operations, ROI initiatives and strategic objectives. Mr. Freeman has considerable business experience in accounting, operations, consulting, and marketing. His community and philanthropic activities span a wide breadth of Kansas City organizations and universities. As such, Mr. Freeman has management and operational oversight experience of finance companies. As a former manager for Deloitte & Touche LLP, our independent registered accounting firm, he has accounting experience for public companies and understands the regulatory environment in which we operate.

        Robert F. Hatcher has served as a member of our Board since January 2010. Mr. Hatcher has served as President and Chief Executive Officer of MCFC since its inception in 2002. Mr. Hatcher was the President of First Liberty Bank from 1988 until 1990 and President and Chief Executive Officer of that bank and its parent, First Liberty Financial Corp., from 1990 until its merger with BB&T in 1999. Prior to joining First Liberty, Mr. Hatcher served in various positions with Trust Company Bank (now SunTrust) for 27 years. He has been a director of MCFC since 2002. Mr. Hatcher has management and financial experience as a chief executive officer of a financial services company. He also has oversight and corporate governance experience as a current member and former chairman of the Board of Regents of the University System of Georgia and a current and former director of various corporate and nonprofit entities.

Director Compensation, Composition and Committees

        We have no outside directors and do not pay separate compensation for serving as a director.

        We are a wholly-owned subsidiary of MCFC. In view of this, the small size of our Board and that we do not have publicly traded equity securities that would be subject to exchange listing requirements, we do not have a separate standing nominating committee or compensation committee. The functions which are normally performed by those committees are performed by our Board as a whole. Our Board has formed an audit committee, consisting of two members of our Board, Laura V. Stack and Joseph B. Freeman. Ms. Stack has been appointed the chair of the audit committee and is an audit committee

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expert. The designation of a person as an "audit committee financial expert", within the meaning of the rules under Section 407 of the Sarbanes-Oxley Act of 2002, shall not impose any greater responsibility or liability on that person than the responsibility and liability imposed on such person as a member of the audit committee, nor shall it decrease the duties and obligations of other audit committee members or the Board. The audit committee does not have a separate charter. In recognition of the expertise and experience of the audit committee of MCFC, our audit committee relies and expects to continue to rely heavily on MCFC's audit committee in fulfilling the functions of an audit committee. Our executive officers and directors are subject to our Code of Ethics, a copy of which may be obtained at no charge from us upon written request.


COMPENSATION, DISCUSSION AND ANALYSIS

        This compensation discussion and analysis ("CD&A") describes the material elements of compensation awarded to, earned by, or paid to each of our Principal Executive Officer (referred to in this CD&A as our "Chief Executive Officer"), Principal Financial Officer (referred to in this CD&A as our "Chief Financial Officer") and other executive officers for all services rendered by these officers in all capacities to us. During the last completed fiscal year, our named executive officers and other executive officers have been employed by CBD. Our Chief Executive Officer is now employed by MCFC. In fiscal 2012, the Chief Executive Officer provided less than 50% of his services to us. However, due to a realignment of management responsibilities, it is expected that during fiscal 2013, our Chief Executive Officer will provide a greater proportion of his services to us. The Chief Financial Officer provides over 50% of her services to us. The other executive officers provide less than 50% of their services to us. Other than our Chief Executive Officer, Chief Financial Officer, and President and Chief Operating Officer, none of our executive officers earned or were paid or awarded compensation equal to or greater than $100,000 for services provided to us in any capacity. As disclosed under "Management Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations," we pay CBD and MCFC various fees for services provided to us. All compensation for the named and other executive officers, except the Chief Financial Officer, is paid by CBD or MCFC and reviewed by the Compensation Committee of the Board of Directors of MCFC. For fiscal 2012, the compensation of the Chief Financial Officer was reviewed by the Chief Executive Officer of the Company. For fiscal 2013, the Company expects that the Compensation Committee of MCFC will review the compensation of the named and other executive officers, including the Chief Financial Officer.

        The purpose of this analysis is to summarize the philosophical principles, specific program elements and other factors considered in making decisions about executive compensation. Our compensation discussion and analysis primarily focuses on the compensation information for the last completed fiscal year, as contained in the tables, related footnotes and other narrative descriptions which follow this discussion, but we also describe compensation actions taken before or after the last completed fiscal year to the extent it enhances the understanding of our executive compensation disclosure.

MCFC Compensation Committee's Responsibilities

        The Board of Directors of MCFC (the "MCFC Board") established the MCFC Board Compensation Committee (the "Committee") that is responsible for oversight of MCFC's executive compensation program, including stock grants, to ensure that CBD and MCFC provide the appropriate motivation to retain key executives and employees and achieve superior corporate performance and stockholder value. The Committee is responsible for all matters dealing with executive officers' and director's compensation including: annual incentive plans, employment contracts for executive officers and restricted stock unit awards for eligible employees.

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        The Committee is composed of three MCFC Board directors and meets approximately four times per year. Reports of the Committee's actions and recommendations are presented to the full MCFC Board after each meeting. In May 2012, the Committee engaged Blanchard Consulting Group ("Blanchard"), an independent executive compensation consultant, to advise it on compensation practices for executive officers based on information provided to Blanchard by MCFC's management and Blanchard's independent research. Blanchard completed a formal executive compensation review ("Blanchard Report") and presented this to the Committee in September 2012. A formal review of executive compensation is completed every two years by an independent executive compensation consultant.

Compensation Philosophy

        MCFC is a privately held company and its primary concerns are improving shareholder value for its shareholders and meeting our obligations to our investment note holders. Accordingly, the guiding compensation philosophy of the Committee is to establish a compensation program that will enable the attraction, development, and retention of key executives and employees who are motivated to achieve excellent corporate performance, strong results of operations and cash flows and sustained long-term shareholder value. Furthermore, the pay practices we have in place do not encourage employees to take inappropriate or excessive risks that would be potentially detrimental to our financial or operating results, our cash flow, our profits and the interests of our investment note holders.

Program Elements

        Our executive compensation program is composed of base salary, annual incentive compensation and long-term incentive compensation. The following table outlines the total compensation earned by, and awarded to, our named executive officers for services provided to us in any capacity.


Summary Compensation Table

Name and Principal Position
  Year   Salary   Annual
Incentive(1)
  Restricted
Stock Awards
  All Other
Compensation
  Total Annual
Compensation
 

Thomas H. Holcom Jr.

                                     

Chief Executive Officer

    2012   $ 70,654   $ 9,564   $ 10,312   $ 6,200   $ 96,729  

President and Chief Executive Officer

    2011   $ 65,923   $ 48,834   $ 11,682   $ 6,457   $ 132,895  

President and Chief Executive Officer

    2010   $ 76,731   $ 64,479   $ 14,768   $ 7,228   $ 163,205  

Laura V. Stack

                                     

Chief Financial Officer

    2012   $ 88,972   $   $ 3,085   $ 7,962   $ 100,018  

Chief Financial Officer

    2011   $ 85,217   $ 49,009   $   $ 8,020   $ 142,246  

Chief Financial Officer

    2010   $ 82,023   $ 49,214   $   $ 7,972   $ 139,209  

Joseph B. Freeman

                                     

President and Chief Operating Officer

    2012   $ 64,385   $ 4,643   $ 4,492   $ 5,521   $ 79,040  

Chief Operating Officer

    2011   $ 58,950   $ 38,401   $ 3,704   $ 5,524   $ 106,579  

Chief Operating Officer

    2010   $ 46,177   $ 34,628   $ 3,608   $ 3,917   $ 88,330  

(1)
Annual incentives earned are paid primarily in the subsequent fiscal year.

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Base Salary

        Base salaries are determined after considering an individual's responsibilities, experience and overall job performance. The Committee reviewed the competitiveness of base compensation as compared to market published survey data and a third party peer group in the Blanchard Report. Base salaries are targeted at the midpoint to seventy-fifth percentile of the market based on job experience and as compared to similar positions in markets where we compete for talent.

        The third party peer group of companies consists of:

Company Name
  Ticker   Total Assets
2011Y
($000)
  Market Cap
2011Y
($M)
  ROAA
2011Y
(%)
  ROAE
2011Y
(%)
  Net Interest
Margin
2011Y
(%)
 
 

1

 

Home BancShares, Inc. 

  HOMB     3,604,117     733     1.50     11.53     4.69  
 

2

 

Community Trust Bancorp, Inc.(1)

  CTBI     3,591,179     454     1.11     10.91     4.13  
 

3

 

Republic Bancorp, Inc.(2)

  RBCAA     3,419,991     480     2.76     21.42     5.09  
 

4

 

Southside Bancshares, Inc. 

  SBSI     3,303,817     357     1.29     16.69     3.60  
 

5

 

First Financial Corporation(1)(2)

  THFF     2,954,061     439     1.49     10.88     4.50  
 

6

 

Lakeland Financial Corporation(2)

  LKFN     2,889,688     418     1.10     11.78     3.54  
 

7

 

State Bank Financial Corporation

  STBZ     2,776,334     479     1.56     11.38     7.00  
 

8

 

CoBiz Financial Inc.(2)

  COBZ     2,423,504     214     1.39     16.23     4.23  
 

9

 

S.Y. Bancorp, Inc.(2)

  SYBT     2,053,097     284     1.20     13.14     3.99  
 

10

 

Hills Bancorporation

  HBIA     2,018,297     300     1.36     14.96     3.78  
 

11

 

German American Bancorp, Inc.(2)

  GABC     1,873,767     229     1.11     12.67     3.84  
 

12

 

Bryn Mawr Bank Corporation(3)

  BMTC     1,774,907     257     1.14     11.08     3.96  
 

13

 

Bank of Kentucky Financial Corporation(2)

  BKYF     1,744,724     149     1.00     10.10     3.73  
 

14

 

Mercantile Bank Corporation

  MBWM     1,433,229     84     2.45     28.30     3.60  
 

15

 

West Bancorporation, Inc.(2)

  WTBA     1,269,524     167     1.18     11.27     3.58  
 

16

 

First Citizens Bancshares, Inc. 

