PFSI-2015.6.30-10Q

10-Q 1 pfsi-2015630x10q.htm 10-Q PFSI-2015.6.30-10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2015

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 333-103293

Pioneer Financial Services, Inc.

(Exact name of registrant as specified in its charter)



Missouri		44-0607504
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4700 Belleview Avenue, Suite 300, Kansas City, Missouri		64112
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code: (816) 756-2020

(Former name, former address and former fiscal year, if

changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by 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. (Check one)



Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding as of August 12, 2015
Common Stock, no par value		One Share

As of August 12, 2015, one share of the registrant’s common stock is outstanding. The registrant is a wholly owned subsidiary of MidCountry Financial Corp.

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PIONEER FINANCIAL SERVICES, INC.

FORM 10-Q

June 30, 2015

TABLE OF CONTENTS



Item No.		Page

	PART I FINANCIAL INFORMATION

1.	Consolidated Financial Statements	1

	Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014	1

	Consolidated Statement of Operations for the three and nine months ended June 30, 2015 and 2014	2

	Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2015 and 2014	3

	Consolidated Statements of Stockholder's Equity for the nine months ended June 30, 2015 and 2014	4

	Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014	5

	Notes to Consolidated Financial Statements	6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

3.	Quantitative and Qualitative Disclosures About Market Risk	31

4.	Controls and Procedures	31

	PART II OTHER INFORMATION

1.	Legal Proceedings	32

1A.	Risk Factors	32

6.	Exhibits	32

Signatures		33

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PART I - FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements

PIONEER FINANCIAL SERVICES, INC.

Consolidated Balance Sheets

As of June 30, 2015 and September 30, 2014

(unaudited)



	June 30, 2015			September 30, 2014
	(dollars in thousands)

ASSETS

Cash and cash equivalents - non-restricted	$	5,206		$	7,656
Cash and cash equivalents - restricted	620			621
Investments	—			350
Gross finance receivables	258,104			268,522
Less:
Unearned fees	(9,321		)	(9,451		)
Allowance for credit losses	(28,987		)	(31,850		)
Net finance receivables	219,796			227,221

Furniture and equipment, net	2,824			2,567
Net deferred tax asset	15,155			20,669
Prepaid and other assets	9,048			8,119
Deferred acquisition costs	1,056			1,103

Total assets	$	253,705		$	268,306

LIABILITIES AND STOCKHOLDER’S EQUITY

Liabilities:
Revolving credit line - banks	$	16,980		$	—
Accounts payable	3,464			316
Accrued expenses and other liabilities	2,741			7,738
Voluntary remediation payable	1,490			14,552
Amortizing term notes	111,287			127,777
Investment notes	43,791			54,773

Total liabilities	179,753			205,156

Stockholder’s equity:
Common stock, no par value; 1 share issued and outstanding	86,394			86,394
Additional paid in capital	9,022			—
Retained deficit	(21,464		)	(23,244		)

Total stockholder’s equity	73,952			63,150

Total liabilities and stockholder’s equity	$	253,705		$	268,306

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

Consolidated Statements of Operations

For the three and nine months ended June 30, 2015 and 2014

(unaudited)



	Three Months Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
	(dollars in thousands)

Interest income and fees	$	18,112		$	21,530		$	56,016		$	72,360

Interest expense	2,635			3,676			8,448			12,220

Net interest income before provision for credit losses	15,477			17,854			47,568			60,140
Provision for credit losses	5,573			8,323			19,076			28,671
Net interest income	9,904			9,531			28,492			31,469

Debt protection income, net
Debt protection revenue	391			704			1,216			2,360
Claims paid and change in reserves	(234		)	(203		)	(585		)	(458		)
Third party commissions	(43		)	(76		)	(135		)	(254		)
Total debt protection income, net	114			425			496			1,648

Other revenue	1			5			4			16

Total non-interest income, net	115			430			500			1,664

Non-interest expense
Management and record keeping services	5,716			5,603			17,131			22,355
Consumer lending software expense	2,313			—			2,313			—
Professional and regulatory fees	751			523			1,942			1,516
Amortization of intangibles	—			311			—			933
Other operating expenses	693			641			2,113			2,056
Total non-interest expense	9,473			7,078			23,499			26,860

Income before income taxes	546			2,883			5,493			6,273
Provision for income taxes	199			1,101			2,122			2,374
Net income	$	347		$	1,782		$	3,371		$	3,899

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

Consolidated Statements of Comprehensive Income

For the three and nine months ended June 30, 2015 and 2014

(unaudited)



	Three Months Ended June 30,					Nine Months Ended June 30,
	2015		2014			2015		2014
	(dollars in thousands)