  FIZN     1,053,549     112     1.19     12.34     4.24  
 

17

 

Ames National Corporation

  ATLO     1,035,564     182     1.38     10.82     3.60  
 

18

 

EZCORP, Inc. 

  EZPW     756,450     1,433     18.04     20.63     NM  
 

19

 

World Acceptance Corporation

  WRLD     666,397     1,024     13.82     22.95     63.79  
 

20

 

CompuCredit Holdings Corporation

  CCRT     647,907     81     17.21     169.77     15.47  
 

21

 

First Cash Financial Services, Inc. 

  FCFS     357,096     1,056     21.58     24.86     NM  
 

22

 

Regional Management Corporation

  RM     304,150     NA     8.09     51.10     29.42  
 

23

 

America's Car-Mart, Inc. 

  CRMT     276,409     257     10.53     15.63     11.98  
 

24

 

Nicholas Financial, Inc. 

  NICK     243,643     144     7.30     15.87     22.57  

        All executive officers are eligible for an annual merit increase to base salary, effective January 1st, based primarily on performance of job responsibilities and accomplishment of predetermined performance objectives. Job accomplishments are measured by a written performance appraisal which includes evaluating the key responsibilities of the position using five levels of defined performance ratings culminating in an overall job performance rating. Our Chief Executive Officer evaluates our other executive officers' performance. The Chief Executive Officer of MCFC evaluates our Chief Executive Officer's performance.

Annual Incentive

        CBD and MCFC provide our named executive officers with an annual opportunity to earn cash incentive awards through the Annual Incentive Plan (the "AIP"). Annual incentive compensation is paid in cash. Incentive opportunity levels for named executive officers are generally positioned at or above market competitive levels. Cash incentives are targeted to be between the midpoint and seventy-fifth percentile when targeted performance is met and above the seventy-fifth percentile when maximum performance is met. Additionally, the Company believes in deferring a portion of the AIP to ensure accurate performance measurement and to add a retention component to short-term awards.

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Incentive and Retention Plan Awards

 
  Threshold ($)   Target ($)   Maximum ($)  

Thomas H. Holcom Jr. 

  $ 28,262   $ 45,925   $ 67,121  

Laura V. Stack

  $ 26,692   $ 40,037   $ 53,383  

Joseph B. Freeman

  $ 28,973   $ 38,631   $ 48,288  

        For fiscal 2012, Mr. Holcom's annual incentive was based 45% on our operating earnings, 30% on the operating earnings of MCFC and 25% based on delinquency plus net charge-offs. To receive an incentive payment, the minimum performance objective must be achieved. 10% of Mr. Holcom's annual earned cash incentive is deferred for a period of two years, with 50% of the deferred incentive paid after one year and the remaining 50% paid after two years.

        For fiscal 2012, Ms. Stack's annual incentive was based 33% on our operating earnings combined with the operating earnings of CBD, 14% on the portfolio, 33% on delinquency and net charge-off and 20% on customer count. To receive an incentive payment, the minimum performance objective must be achieved.

        For fiscal 2012, Mr. Freeman's annual incentive was based 45% on our operating earnings, 15% on the operating earnings of MCFC and 25% based on delinquency plus net charge-offs and 15% based on loan portfolio level. To receive an incentive payment, the minimum performance objective must be achieved. 10% of Mr. Freeman's annual earned cash incentive is deferred for a period of two years, with 50% of the deferred incentive paid after one year and the remaining 50% paid after two years.

Long Term Incentive

        CBD and MCFC provide our executive officers with a Long Term Incentive Plan ("LTIP") that annually grants restricted MCFC stock unit awards to officers based on the earned annual cash incentive, if one is earned. The restricted MCFC stock unit awards vest 40% on the third anniversary of the grant date, 30% on the fourth anniversary of the grant date and 30% on the fifth anniversary of the grant date.

        The Committee reviewed the competitiveness of LTIP compensation as compared to market published survey data and a third party peer group in the Blanchard Report. The following table

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provides information concerning options exercised and restricted stock awards vested during the year ended September 30, 2012, for each of our named executive officers.

 
  Option Awards   Restricted Stock Units  
Name
  Shares
Acquired on
Exercise
  Value Realized
on Exercise ($)
  Number of
Shares
Acquired
  Value
Realized on
Vesting ($)
 

Thomas H. Holcom Jr.

                         

December 1, 2011

      $     963   $ 10,312  

December 1, 2010

              1,733     11,682  

May 31, 2010

            1,167     6,535  

December 1, 2009

            2,167     8,233  
                   

Laura V. Stack

                         

December 1, 2011

      $     288   $ 3,085  

December 1, 2010

                 

May 31, 2010

                 

December 1, 2009

                 
                   

Joseph B. Freeman

                         

December 1, 2011

      $     419   $ 4,492  

December 1, 2010

            550     3,704  

May 31, 2010

            333     1,868  

December 1, 2009

            458     1,741  

Deductibility of Executive Compensation

        Section 162(m) of the Internal Revenue Code provides guidance on the deductibility of compensation paid to our five highest paid officers. CBD and MCFC have taken the necessary actions to ensure the deductibility of payments under our annual and long-term performance incentive compensation plans. CBD and MCFC also intend to take the actions necessary to maintain the future deductibility of payments and awards under these programs.

Conclusion

        We are satisfied that the base salary, annual incentive plan and long-term incentive plan provided to our named executive officers by CBD and MCFC are structured to foster a performance-oriented culture. They create strong alignment with the long-term best interests of our shareholder and noteholders. Compensation levels are reasonable in light of services provided, executive performance, our performance and industry practices. Furthermore, the pay practices we have in place do not encourage employees to take inappropriate or excessive risks that would be potentially detrimental

Potential payments upon termination

        Assuming the employment of the following named executive officers were to be terminated by the Company without cause or by such executives with good reason as of September 30, 2012, each named executive officer would be entitled to payments as stipulated in the terms of his signed Employment Agreement, as follows.

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Severance Benefits

 
  Average Base Salary(1)   Average Annual Incentive   Total  

Thomas H. Holcom Jr. 

  $ 71,103   $ 40,959   $ 112,061  

Joseph B. Freeman

    56,504     25,890     82,394  

(1)
Average amounts are based on the most current three years

        No severance payment is provided for any of the executive officers in the event of death, disability or retirement. Assuming the employment of our named executive officers were to be terminated due to death, disability or retirement after attaining age 65, restricted stock unit awards would automatically vest. If employment of the named executive officer is terminated because of death or disability, stock options may be exercised to the extent exercisable on the termination date. In the case of retirement after attaining age 65, stock options would become fully vested on the termination date. Upon all other terminations, the amounts in the AIP and LTIP would be forfeited.


REPORT OF THE COMPENSATION COMMITTEE

        Our Board serves as our Compensation Committee and has reviewed and with the assistance of the MCFC Compensation Committee, reviewed and discussed the Compensation Discussion and Analysis presented above with management. Based on that review and discussion, our Board has recommended that the Compensation Discussion and Analysis be included in this Registration Statement on Form S-1.

By our Board: Thomas H. Holcom, Jr., Laura V. Stack, Joseph B. Freeman and Robert F. Hatcher.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        The members of the Board are set forth in the preceding section. During the past three fiscal years, none of our executive officers served on the MCFC Compensation Committee or any compensation committee (or equivalent) or the board of directors of another entity whose executive officer(s) served on the MCFC Compensation Committee. Our Board is our Compensation Committee.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        As of September 30, 2012, MCFC, a Georgia corporation, owns one share of our common stock, which constitutes our only outstanding and issued share of common stock. We have no other class of capital stock authorized. The address of MCFC is 201 Second Street, Suite 950 (31201), P.O. Box 4164, Macon, Georgia 31208. MCFC has sole voting and investment power with respect to the share of our common stock set forth above. Neither our director nor any of our executive officers own any shares of our common stock.


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

        Our Chief Executive Officer, Thomas H. Holcom, Jr., and certain immediate family members own investment notes issued by us. Amounts held by these related parties totaled $843,292 and $785,461 at September 30, 2012 and 2011 respectively. These investment notes will mature in 2013, 2014 and 2021, and bear a weighted average interest rate of 6.67%. Carol Jackson, a member of the MCFC Board of Directors, owns investment notes issued by us. Amounts held by her totaled $541,250 and $500,000 at September 30, 2012 and 2011 respectively. These investment notes will mature in 2014 and bear a weighted average interest rate of 8.25% (see Note 7 to the consolidated financial statements).

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        We entered into a LSMS Agreement with CBD in June 2009. Under the LSMS agreement, we buy certain military loans that CBD originates and receives management and record keeping services. The following table represents the related party transactions associated with this agreement and other related transactions for the periods presented.

 
  As of and for the Years Ended September 30,  
 
  2012   2011   2010  

Loan purchasing:

                   

Loans purchased from CBD

  $ 239,616,353   $ 251,013,073   $ 240,871,321  
               

Management and record keeping services:

                   

Monthly servicing to CBD (0.7% of outstanding principal)

  $ 33,820,834   $ 33,609,257   $ 31,323,735  

Monthly servicing to CBD ($2.82 for each loan owned at prior fiscal year end)

    5,084,245     5,173,367     5,012,020  

Monthly cost sharing to MCFC ($62,500 per month, $61,250 per month in 2010)

    750,000     750,000     735,000  
               

Total management and record keeping services

  $ 39,655,079   $ 39,532,624   $ 37,070,755  
               

Other transactions:

                   

Fees paid to CBD in connection with loans purchased ($30.00 each loan purchased)

  $ 3,276,540   $ 3,630,526   $ 3,620,390  

Tax payments

    9,844,816     13,727,467     12,019,609  

Dividends paid to MCFC

    6,773,313     8,845,387     10,560,722  
               

Total other transactions

  $ 19,894,669   $ 26,203,380   $ 26,200,721  
               


POLICIES AND PROCEDURES

        Our audit committee, with the assistance of the audit committee of the MCFC Board, reviews, approves or ratifies any related party transactions. The review includes the nature of the relationship, the materiality of the transaction, the related person's interest in the transaction and position, the benefit to us and the related party, and the effect on the related person's willingness or ability in making such determination to properly perform their duties here.


DIRECTOR INDEPENDENCE

        Our Board consists of the following four persons: Thomas H. Holcom, Jr., Laura V. Stack, Joseph B. Freeman and Robert F. Hatcher. As each of these individuals is an executive officer of PFS or an executive officer of our parent, our Board has determined that none of these individuals are independent, as the term is defined under the listing standards of the NASDAQ Global Select Market. Our only outstanding share of common stock is held by MCFC and neither our common stock nor investment notes are listed on any national exchange stock. None of the members of our Board sit on the board of directors of any public company.


DESCRIPTION OF INVESTMENT NOTES

    General

        The notes are being issued under a Second Amended and Restated Indenture dated as of December 29, 2009 ("indenture") between us and U.S. Bank National Association, as trustee. The indenture was originally executed on May 12, 2003 and was amended and restated in 2004 to reflect the change of the title of the securities from junior subordinated debentures to investment notes. In 2009, the indenture was amended and restated to reflect changes in our senior indebtedness, and the new

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SSLA and to facilitate the public offering of investment notes. No other substantive changes were made to the indenture. The indenture was filed as an exhibit to our registration statement filed on December 31, 2009. You can also obtain a copy of the indenture from us. Below, we have summarized certain parts of the indenture. The summary is not complete and you should read the indenture in its entirety for provisions that may be important to you. In the summary below, we have included references to the section number of the indenture provision that is summarized so you can easily locate these provisions. Capitalized terms used in this summary have the meanings specified in the indenture.

        The notes are unsecured obligations and are subordinate to all of our senior indebtedness and rank equal in payment with our junior subordinated debentures issued to Missouri residents only and all prior to November 1, 2002 and investment notes issued prior to December 31, 2010. See "—Subordination". Unless otherwise agreed upon, each note will have a term of not less than 12 months and not more than 120 months as determined by us and the holder at the time the note is purchased. (Section 2.2(b)). There is no sinking fund or similar provision for payment of the notes at maturity. We will pay maturing notes from our general funds. (Section 2.2(e)).

        The notes will be issued, without coupons, in any amount $10,000 or greater. (Section 2.2(a)). Under certain conditions discussed below, the notes automatically renew. We may redeem the notes prior to their maturity, but the holders have no right to redeem the notes prior to maturity. (Article 3). The notes will mature on the date specified on the note.

    Renewal

        The notes contain a renewal provision which effectively extends the maturity date of and resets the interest rate on the note upon maturity unless the holder requests repayment in writing. The principal amount of the renewed note will equal the principal amount of the note on the most recent maturity date, plus all accrued and unpaid interest. The term of a renewed note will be equal to the original term of the note, and the interest rate of the note will be equal to the interest rate we are then paying on notes of a like term and principal amount, which may be higher or lower than the interest rate on the original note. (Section 2.2(d)).

        At least 20 days prior to the maturity date of a note, we will send the note holder a written notice reminding the holder of the pending maturity of the note and that it will be renewed unless the holder requests repayment in writing within 20 days after the maturity date and a copy of the current prospectus for the notes. The notice will also state the place where the note may be surrendered for payment. (Section 2.2(d)).

        While we have the right to renew a note, we have no obligation to renew a note and may pay it in full upon maturity. So long as we have an effective registration statement on file with the SEC and the securities commissions of the states in which the notes are sold, we currently intend to renew the notes. If we do not have an effective registration statement on file with the SEC and the securities commissioners of the states in which the notes are sold, we will pay the notes in full upon maturity. (Article 3).

    Subordination

        The payment of principal and interest on the notes is subordinated to all of our senior indebtedness, as described below. Upon the maturity of our senior indebtedness, by lapse of time, acceleration or otherwise, the holders of the senior indebtedness will be entitled to receive payment in full before the holders of the notes are entitled to receive any payment. The indenture does not limit the amount of additional indebtedness, including senior indebtedness, which we or any of our subsidiaries may create, incur, assume or guarantee. As a result of these subordination provisions, upon default, holders of the notes may recover less than holders of our senior indebtedness. (Section 10.3).

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        Under the indenture, our "senior indebtedness" means all outstanding indebtedness (present or future) created, incurred, assumed or guaranteed by us (and all renewals, extensions or refundings thereof), which is (a) not expressly subordinate or junior to any other indebtedness of us; (b) which is expressly subordinate and junior to the indebtedness described in clause (a) but not to any other of our indebtedness and (c) which is expressly subordinate and junior to the indebtedness described in clauses (a) and (b) but not to any other of our indebtedness. Senior indebtedness includes, but is not limited to, (x) the guarantee by us of any indebtedness of any other person (including, without limitation, our subordinated indebtedness of another person), unless such indebtedness is expressly subordinated to the notes, (y) any indebtedness to any of our subsidiaries, and (z) our indebtedness under the SSLA. Notwithstanding anything herein to the contrary, senior indebtedness does not include junior subordinated debentures, investment notes and money saver certificates issued prior to December 31, 2010, which in the aggregate was in the amount of $52,877,941, including outstanding principal and accrued interest, as of December 31, 2010.

        The notes sold in this offering will rank equally with each other, and with our outstanding junior subordinated debentures issued prior to November 1, 2002 and any investment notes purchased prior to December 31, 2010 and are subordinate and junior in rank, priority and right of payment to all of our senior indebtedness. (Section 2.2(e)).

        Nothing in the indenture prohibits us from entering into another indenture to issue other investment notes or securities which are senior to, have the same rights and obligations of, or are subordinate to the investment notes.

    Interest

        We may change the interest rates at which we offer notes from time to time based on market conditions, our financial requirements, the principal amount of the note and the term to maturity chosen by the purchaser, but no such change will affect the interest rate of any note purchased before the effective date of such change. Except as otherwise stated below, the interest rate applicable to the notes will be the rate set forth in the supplement to this prospectus in effect as of the date of the issuance of the note. Interest payable for any month or portion of a month will be computed on the basis of the number of days elapsed in a 360-day year or twelve 30-day months. (Section 2.2(c)).

        Interest on a note accrues from the date of issue, which is deemed to be the date we receive and accept proper documentation, including an executed subscription agreement, and appropriate funds, but only if they are received before 3:00 p.m. on a business day. If we receive the documents and funds on a non-business day or after 3:00 p.m. on a business day, then the date of issue will be deemed to be the next business day. For this purpose, business days are Monday through Friday, except for Missouri legal holidays. (Sections 1.1 and 2.2(c)).

        We will pay or compound interest on the notes annually, at the election of the note holder. We will pay interest on compounded interest at the same rate paid on the underlying principal. Holders of notes in principal amounts of $10,000 or more may, in return for a 0.5% reduction in the interest rate on the note, elect to receive monthly interest payments. (Section 2.2(c)).

        Interest rates on notes in a principal amount in excess of $100,000 will be negotiated on a case by case basis based upon our financial requirements, the term of the investment and prevailing interest rates. (Section 2.2(c)).

    Redemption at the Option of Pioneer

        We may, at our option, redeem any or all of the notes on at least 30 days' written notice to each holder at a price equal to 100% of the principal amount of the notes being redeemed, plus accrued interest on a daily basis up to, but not including, the redemption date. We will pay no premium upon redemption of the notes. We may select notes for redemption in our sole discretion. (Article 3).

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    Modification of Indenture

        We, together with the trustee, may modify the indenture at any time with the consent of the holders of not less than a majority in principal amount of the notes that are then outstanding. However, we and the trustee may not make a modification to the indenture without the consent of each holder affected if the modification; (1) affects the terms of payment of, the principal of, or any interest on any note; (2) changes the percentage of note holders whose consent to a waiver or modification is required; (3) affects the subordination provisions of the indenture in a manner that adversely affects the right of any holder or (4) waives any event of default in the payment of principal of, or interest on, any note.

        Without action or consent by the note holders, we and the trustee may amend the indenture or enter into supplemental indentures to clarify any ambiguity, defect or inconsistency in the indenture, to provide for the assumption of the notes by any successor to us, to make any change to the indenture that does not adversely affect the legal rights of any note holders, or to comply with the requirements of the Trust Indenture Act of 1939, as amended. We will give written notice to the note holders of any amendment or supplement to the indenture or notes. (Sections 9.1 and 9.2).

    Place, Method and Time of Payment

        We will pay principal and interest on the notes at our principal executive office, or at such other place as we may designate for that purpose; provided, however, that if we make payments by check, they will be mailed to the holder of the note at his or her address appearing on the register of the notes maintained by the registrar at the close of business ten (10) days prior to such payment date. Any payment of principal or interest which is due on a nonbusiness day will be payable by us on the next business day immediately following that nonbusiness day and no additional interest will accrue in the intervening period. (Section 4.1).