Net income	$	347	$	1,782		$	3,371	$	3,899
Other comprehensive loss:
Unrealized losses on investment securities available for sale, gross	—		(2		)	—		(12		)
Tax benefit	—		1			—		4
Total other comprehensive loss, net of tax	—		(1		)	—		(8		)
Total comprehensive income	$	347	$	1,781		$	3,371	$	3,891

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

Consolidated Statements of Stockholder’s Equity

For the nine months ended June 30, 2015 and 2014

(unaudited)



	Total			Common Stock		Additional Paid in Capital		Retained (Deficit) Earnings			Accumulated Other Comprehensive Income
	(dollars in thousands)

Balance, September 30, 2013	$	104,672		$	86,394	$	—	$	18,269		$	9

Total comprehensive income	3,891			—		—		3,899			(8		)
Dividends paid to parent	(2,340		)	—		—		(2,340		)	—

Balance, June 30, 2014	$	106,223		$	86,394	$	—	$	19,828		$	1

Balance, September 30, 2014	$	63,150		$	86,394	$	—	$	(23,244	)	$	—

Capital contribution from parent	9,022			—		9,022		—			—
Total comprehensive income	3,371			—		—		3,371			—
Dividends paid to parent	$	(1,591	)	—		—		(1,591		)	—

Balance, June 30, 2015	$	73,952		$	86,394	$	9,022	$	(21,464	)	$	—

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

Consolidated Statements of Cash Flows

For the nine months ended June 30, 2015 and 2014

(unaudited)



	Nine Months Ended June 30,
	2015			2014
	(dollars in thousands)

Cash flows from operating activities:
Net income	$	3,371		$	3,899
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Provision for credit losses on finance receivables	19,076			28,671
Consumer lending software expense	2,313			—
Depreciation and amortization	80			1,023
Deferred income taxes	5,514			460
Interest accrued on investment notes	1,949			2,043
Changes in:
Voluntary remediation payable	(13,062		)	—
Accounts payable and accrued expenses	(2,834		)	(1,013		)
Deferred acquisition costs	47			1,135
Unearned debt protection fees	111			(2,797		)
Prepaid and other assets	(929		)	1,174

Net cash provided by operating activities	15,636			34,595

Cash flows from investing activities:
Finance receivables purchased from affiliate	(136,273		)	(111,681		)
Finance receivables purchased from retail merchants	—			(1,464		)
Finance receivables repaid	124,511			155,629
Capital expenditures	(1,724		)	(121		)
Change in restricted cash	1			1
Investments matured	350			1,350

Net cash (used)/provided by investing activities	(13,135		)	43,714

Cash flows from financing activities:
Net borrowings/(repayments) under lines of credit	16,980			(19,240		)
Proceeds from borrowings	52,201			21,714
Repayment of borrowings	(81,563		)	(71,940		)
Capital contribution from parent	9,022			—
Dividends paid to parent	(1,591		)	(2,340		)

Net cash used in financing activities	(4,951		)	(71,806		)

Net (decrease)/increase in cash and equivalents	(2,450		)	6,503

Cash and cash equivalents - non-restricted, Beginning of period	7,656			1,923

Cash and cash equivalents - non-restricted, End of period	$	5,206		$	8,426

Additional cash flow information:
Interest paid	$	7,096		$	10,942
Income taxes (refunded)/paid	(743		)	1,812
Consumer lending software expense in accounts payable and other liabilities	985			—

See Notes to Consolidated Financial Statements

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PIONEER FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2015 and September 30, 2014 and for the three and nine months ended June 30, 2015 and June 30, 2014

(unaudited)

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

Basis of Presentation

The accompanying unaudited 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 are a wholly owned subsidiary of MidCountry Financial Corp., a Georgia corporation (“MCFC”). The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K. In the opinion of the management of the Company, these financial statements reflect all normal and recurring adjustments necessary to present fairly these consolidated financial statements in accordance with GAAP.

Nature of Operations and Concentration

We are headquartered in Kansas City, Missouri. We purchase finance receivables from the Consumer Banking Division (“CBD”) of MidCountry Bank (“MCB”), a federally chartered savings bank and wholly owned subsidiary of MCFC. These receivables represent loans primarily to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. We also historically purchased finance receivables from retail merchants that sold consumer goods to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. We terminated the purchasing of retail installment contracts on March 31, 2014. See Note 2 for further information.

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the unaudited consolidated financial statements and in disclosures of contingent assets and liabilities. We use estimates and employ judgments in determining the amount of our allowance for credit losses, debt protection claims and policy reserves, deferred tax assets and liabilities and establishing the fair value of our financial instruments.