    Events of Default

        An event of default is defined in the indenture as being a default in payment of principal or any installment of interest on the notes which has not been cured following 10 days' written notice; our becoming subject to certain events of bankruptcy or insolvency; or our failure to comply with provisions of the notes or the indenture and the failure is not cured or waived within 60 days after we have received notice of such failure from the trustee or from the holders of at least a majority in principal amount of the outstanding notes. (Section 6.1).

        If an event of default occurs and is continuing, the trustee or the holders of a majority in principal amount of the then outstanding notes may declare the principal of and the accrued interest on all outstanding notes due and payable. (Section 6.2). If such a declaration is made, we are required to pay the principal of and interest on all outstanding notes within 90 days after the declaration, so long as the senior indebtedness has not matured by lapse of time, acceleration or otherwise. (Section 10.4). We are required to file annually with the trustee an officer's certificate that certifies the absence of defaults under the terms of the indenture. We are also required to file with the trustee and the paying agent prompt notice of an event of default under the indenture and any default related to any senior indebtedness. (Section 4.3).

        The indenture provides that the holders of a majority of the aggregate principal amount of the notes at the time outstanding may, on behalf of all holders, waive any existing event of default or compliance with any provision of the indenture or the notes, except a default in payment of principal or interest on the notes or an event of default with respect to a provision that cannot be amended without the consent of each affected holder. In addition, the trustee may waive an existing event of default or compliance with any provision of the indenture or notes, except in payments of principal or

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interest on the notes, if the trustee in good faith determines that a waiver or consent is in the best interests of the holders of the notes. (Section 6.4).

        If an event of default occurs and is continuing, the trustee is required to exercise the rights and duties vested in it by the indenture and to use the same degree of care as a prudent person would exercise under the circumstances in the conduct of his or her affairs. The trustee however, is under no obligation to perform any duty or exercise any right under the indenture at the request, order or direction of any note holders unless the trustee receives indemnity satisfactory to it against any loss, liability or expense (Section 7.1). Subject to such provisions for the indemnification of the trustee, the holders of a majority in principal amount of the notes at the time outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee. The indenture effectively limits the right of an individual note holder to institute legal proceedings in the event of our default. (Section 6.5).

    Satisfaction and Discharge of Indenture

        The indenture may be discharged upon the payment of all notes outstanding issued under the indenture. (Article 8).

    Reports to the Securities and Exchange Commission

        We plan to file annual reports containing audited financial statements and quarterly reports containing unaudited financial information for the first three fiscal quarters of each fiscal year with the Securities and Exchange Commission while the registration statement containing this prospectus is effective and as long thereafter as we are required to do so. (Section 4.2). Copies of such reports will be sent to any note holder upon written request.

    Service Charges

        We reserve the right to assess service charges and fees for issuing notes to replace lost or stolen notes, to transfer a note, or to issue a replacement interest payment check. (Sections 2.6 and 2.7).

    Transfer

        A note holder may not transfer any note until the registrar has received, among other things, appropriate endorsements and transfer documents and any taxes and fees required by law or permitted by the indenture. The registrar is not required to transfer any note for a period beginning 15 days before the date notice is mailed of the redemption or the maturity of such note and ending on the redemption of such note or 21 days after the maturity date of the note, as appropriate. (Section 2.6). No assurance can be given that a note holder will be able to sell any note or to sell any note at a profit. See "Risk Factors—Your investment in the notes is illiquid."

    Concerning the Trustee

        The indenture contains certain limitations on the right of the trustee, should it become one of our creditors, to obtain payment of claims in certain cases, or to realize on certain property with respect to any such claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires certain conflicting interests and if any of the indenture securities are in default, it must eliminate such conflict or resign. (Sections 7.10 and 7.11).

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    Accounts

        We are qualified to serve as custodian for individual retirement accounts, simplified employee pension accounts, Roth IRAs and Coverdell education savings accounts. Qualifying investors may choose to establish one of these accounts with us to hold their notes.


PLAN OF DISTRIBUTION

        Pursuant to this prospectus, we are offering up to $50,000,000 in aggregate principal amount of the notes. We will offer the notes through our officers and employees directly without an underwriter or agent and on a continuous basis. This offering will expire on January 28, 2014. However, we have the right to terminate this offering at any time before that date.

        We plan to offer the notes through our officers and employees in accordance with Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and all applicable state securities laws. We intend to conduct the offering by direct mail, advertisements in print and electronic media, and other methods, all in compliance with applicable laws and regulations, including securities laws. Our officers and employees will not receive any additional compensation or commission for their selling efforts. Except as set forth below, once received and accepted orders will be irrevocable and no funds will be refunded.

        We do not currently use a broker-dealer or an agent to assist in the sales of the notes. We may employ the services of a FINRA member broker-dealer in the future for purposes of offering the notes on a "best-efforts" or agency basis. If an agreement concerning the use of the services of any broker-dealer is reached, we will file a post-effective amendment to the registration statement containing this prospectus to disclose the name of the broker-dealer, the compensation being paid to the broker-dealer and any other material terms of our agreement with the broker-dealer, including any agreement that we make to indemnify the broker-dealer against specific liabilities, including liabilities under the Securities Act of 1933. Any written agreement that we reach with the broker-dealer will also be filed as an exhibit to the registration statement. We will cease selling the notes until the SEC declares the registration statement effective.

        We plan to sell the investment notes only to accredited investors as defined in rule 501 of Regulation D under the Securities Act of 1933 or to persons who meet the suitability requirements of their state of residency and have at least:

    a gross annual income of $65,000 and a net worth of $65,000 (exclusive of home, home furnishings and automobiles); or

    a net worth of $150,000 (exclusive of home, home furnishings and automobiles); and

    no more than 10% of their liquid net worth invested in the notes, unless defined as an accredited investor. Liquid net worth is the portion of a person's total net worth that is comprised of cash, cash equivalents, and readily marketable securities.

        The notes may be purchased only by means of a written offer to purchase in the form provided by us. We will not accept an offer to purchase notes or negotiate checks delivered for payment on the sale of notes until five business days following the date the prospective purchaser has received the final prospectus and any related prospectus supplement. If we receive a properly executed offer to purchase and payment for the purchase of notes from any person who has previously received the final prospectus but who has not received a current prospectus supplement, we will not accept the offer to purchase or any payment for a note until five business days following the mailing of a confirmation of sale and a current prospectus supplement to such prospective purchaser.

        Once we accept an offer, however, the purchase of the note and the issuance of certificates for the note will be deemed to have occurred as of the date we receive and accept the offer to purchase and

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payment. We reserve the right to reject any offer to purchase, in whole or in part. In the event your offer is not accepted, we will promptly refund your funds, without deduction of any costs and without interest.

        There is no established trading market for the notes, and we do not expect one to develop.

        Investors seeking information as to the current interest rates for the notes may contact us at (816) 756-2020 to receive a current quote as to such rates.

        We reserve the right to withdraw or cancel the offering at any time. In the event of a withdrawal or cancellation, orders previously received will be irrevocable and no funds will be refunded.


NOTICE TO MISSOURI RESIDENTS

        The Missouri Securities Division has determined that an investment in the notes is not suitable for any person who:

    does not have a gross income of at least $45,000 and a net worth of at least $45,000 (exclusive of home, home furnishings and automobiles); or

    does not have a net worth of at least $150,000 (exclusive of home, home furnishings and automobiles); and

    has more than 10% of their liquid net worth invested in the notes.

        In determining whether to sell notes to a particular investor, we will comply with the general standards set forth above. See "Plan of Distribution."


VALIDITY OF INVESTMENT NOTES

        The validity of the notes being offered by this prospectus has been passed upon for us by Stinson Morrison Hecker LLP, Kansas City, Missouri.


EXPERTS

        The consolidated financial statements included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the registration statement. Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.


INTERESTS OF NAMED EXPERTS AND COUNSEL

        No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the investment notes offered hereby was employed on a contingency basis, or had, or is to receive, in connection with such offering, a substantial interest, direct or indirect, in PFS, nor was any such person connected with the PFS as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.


MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

        The following is a summary of the material United States federal income tax considerations relating to the purchase, ownership and disposition of the notes, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This discussion is based on provisions of the Internal Revenue Code of 1986, as amended, applicable regulations, judicial authority and current administrative rulings now in effect, all of which are subject to change, potentially with a retroactive effect.

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        This summary applies only to United States holders that are beneficial owners of the notes as "capital assets," within the meaning of Code Section 1221. This discussion does not address tax considerations applicable to an investor's particular circumstances or to investors that may be subject to special tax rules such as (1) banks, thrifts, regulated investment companies, or other financial institutions or financial service companies, (2) S corporations, (3) holders subject to the alternative minimum tax, (4) tax-exempt organizations, (5) insurance companies, (6) foreign persons or entities, (7) brokers or dealers in securities or currencies, (8) holders whose "functional currency" is not the U.S. dollar, (9) persons that will hold the notes as a position in a hedging transaction, "straddle," "conversion transaction" (as defined for tax purposes), or (10) persons deemed to sell the notes under the constructive sale provisions of the Code. This summary discusses the Federal income tax considerations applicable to the initial purchase of the notes and does not discuss the tax considerations of a subsequent purchase of the notes. Each prospective purchaser of notes should consult his or her own tax advisor.

        The interest income earned on the notes will be taxable as ordinary income to the holders of the notes. The holder will report the interest income earned on the note in accordance with the holder's method of accounting for Federal income tax purposes. Holders of notes using the cash basis of accounting will report the interest income in the year the interest is actually or constructively received. Because a note holder has the option to receive monthly payment of interest income on the note, the interest income will be treated as constructively received by a cash basis taxpayer on each interest payment date irrespective of whether a note holder has exercised such option. Holders of notes using the accrual basis of accounting will include the interest income ratably over the term of the note.

        Upon the sale, exchange or redemption of a note, a holder generally will recognize capital gain or loss equal to the difference between (1) the amount of cash proceeds and the fair market value of any property received on the sale, exchange or redemption (except to the extent such amount is attributable to accrued interest income not previously included in income, which will be taxable as ordinary income, or is attributable to accrued interest that was previously included in income and not added to the note's basis, which amount may be received without generating further income) and (2) such holder's adjusted tax basis in the note. A holder's adjusted tax basis in a note generally will equal the cost of the note to such holder less any principal payments received by the holder. Such capital gain or loss will be long-term capital gain or loss if the holder's holding period in the note is more than twelve months at the time of sale, exchange or redemption. Under current law, long-term capital gains recognized by some noncorporate holders, including individuals, will generally be subject to taxation at capital gains rates. The deductibility of both short-term and long-term capital losses are subject to various limitations.

        Under the Code, we must report the interest earned on notes with respect to each holder to the Internal Revenue Service on the appropriate Form 1099, a copy of which will also be provided to a note holder. No portion of interest generally will be withheld for holders who properly provide us with a taxpayer identification number on Forms W-8 or W-9. If a note holder does not provide us with a taxpayer identification number on Forms W-8 or W-9, we are required to withhold tax on any interest paid. The withholding rate is presently 31% of the interest. It is our policy not to sell to anyone refusing to provide a taxpayer identification number on a Form W-8 or W-9.

        THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.

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WHERE YOU CAN FIND MORE INFORMATION

        We have filed with the SEC, Washington, D.C., our registration statement on Form S-1 under the Securities Act with respect to the notes offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Certain items are omitted in accordance with the rules and regulations of the SEC. For further information about us and our notes sold in this offering, refer to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other documents filed as an exhibit to the registration statement.

        A copy of our registration statement, including the exhibits and schedules thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov, from which interested persons can electronically access the registration statement, including the exhibits and schedules thereto.

        As a result of the offering, we are subject to the informational requirements of the Securities Exchange Act of 1934. We will fulfill our obligations with respect to such requirements by filing periodic reports and other required information with the SEC.

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Index to Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and Stockholder of Pioneer Financial Services, Inc.
Pioneer Financial Services, Inc.
Kansas City, MO.

        We have audited the accompanying consolidated balance sheets of Pioneer Financial Services, Inc. (the "Company") as of September 30, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholder's equity, and cash flows for the three years ended September 30, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years ended September 30, 2012, in conformity with accounting principles generally accepted in the United States of America.

/s/Deloitte & Touche LLP
Minneapolis, MN
December 20, 2012

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PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2012 AND 2011

 
  As of September 30,  
 
  2012   2011  

ASSETS

 

Cash and cash equivalents—non-restricted

 
$

2,136,520
 
$

1,256,841
 

Cash and cash equivalents—restricted

    727,857     696,578  

Investments—restricted

    1,024,134     3,087,572  

Investments—non-restricted

    3,360,773     2,832,972  

Gross finance receivables

    396,803,008     405,233,539  

Less:

             

Unearned fees and premiums

    (35,892,490 )   (49,132,513 )

Allowance for credit losses

    (29,000,000 )   (25,396,255 )
           

Net finance receivables

    331,910,518     330,704,771  

Furniture and equipment, net

    565,027     110,056  

Net deferred tax asset

    13,377,298     8,547,625  

Prepaid and other assets

    7,913,040     4,958,825  

Deferred acquisition costs

    5,485,083     5,917,860  

Goodwill

    31,474,280     31,474,280  

Intangibles, net

    5,504,600     7,740,200  
           

Total assets

  $ 403,479,130   $ 397,327,580  
           

LIABILITIES AND STOCKHOLDER'S EQUITY

 

Revolving credit line—banks

 
$

19,450,000
 
$

 

Accounts payable

    536,919     217,661  

Accrued expenses and other liabilities

    9,898,053     8,156,940  

Amortizing term notes

    186,230,677     214,490,826  

Investment notes

    67,428,441     59,724,991  
           

Total liabilities

    283,544,090     282,590,418  
           

Stockholder's equity:

             

Common stock, no par value; 1 share issued and outstanding

    86,394,200     86,394,200  

Accumulated other comprehensive income

    58,410     114,522  

Retained earnings

    33,482,430     28,228,440  
           

Total stockholder's equity

    119,935,040     114,737,162  
           

Total liabilities and stockholder's equity

  $ 403,479,130   $ 397,327,580  
           

   

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Year Ended September 30,  
 
  2012   2011   2010  

Interest income and fees

  $ 113,249,059   $ 114,121,026   $ 105,460,224  

Interest expense

   
19,250,406
   
19,202,745
   
18,019,188
 
               

Net interest income before provision for credit losses

    93,998,653     94,918,281     87,441,036  

Provision for credit losses

    34,617,355     25,565,703     22,432,831  
               

Net interest income

    59,381,298     69,352,578     65,008,205  

Non-interest income, net

                   

Debt Protection, insurance premiums earned and other income

    4,809,573     7,366,584     6,296,353  
               

Total non-interest income, net

    4,809,573     7,366,584     6,296,353  

Non-interest expense

                   

Management and record keeping services fee

    39,655,079     39,532,624     37,070,755  

Professional and regulatory fees

    1,229,501     1,416,654     1,165,394  

Amortization of intangibles

    2,235,600     2,973,600     3,691,200  

Other operating expenses

    2,999,076     4,168,082     3,593,563  
               

Total non-interest expense

    46,119,256     48,090,960     45,520,912  

Income before income taxes

   
18,071,615
   
28,628,202
   
25,783,646
 

Provision for income taxes

    6,044,312     11,524,389     9,221,419  
               

Net income

  $ 12,027,303   $ 17,103,813   $ 16,562,227  
               

Net income per share, basic and diluted(1)

  $ 12,027,303   $ 17,103,813   $ 16,562,227  
               

(1)
Number of shares outstanding is one.

   

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

Consolidated Statements of Comprehensive Income

 
  For the Years Ended September 30,  
 
  2012   2011   2010  

Net Income

  $ 12,027,303   $ 17,103,813   $ 16,562,227  

Other comprehensive loss, net of tax:

                   

Unrealized gains (losses) on investment securities available for sale:

                   

Unrealized gains (losses) arising during the period, net of income tax benefit (expense) of $30,215, $28,622 and ($23,312), respectively

    (56,112 )   (53,158 )   43,297  
               

Total other comprehensive income (loss)

    (56,112 )   (53,158 )   43,297  
               

Total comprehensive income

  $ 11,971,191   $ 17,050,655   $ 16,605,524  
               

   

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

Consolidated Statements of Stockholder's Equity

For the years ended September 30, 2012, 2011 and 2010

 
  Total   Common Stock   Retained
Earnings
  Accumulated
Other
Comprehensive
Income
 

Balance, September 30, 2009

  $ 100,487,092   $ 86,394,200   $ 13,968,509   $ 124,383  
                   

Comprehensive income:

                         

Net income

    16,562,227         16,562,227      

Unrealized gain on investments, net of tax of $23,312

    43,297             43,297  
                   

Total comprehensive income

    16,605,524         16,562,227     43,297  

Dividend paid to parent

    (10,560,722 )       (10,560,722 )    
                   

Balance, September 30, 2010

  $ 106,531,894   $ 86,394,200   $ 19,970,014   $ 167,680  
                   

Comprehensive income:

                         

Net income

    17,103,813         17,103,813      

Unrealized loss on investments, net of tax of ($28,622)

    (53,158 )           (53,158 )
                   

Total comprehensive income

    17,050,655         17,103,813     (53,158 )

Dividend paid to parent

    (8,845,387 )       (8,845,387 )    
                   

Balance, September 30, 2011

  $ 114,737,162   $ 86,394,200   $ 28,228,440   $ 114,522  
                   

Comprehensive income:

                         

Net income

    12,027,303         12,027,303      

Unrealized loss on investments, net of tax of ($30,215)

    (56,112 )           (56,112 )
                   

Total comprehensive income

    11,971,191         12,027,303     (56,112 )

Dividend paid to parent

    (6,773,313 )       (6,773,313 )    
                   

Balance, September 30, 2012

  $ 119,935,040   $ 86,394,200   $ 33,482,430   $ 58,410  
                   

   

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Years Ended September 30,  
 
  2012   2011   2010  

Cash flows from operating activities:

                   

Net income

  $ 12,027,303   $ 17,103,813   $ 16,562,227  

Adjustments to reconcile net income to net cash and cash equivilents provided by operating activities:

                   

Provision for credit losses on finance receivables

    34,617,355     25,565,703     22,432,831  

Depreciation and amortization

    2,245,002     2,893,041     3,873,419  

Deferred income taxes

    (4,799,458 )   (2,625,901 )   (1,688,424 )

Interest accrued on investment notes

    2,388,051     2,055,904     1,786,588  

Changes in:

                   

Accounts payable and accrued expenses

    2,060,371     (228,399 )   (971,712 )

Deferred acquisition costs

    432,777     (1,309,561 )   (1,573,700 )

Unearned premium reserves

    1,627,569     3,062,168     3,661,587  

Prepaids and other assets

    (2,954,215 )   1,242,520     (286,230 )
               

Net cash provided by operating activities

    47,644,755     47,759,288     43,796,586  
               

Cash flows from investing activities:

                   

Finance receivables purchased from affiliate

    (239,616,353 )   (251,013,073 )   (240,871,321 )

Finance receivables purchased from retail merchants

    (23,326,384 )   (29,026,308 )   (37,421,612 )

Finance receivables repaid

    225,492,066     250,664,133     236,171,217  

Capital expenditures

    (542,020 )   (25,920 )   (57,294 )

Change in restricted cash

    (31,279 )   (27,187 )   (555,333 )