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NOTE 2: FINANCE RECEIVABLES

Our finance receivables are comprised of military loans and retail installment contracts. During the third quarter of fiscal 2015, we purchased $105.2 million of military loans from CBD compared to $51.5 million during the third quarter of fiscal 2014. Approximately 34.7% of the amount of military loans we purchased in the third quarter of fiscal 2015 were refinancings of outstanding loans compared to 29.2% during the third quarter of fiscal 2014. We ceased purchasing retail installment contracts on March 31, 2014 and thus did not acquire retail installment contracts during either the third quarter of fiscal 2015 or the third quarter of fiscal 2014.

CBD has assumed the relationships with members of our retail merchant network. We will purchase direct military loans made by CBD to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees that are customers of such retail merchants who wish to finance a retail purchase with a direct military loan from CBD.

The following table represents finance receivables for the periods presented:



	June 30, 2015			September 30, 2014
	(dollars in thousands)

Finance Receivables:
Military loans	$	256,685		$	263,675
Retail installment contracts	1,419			4,847
Gross finance receivables	258,104			268,522

Less:
Net deferred loan fees and dealer discounts	(5,394		)	(4,573		)
Unearned debt protection fees	(2,793		)	(2,682		)
Debt protection claims and policy reserves	(1,134		)	(2,196		)
Total unearned fees	(9,321		)	(9,451		)

Finance receivables - net of unearned fees	248,783			259,071

Allowance for credit losses	(28,987		)	(31,850		)

Net finance receivables	$	219,796		$	227,221

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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, we have 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 losses inherent in the finance receivables 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 receivables portfolio, including the following:


•	Prior credit losses and recovery experience;


•	Current economic conditions;


•	Current finance receivables delinquency trends; and


•	Demographics of the current finance receivables portfolio.

We also use internally developed data in this process. We utilize a statistical model based on 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 inherent losses and to establish the allowance for credit losses for each segment of our finance receivables portfolio.

As part of the on-going monitoring of the credit quality of our entire finance receivables 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 balance.

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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:



	For the Three Months Ended June 30, 2015									For the Three Months Ended June 30, 2014
	Military Loans			Retail Contracts			Total			Military Loans			Retail Contracts			Total
	(dollars in thousands)

Allowance for credit losses:
Balance, beginning of period	$	29,709		$	638		$	30,347		$	29,964		$	1,886		$	31,850
Finance receivables charged-off	(8,146		)	(172		)	(8,318		)	(9,647		)	(569		)	(10,216		)
Recoveries	1,269			116			1,385			1,127			171			1,298
Provision	5,632			(59		)	5,573			8,099			224			8,323
Balance, end of period	$	28,464		$	523		$	28,987		$	29,543		$	1,712		$	31,255

	For the Nine Months Ended June 30, 2015									For the Nine Months Ended June 30, 2014
	Military Loans			Retail Contracts			Total			Military Loans			Retail Contracts			Total
	(dollars in thousands)

Allowance for credit losses:
Balance, beginning of period	$	30,537		$	1,313		$	31,850		$	30,058		$	1,342		$	31,400
Finance receivables charged-off	(25,095		)	(832		)	(25,927		)	(30,142		)	(2,127		)	(32,269		)
Recoveries	3,633			355			3,988			3,036			417			3,453
Provision	19,389			(313		)	19,076			26,591			2,080			28,671
Balance, end of period	$	28,464		$	523		$	28,987		$	29,543		$	1,712		$	31,255

Finance receivables	$	256,685		$	1,419		$	258,104		$	281,118		$	6,864		$	287,982
Allowance for credit losses	(28,464		)	(523		)	(28,987		)	(29,543		)	(1,712		)	(31,255		)
Balance net of allowance	$	228,221		$	896		$	229,117		$	251,575		$	5,152		$	256,727

The accrual of interest income is suspended when three full payments (95% or more of the contracted payment amount) on either military loans or retail installment contracts has not been received and accrued interest is limited to no more than 92 days. Loans that are 92 days past their contractual due date are deemed to be non-performing. As of June 30, 2015, we had $14.7 million in military loans and $0.4 million in retail installment contracts that were classified to be non-performing, compared to $16.2 million in military loans and $1.1 million in retail installment contracts as of September 30, 2014. As of June 30, 2015, we had $0.8 million in accrued interest for military loans and $5.0 thousand in accrued interest for retail installment contracts for assets that were classified as non-performing. As of September 30, 2014, we had $0.9 million in accrued interest for military loans and $0.02 million in accrued interest for retail installment contracts for assets that were classified as non-performing.