Investments purchased—restricted

            (1,089,712 )

Investments purchased—non-restricted

    (249,000 )   (790,238 )    

Investments matured—restricted

        130,237     2,189,168  

Investments matured—non-restricted

    1,685,000     2,200,000      
               

Net cash used in investing activities

    (36,587,970 )   (27,888,356 )   (41,634,887 )
               

Cash flows from financing activities:

                   

Net borrowings/(repayments) under lines of credit

    19,450,000     (21,373,000 )   603,000  

Proceeds from borrowings

    79,002,245     142,131,268     102,976,531  

Repayment of borrowings

    (101,856,038 )   (118,565,582 )   (96,553,376 )

Repayment of subordinated debt—parent

        (13,900,000 )    

Dividends paid to parent

    (6,773,313 )   (8,845,387 )   (10,560,722 )
               

Net cash used in financing activities

    (10,177,106 )   (20,552,701 )   (3,534,567 )
               

Net increase/(decrease) in cash and equivalents—non-restricted

    879,679     (681,769 )   (1,372,868 )

Cash and cash equivalents—non-restricted Beginning of period

   
1,256,841
   
1,938,610
   
3,311,478
 
               

Cash and cash equivalents—non-restricted End of period

  $ 2,136,520   $ 1,256,841   $ 1,938,610  
               

Additional cash flow information:

                   

Interest paid

  $ 16,468,662   $ 16,449,222   $ 16,079,944  

Income taxes paid

  $ 9,844,816   $ 13,727,467   $ 12,019,609  

   

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

        The accompanying consolidated financial statements include the accounts of Pioneer Financial Services, Inc. and its wholly owned subsidiaries (collectively "we," "us," "our" or the "Company"). Intercompany balances and transactions have been eliminated. We were acquired on May 31, 2007 by MidCountry Financial Corp, a Georgia corporation ("MCFC") as a wholly owned subsidiary (the "Transaction").

        Immediately subsequent to the Transaction, we declared and paid a dividend to MCFC of our business operation and certain assets and liabilities related to the origination and servicing of our finance receivables. MCFC contributed these operations to MidCountry Bank, a federally chartered savings bank and wholly owned subsidiary of MCFC ("MCB"). MCB formed the Consumer Banking Division ("CBD") (formerly known as the Military Banking Division) which is composed exclusively of the assets and liabilities contributed from MCFC. This transaction is further described in "Note 6: Goodwill and Other Intangible Assets". As part of the Transaction, we entered into a Loan Sale and Master Services Agreement ("LSMS Agreement") with CBD. Under the LSMS Agreement, CBD is obligated to originate loans and we are obligated to purchase those loans that meet our business model and lending criteria. Also under the LSMS Agreement, CBD will provide us with management and record keeping services. As part of the Transaction, substantially all of our employees became employees of CBD. We pay fees for loans purchased and originated by CBD and management and record keeping services provided by CBD. The LSMS Agreement is further described in "Note 9: Related Party Transactions."

Nature of Operations and Concentration

        We are headquartered in Kansas City, Missouri. We purchase finance receivables from CBD. These receivables represent loans primarily to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. We also purchase finance receivables from retail merchants that sell consumer goods to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees.

Cash and Cash Equivalents—Non-Restricted

        We had no cash equivalents as of September 30, 2012 or 2011. Our cash consisted of checking accounts with an aggregate balance of approximately $2.1 million and $1.3 million as of September 30, 2012 and 2011, respectively.

Cash and Cash Equivalents—Restricted

        We are required to maintain restricted cash pursuant to an agreement with The Assurant Group ("Assurant") a third party insurance company that underwrites policies sold by us. Based on the agreement, we are required to maintain cash and cash equivalents and/or investments in custodial accounts, in the amount of 102% of unearned premium and insurance claim and policy reserves, with a qualified financial institution. As of September 30, 2012, the amount required per the agreement with Assurant was $0.3 million.

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Investments—Non-Restricted

        We classify our certificates of deposit as held-to-maturity and our government bonds as available-for-sale. Held-to-maturity are recorded at historical cost, adjusted for amortization of premiums and accretion of discounts. We have the intent and ability to hold these investments to maturity. Available-for-sale are recorded at fair value. Unrealized gains and losses on available-for-sale investments are recorded as accumulated other comprehensive income in the shareholder's equity section of our balance sheet, net of related income tax effects. If the fair value of any investment security declines below cost and we consider the decline to be other than temporary, we reduce the investment security to its fair value, and record a loss.

Investments—Restricted

        We classify our restricted government bonds as available-for-sale and record them at fair value. Unrealized gains and losses are recorded as accumulated other comprehensive income in the shareholder's equity section of our balance sheet, net of related income tax effects. If the fair value of any investment security declines below cost and we consider the decline to be other than temporary, we reduce the investment security to its fair value, and record a loss.

        These investments are restricted pursuant to an agreement with Assurant.

Finance Receivables

        Finance receivables are carried at amortized cost and are adjusted for unamortized direct origination fees and reduced for finance charges on pre-computed finance receivables, unearned dealer discounts, allowances for credit losses, debt protection reserves, insurance reserves and unearned fees and premiums. Debt protection and reinsurance reserves, unearned premiums and unearned fees applicable to credit risk on consumer receivables are treated as a reduction of finance receivables in the consolidated balance sheet since the payments on such policies generally, are used to reduce outstanding receivables.

Allowance for Credit Losses

        We maintain an allowance for credit losses, which represents management's best estimate of inherent losses 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 losses. The provision for finance receivable losses are charged to earnings to bring the total allowance to a level considered necessary by management. As the portfolio of total finance receivables consists of military loans and retail installment contracts, 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

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

    Current finance receivable delinquency trends

    Demographics of the current finance receivable portfolio

Goodwill and Other Intangible Assets

        Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as purchases. Other intangible assets represent premiums paid for other identifiable assets (see Note 6: Goodwill and Other Intangible Assets for more details). Goodwill is not amortized over an estimated useful life, but rather is tested annually for impairment as of September 30th, or when there are indicators of impairment. Intangible assets other than goodwill, which are determined to have finite lives, are amortized on straight-line or accelerated basis over their estimated useful lives between three and ten years. Amortizing intangibles are assessed for impairment only when events have occurred that may give rise to impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets, including such intangibles, are written down to their respective fair values.

Deferred Policy Acquisition Costs

        The costs of acquiring the debt protection fees and insurance policies are primarily related to the production of new and renewal business and have been deferred to the extent that such costs are deemed recoverable from future revenue. Such costs principally include debt protection commission and reinsurance premium taxes and third party servicing fees. Costs deferred on property and casualty and credit policies are amortized over the term of the related policies in relation to the premiums and fees earned. Deferred policy acquisition costs are written off to current period results of operations if such costs are deemed to be not recoverable from future investment income.

Debt Protection—Insurance Claims and Reserves

        Life and health reserves for credit coverage consist principally of future policy benefit reserves and reserves for estimates of future payments on incurred claims reported and unreported but not yet paid. Such estimates are developed using actuarial principles and assumptions based on past experience adjusted for current trends. Any change in the probable ultimate liabilities is reflected in net income in the period in which the change in probable ultimate liabilities was determined.

Revenue Recognition

Interest Income on Finance Receivables

        Interest income on finance receivables is recognized as revenue on an accrual basis using the effective yield method. The deferred fees, net of costs, are accreted into income using the effective yield method over the estimated life of the finance receivable. If a finance receivable, net of costs, liquidates before accretion is completed, we charge or credit any unaccreted net deferred fees or costs to income at the date of liquidation. We recognized late charges as fee income when received. We stop

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

accruing interest income on finance receivables when a payment has not been received for 90 days, and the interest due exceeds an amount equal to 60 days of interest charges. The accrual is resumed when a full payment (95% or more of the contracted payment amount) is received.

Debt Protection and Reinsurance Income

        CBD sells life, accident and health protection along with other exclusive coverages that are unique to our customers. Under an agreement, we assume from CBD, all risks on debt protection, credit accident, health insurance and all other coverage's written on the military loans. Unearned fees and premiums are recognized as non-interest income over the period of risk in proportion to the amount of debt protection provided.

Income Taxes

        We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recorded at currently enacted tax rates applicable to the period in which assets or liabilities are expected to be realized or settled. Deferred tax assets and liabilities are adjusted to reflect changes in statutory tax rates resulting in income adjustments in the period such changes are enacted.

        The provisions of FASB ASC 740, Income Taxes, prescribes a comprehensive financial statement model of how a company should recognize, measure, present, and disclose uncertain tax positions that the company has taken or expects to take in its income tax returns. The Company recognizes tax benefits that meet the "more likely than not" recognition threshold as defined within FASB ASC 740. In the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws for which the outcome is uncertain. Management periodically reviews and evaluates the status of uncertain tax positions and makes estimates of amounts ultimately due or owed. The benefits of tax positions are recorded in income tax expense in the consolidated financial statements, net of the estimates of ultimate amounts due or owed, including any applicable interest and penalties. Changes in the estimated amounts due or owed may result from closing of the statute of limitations on tax returns, new legislation, and clarification of existing legislation through government pronouncements, the courts, and through the examination process.

        The Company's operations are included in the consolidated federal income tax return of MCFC, and various combined state returns. Income taxes are paid to or refunded by MCFC pursuant to the terms of a tax-sharing agreement, approved by the Board of Directors, under which taxes approximate the amount that would have been computed on a separate company basis. Income taxes incurred in the current and prior years will be available for recoupment by the Company only in the event of future net losses of consolidated MCFC.

        The Company receives a benefit at the federal and state rate in the current year for net losses incurred in that year to the extent losses can be utilized in the consolidated federal income tax return or combined state income tax return of MCFC. MCFC and its subsidiaries currently file income tax returns in the United States federal jurisdiction, and most state jurisdictions. These tax returns, which often require interpretation due to their complexity, are subject to changes in income tax regulations or

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

in how the regulations are interpreted. In the normal course of business, MCFC and its subsidiaries are routinely subject to examinations and challenges from federal and state taxing authorities regarding the amount of taxes due in connection with the businesses they are engaged in. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial services organizations. The challenges made by taxing authorities may result in adjustments to the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. The Company does not believe any adjustments that may result from these examinations will be material to the Company.

        MCFC's federal income tax returns are open and subject to examination by the Internal Revenue Service for the tax year ended September 30, 2009 and later. MCFC and subsidiaries state returns are generally open and subject to examinations for the tax year ended September 30, 2008 and later in major state jurisdictions.

New Accounting Pronouncements Not Yet Adopted

        In December 2011, the FASB issued the FASB ASU 2011-11 "Balance Sheet disclosures about Offsetting Assets and Liabilities". The update requires entities to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The objective of this disclosure is to facilitate comparison between those entities that prepare financial statements on the basis of U.S. GAAP and those entities that prepare the financial statements on the basis of IFRS. The amended guidance is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. We are currently evaluating the impact this update will have on our consolidated financial statements.

        In July 2012, the FASB issued ASU 2012-02, which provides entities an option to perform a qualitative assessment to determine whether further impairment testing on indefinite-lived intangible assets is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. We believe that the adoption of this guidance will not have a material impact on our financial condition or results of operations.

Use of Estimates

        The preparation of consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and disclosures of contingent assets and liabilities. We use estimates and employ the judgments of management in determining the amount of our allowance for credit losses, insurance claims and policy reserves, and establishing the fair value of our financial instruments. While the consolidated financial statements and footnotes reflect the best estimates and judgments of management at the time, actual results could differ significantly from those estimates.

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 2: FINANCE RECEIVABLES

        Our finance receivables are comprised of military loans and retail installment contracts. During fiscal year 2012, we originated $398.3 million of military loans from CBD compared to $425.6 million during fiscal year 2011. We acquired $25.5 million in retail installment contracts during fiscal 2012 compared to $30.9 million during fiscal 2011. Approximately 29.0% of the amount of military loans we purchased in fiscal 2012 were refinancings of outstanding loans compared to 27.7% during fiscal 2011. Our finance receivables are disaggregated as military loans and retail installment contracts.

        In the normal course of business, we receive some customer payments through the Federal Government Allotment System on the first day of each month. If the first day of the month falls on a weekend or holiday, our customer payments are received on the last business day of the preceding month. On September 30, 2011 we collected $14.1 million in customer loan payments in advance of the payment due date of October 1, 2011. These payments and use of cash are reflected on the balance sheets as a reduction of net finance receivables and the corresponding accrued interest receivable. Unapplied finance receivables payments consist of principal amounts collected on September 30, 2011, but due on October 1, 2011. There were no Federal Government Allotment System payments received in advance of the payment due dates on September 30, 2012.

        The following table represents finance receivables for the periods presented:

 
  As of September 30,  
 
  2012   2011  

Military loans

  $ 369,361,165   $ 370,601,538  

Retail installment contracts

    27,441,843     34,632,001  
           

Gross finance receivables

    396,803,008     405,233,539  

Net deferred loan fees and dealer discounts

    (19,843,416 )   (21,519,999 )

Unearned debt protection fees and insurance premium reserves

    (13,073,836 )   (14,701,405 )

Unapplied finance receivables payments

        (11,152,083 )

Debt protection claims and policy reserves

    (2,975,238 )   (1,759,026 )
           

Total unearned fees and premiums

    (35,892,490 )   (49,132,513 )

Finance receivables—net of unearned fees and premiums

    360,910,518     356,101,026  

Allowance for credit losses

    (29,000,000 )   (25,396,255 )
           

Net finance receivables

  $ 331,910,518   $ 330,704,771  
           

        Management has an established methodology to determine the adequacy of the allowance for credit losses that assesses the risks and losses inherent in the finance receivable portfolio. Our portfolio consists of a large number of relatively small, homogenous accounts. No account is large enough to warrant individual evaluation for impairment. For purposes of determining the allowance for credit losses, the Company has segmented the finance receivable portfolio by military loans and retail installment contracts.

        The allowance for credit losses for military loans and retail installment contracts is maintained at an amount that management considers sufficient to cover estimated future losses inherent in the

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 2: FINANCE RECEIVABLES (Continued)

finance receivable portfolio. Our allowance for credit losses is sensitive to risk ratings assigned to evaluated segments, economic assumptions and delinquency trends driving statistically modeled reserves. We consider numerous qualitative and quantitative factors in estimating losses in our finance receivable portfolio, including the following:

    prior credit losses and recovery experience;

    current economic conditions;

    current finance receivable delinquency trends; and

    demographics of the current finance receivables.

        We also use internally developed data in this process. We utilize a statistical model based on potential credit risk trends, growth rate and charge off data, when incorporating historical factors to estimate losses. These results and management's judgment are used to project future losses and to establish the allowance for credit losses for each segment of our finance receivables.

        As part of the on-going monitoring of the credit quality of our entire finance receivable portfolio, management tracks certain credit quality indicators of our customers including trends related to (1) net charge-offs, (2) non-performing loans and (3) payment history.

        There is uncertainty inherent in these estimates, making it possible that they could change in the near term. We make regular enhancements to our allowance estimation methodology that have not resulted in material changes to our allowance.

        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:

 
  As of and for the Years Ended September 30,  
 
  2012   2011  
 
  Military
Loans
  Retail
Contracts
  Total   Military
Loans
  Retail
Contracts
  Total  
 
  (dollars in thousands)
 

Allowance for credit losses:

                                     

Balance, beginning of period

  $ 22,970   $ 2,426   $ 25,396   $ 22,764   $ 1,732   $ 24,496  

Finance receivables charged-off

    (32,611 )   (1,923 )   (34,534 )   (26,349 )   (2,516 )   (28,865 )

Recoveries

    3,125     396     3,521     3,693     506     4,199  

Provision

    33,973     644     34,617     22,862     2,704     25,566  
                           

Balance, end of period

  $ 27,457   $ 1,543   $ 29,000   $ 22,970   $ 2,426   $ 25,396  
                           

Finance receivables:

    369,361     27,442     396,803     370,602     34,632     405,234  

Allowance for credit losses

    (27,457 )   (1,543 )   (29,000 )   (22,970 )   (2,426 )   (25,396 )
                           

Balance net of allowance

  $ 341,904   $ 25,899   $ 367,803   $ 347,632   $ 32,206   $ 379,838  
                           

        The accrual of interest income is suspended when a full payment on either military loans or retail installment contracts has not been received for 90 days or more and the interest due exceeds an amount equal to 60 days of interest charges. Non-performing loans represent those finance receivables

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 2: FINANCE RECEIVABLES (Continued)

on which the accrual of interest income has been suspended and for which no full payment of principal or interest has been received for more than 90 days. As of September 30, 2012, we had $10.3 million in military loans and $1.0 million in retail installment contracts that were non-performing loans compared to $7.8 million in military loans and $0.9 million in retail installment contracts as of September 30, 2011.

        We did not have any finance receivables greater than 90 days past due accruing interest as of September 30, 2012 or 2011. The accrual of interest is resumed and the account is considered current when a full payment (95% or more of the contracted payment amount) is received. We consider a loan impaired after 180 days past due and it is removed from our finance receivable portfolio, we do not recognize interest income on impaired loans. We do not restructure troubled debt as a form of curing delinquencies.

        The following table reflects the amount of accrued interest receivable for non-performing loans as of the periods presented:

 
  As of September 30,  
 
  2012   2011(1)  
 
  (dollars in thousands)
 

Total accrued interest receivable

  $ 7,377   $ 5,318  
           

Non-performing assets:

             

Military loans

    631     394  

As percent of total accrued interest receivable

    8.6 %   7.4 %

Retail installment contracts

    13     14  

As percent of total accrued interest receivable

    0.2 %   0.3 %
           

Total accrued interest on non-performing assets

  $ 644   $ 408  

Total non-performing as a percent of total accrued interest

    8.7 %   7.7 %

(1)
Total accrued interest receivable is based on pro forma amounts and excludes the advance allotment payments.

        A large portion of our customers are unable to obtain financing from traditional sources due to factors such as age, frequent relocations and lack of credit history. These factors may not allow them to build relationships with traditional sources of financing. As a result, our receivables do not have a credit risk profile that can be easily measured by the credit quality indicators normally used by the financial markets. We manage the risk by closely monitoring the performance of the portfolio and through our underwriting process.

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 2: FINANCE RECEIVABLES (Continued)

        The following reflects the credit quality of the Company's finance receivables:

 
  As of and for Years
Ending September 30,
 
 
  2012   2011  
 
  (dollars in thousands)
 

Total finance receivables:

             

Gross balance

  $ 396,803   $ 405,234  

Performing

    385,495     396,507  

Non-performing (90 days delinquent)

    11,308     8,727  
           

Non-performing loans as a percent of gross balance

    2.85 %   2.15 %

Military loans:

             

Gross balance

  $ 369,361   $ 370,602  

Performing

    359,108     362,787  

Non-performing (90 days delinquent)

    10,253     7,815  
           

Non-performing loans as a percent of gross balance

    2.78 %   2.11 %

Retail installment contracts:

             

Gross balance

  $ 27,442   $ 34,632  

Performing

    26,387     33,720  

Non-performing (90 days delinquent)

    1,055     912  
           

Non-performing loans as a percent of gross balance

    3.84 %   2.63 %

        As of September 30, 2012, and 2011 the past due finance receivables are as follows:

 
  Age Analysis of Past Due Financing Receivables
As of September 30, 2012
 
 
  60 - 89 Days
Past Due
  90 - 180 Days
Past Due
  Total
60 - 180 Days
Past Due
  0 - 59 Days
Past Due
  Total
Finance
Receivables
 
 
  (dollars in thousands)
 

Finance receivables:

                               

Military loans

  $ 3,539   $ 10,253   $ 13,792   $ 355,569   $ 369,361  

Retail installment contracts

    380     1,055     1,435     26,007     27,442  
                       

Total

  $ 3,919   $ 11,308   $ 15,227   $ 381,576   $ 396,803  
                       

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 2: FINANCE RECEIVABLES (Continued)


 
  Age Analysis of Past Due Financing Receivables
As of September 30, 2011
 
 
  60 - 89 Days
Past Due
  90 - 180 Days
Past Due
  Total
60 - 180 Days
Past Due
  0 - 59 Days
Past Due
  Total
Finance
Receivables
 
 
  (dollars in thousands)
 

Finance receivables:

                               

Military loans

  $ 4,697   $ 7,815   $ 12,512   $ 358,090   $ 370,602  

Retail installment contracts

    529     912     1,441     33,191     34,632  
                       

Total

  $ 5,226   $ 8,727   $ 13,954   $ 391,280   $ 405,234  
                       

        Additionally, CBD uses our underwriting criteria, which were developed from our past customer credit repayment experience and are periodically evaluated based on current portfolio performance. These criteria require the following:

    All borrowers are primarily active duty, 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 review must be conducted on all applicants' military service history. This includes a review of status including rank and time in service. Other review procedures may be conducted as deemed necessary.

    Loan repayment terms are generally structured to repay the entire loan prior to the borrower's estimated separation from the military.

        These indicators are used to help minimize the risk of unwillingness or inability to repay for both military loans and retail installment contracts. These guidelines were developed from past customer credit repayment experience and are periodically revalidated based on current portfolio performance. Loans are limited to amounts that the customer could reasonably be expected to repay from discretionary income.

        The liability for unpaid claims and claim adjustment expenses is estimated using an actuarially computed amount payable on claims reported prior to the balance sheet date that have not yet been settled, claims reported subsequent to the balance sheet date that have been incurred during the period ended, and an estimate (based on prior experience) of incurred but unreported claims relating to such period.

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 2: FINANCE RECEIVABLES (Continued)

        The chart below details the amount of earned fees that are related to our debt protection product as of the period presented:

 
  For the Years Ended September 30,  
 
  2012   2011   2010  

Revenue:

                   

Net debt protection revenue

  $ 8,346,102   $ 7,261,475   $ 1,285,641  
               

Expenses:

                   

Claims paid and change in reserve

  $ 2,944,824   $ 1,879,518   $ 131,258  

Third party commissions

    898,811     797,989     138,656  
               

Total expenses

  $ 3,843,635   $ 2,677,507   $ 269,914  
               

Net debt protection income:

  $ 4,502,467   $ 4,583,968   $ 1,015,727  
               

        Activity in the liability for unpaid claims and claim adjustment expenses for our health and life coverage for debt protection and reinsurance are summarized as follows:

 
  As of and for the Years ended
September 30,
 
 
  2012   2011   2010  

Balance, beginning of period

  $ 1,759,026   $ 653,926   $ 627,106  

Claim amount incurred, related to

                   

Prior periods

    962,354     906,342     281,310  

Current period

    1,980,567     984,708     186,067  
               

Total

    2,942,921     1,891,050     467,377  

Claim amount paid, related to

                   

Prior periods

    564,645     376,690     265,167  

Current period

    1,162,064     409,260     175,390  
               

Total

    1,726,709     785,950     440,557  
               

Balance, end of period

  $ 2,975,238   $ 1,759,026   $ 653,926  
               

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 3: INVESTMENTS—RESTRICTED

        Assurant processes and administers insurance transactions and activity on behalf of the Company. Pursuant to applicable insurance regulations, we are required to maintain a 102% of unearned premium and insurance claim and policy reserves, with a qualified financial institution which, as of September 30, 2012 was $0.3 million. Restricted investments are comprised of U.S. government bonds. As of September 30, 2012, restricted investments of $1.0 million will mature after one year and before five years.

        We record our restricted investments at fair value. The following table represents the restricted investments as of September 30, 2012 and 2011:

 
  As of September 30, 2012   As of September 30, 2011  
 
  Book Value   Gross
Unrealized
Gains(1)
  Gross
Unrealized
(Losses)
  Fair Value   Book Value   Gross
Unrealized
Gains
  Gross
Unrealized
(Losses)
  Fair Value  

Restricted investments:

                                                 

U.S. government bonds

  $ 983,144   $ 40,990   $   $ 1,024,134   $ 2,911,384   $ 176,188   $   $ 3,087,572  
                                   

Total restricted investments

  $ 983,144   $ 40,990   $   $ 1,024,134   $ 2,911,384   $ 176,188   $   $ 3,087,572  
                                   

(1)
The unrealized gain on investments of $40,990 net of tax of $14,347 represents the accumulated other comprehensive income of $26,643.

        During fiscal 2012 and 2011, we did not recognize any material realized gains or losses or receive proceeds from sales on restricted investments. In fiscal 2012, we received authorization from Assurant to transfer $1.9 million in book value of U.S. government bonds from restricted to non-restricted.

NOTE 4: INVESTMENTS—NON-RESTRICTED

        Non-restricted investments are comprised of certificates of deposit and U.S. government bonds. We have total non-restricted investments of $3.4 million and $2.8 million as of September 30, 2012 and 2011, respectively. As of September 30, 2012, non-restricted investments of $1.6 million will mature within one year and $1.8 million will mature after one year and before five years.

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 4: INVESTMENTS—NON-RESTRICTED (Continued)

        We record our non-restricted investments at fair value. The following table represents the non-restricted investments as of September 30, 2012 and 2011:

 
  As of September 30, 2012   As of September 30, 2011  
 
  Book Value   Gross
Unrealized
Gains(1)
  Gross
Unrealized
(Losses)
  Fair Value   Book Value   Gross
Unrealized
Gains
  Gross
Unrealized
(Losses)
  Fair Value  

Non-restricted investments:

                                                 

Certificates of deposit

  $ 594,000   $   $   $ 594,000   $ 900,012   $   $   $ 900,012  

U.S. government bonds

    2,717,902     48,871         2,766,773     1,932,960             1,932,960  
                                   

Total non-restricted investments

  $ 3,311,902   $ 48,871   $   $ 3,360,773   $ 2,832,972   $   $   $ 2,832,972  
                                   

(1)
The unrealized gain on investments of $48,871 net of tax of $17,104 represents the accumulated other comprehensive income of $31,767.

        During fiscal 2012 and 2011, we did not recognize any material realized gains or losses or receive proceeds from sales on non-restricted investments. In fiscal 2012, we received authorization from Assurant to transfer $1.9 million in book value of U.S. government bonds from restricted to non-restricted.

NOTE 5: FURNITURE AND EQUIPMENT

        Cost and accumulated depreciation of property and equipment at September 30, 2012 and 2011 is as follows:

 
  As of and For the Year Ended
September 30,
 
 
  2012   2011  

Furniture and equipment

  $ 41,200   $ 41,200  

Computer software

    1,174,169     1,137,164  

Work in process

    505,014      
           

    1,720,383     1,178,364  

Less accumulated depreciation

    (1,155,356 )   (1,068,308 )
           

Furniture and equipment—net

  $ 565,027   $ 110,056  
           

        Furniture and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method. Estimated useful lives are 7 years for furniture and equipment, and 3 years for computer software. Major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Depreciation expense was $0.1 million for the years ended September 30, 2012 and 2011.

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011, 2010, AND 2009

NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS

        In connection with the Transaction, MCFC paid the shareholders of Pioneer Funding Inc., (the "Sellers") approximately $68.8 million in cash and 882,353 shares of MCFC's common stock. Under the related purchase agreement, MCFC was also required to pay the Sellers an additional $5 million in contingent payments, of which $4 million was contributed to us and $1 million to CBD. The final contingent payment was made on March 31, 2009. The total purchase price was $90,229,762.

        The fair value assigned to intangible assets acquired and assumed liabilities is supported by valuations using estimates and assumptions provided by management.

        We test goodwill for impairment annually and more frequently if events and circumstances indicate that the asset may be impaired and that the carrying value may not be recoverable. The provisions of ASC-350 require that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of our reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to the reporting unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If upon completing the second step of the impairment test the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

        Due to the Transaction, we recorded goodwill and amortizable intangible assets in the form of customer, agent and vendor relationships, trade name, technology for the lending system and the value of business acquired. Goodwill and intangible assets at September 30, 2012 and 2011 are as follows:

 
  As of and for the Year Ended September 30,  
 
  2012   2011  
 
  Gross
Carrying
Amount
  Accumulated
Amortization
  Net
Carrying
Value
  Gross
Carrying
Amount
  Accumulated
Amortization
  Net
Carrying
Value
 

Customer relationships

  $ 11,000,000   $ (8,881,052 ) $ 2,118,948   $ 11,000,000   $ (7,929,344 ) $ 3,070,656  

Agent relationships

    700,000     (525,464 )   174,536     700,000     (456,968 )   243,032  

Vendor relationships

    1,700,000     (1,275,244 )   424,756     1,700,000     (1,109,608 )   590,392  

Trade name

    7,000,000     (4,373,880 )   2,626,120     7,000,000     (3,674,508 )   3,325,492  

Technology

    4,000,000     (3,839,760 )   160,240     4,000,000     (3,489,372 )   510,628