We consider a loan impaired when a full payment has not been received for 180 days and is also 30 days contractually past due. Impaired loans are removed from our finance receivable portfolio, including any accrued interest, and charged against income. We do not restructure troubled debt as a form of curing delinquencies.

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A large portion of our customers are unable to obtain financing from traditional sources due to factors such as time in grade, 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 purchasing criteria. The following reflects the credit quality of the Company’s finance receivables portfolio:



	June 30, 2015			September 30, 2014
	(dollars in thousands)
Total finance receivables:
Gross balance	$	258,104		$	268,522
Performing	242,997			251,276
Non-performing	15,107			17,246
Non-performing loans as a percent of gross balance	5.85		%	6.42		%

Military loans:
Gross balance	$	256,685		$	263,675
Performing	241,966			247,481
Non-performing	14,719			16,194
Non-performing loans as a percent of gross balance	5.73		%	6.14		%

Retail installment contracts:
Gross balance	$	1,419		$	4,847
Performing	1,031			3,795
Non-performing	388			1,052
Non-performing loans as a percent of gross balance	27.34		%	21.70		%

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As of June 30, 2015 and September 30, 2014, the past due finance receivables, on a recency basis, are as follows:



	Age Analysis of Past Due Finance Receivables
	As of June 30, 2015
	60-89 Days		90-180 Days		Total 60-180 Days		0-59 Days		Total
	Past Due		Past Due		Past Due		Past Due		Finance Receivables
	(dollars in thousands)
Finance receivables:
Military loans	$	3,680	$	7,406	$	11,086	$	245,599	$	256,685
Retail installment contracts	34		148		182		1,237		1,419
Total	$	3,714	$	7,554	$	11,268	$	246,836	$	258,104



	Age Analysis of Past Due Finance Receivables
	As of September 30, 2014
	60-89 Days		90-180 Days		Total 60-180 Days		0-59 Days		Total
	Past Due		Past Due		Past Due		Past Due		Finance Receivables
	(dollars in thousands)
Finance receivables:
Military loans	$	4,120	$	10,083	$	14,203	$	249,472	$	263,675
Retail installment contracts	145		482		627		4,220		4,847
Total	$	4,265	$	10,565	$	14,830	$	253,692	$	268,522

Additionally, we have adopted purchasing criteria, which was developed from our past customer credit repayment experience and is periodically evaluated 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 online via the internet; and


•	All loans must meet additional purchasing criteria that was developed from our past credit repayment experience and is periodically revalidated based on current portfolio performance.

These criteria are used to help minimize the risk of purchasing loans where there is an unwillingness or inability to repay. The CBD limits the loan amount to that which the customer could reasonably be expected to repay.

On April 22, 2015, CBD modified its lending criteria and scoring model to use credit score information provided by the FICO Score 8 model, in combination with certain credit overlays. The Company modified its purchasing guidelines to accept loans originated by CBD with the FICO 8 model and certain credit overlays.

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NOTE 3: RELATED PARTY TRANSACTIONS

We entered into the fourth amended and restated Loan Sale and Master Services Agreement (“LSMS Agreement”) with CBD in November 2014. Under the LSMS Agreement, we buy certain military loans that CBD originates and receive management and record-keeping services from CBD. The following table represents the related party transactions associated with this agreement and other related party transactions for the periods presented.



	Three Months Ended June 30,					Nine Months Ended June 30,
	2015			2014		2015			2014
	(dollars in thousands)

Loan purchasing:
Loans purchased from CBD	$	64,055		$	34,364	$	136,273		$	111,681

Management and record keeping services:
Monthly servicing to CBD ⁽¹⁾	$	3,539		$	3,872	$	11,163		$	18,059
Monthly special services fee to CBD⁽²⁾	1,851			1,499		5,019			1,499
Monthly base fee to CBD ⁽³⁾	125			125		375			125
Monthly indirect cost allocations to MCFC ⁽⁴⁾	201			107		574			414
Monthly relationship fee to CBD ⁽⁵⁾	—			—		—			2,258
Total management and record keeping services	$	5,716		$	5,603	$	17,131		$	22,355

Other transactions:
Fees paid to CBD in connection with loans purchased ⁽⁶⁾	$	602		$	513	$	1,425		$	1,685
Tax (refunds)/payments (from)/to MCFC	(632		)	32		(743		)	1,812
Dividends paid to MCFC	474			479		1,591			2,340
Direct cost allocations to MCFC ⁽⁷⁾	269			270		755			890
Capital contribution from MCFC	—			—		(9,022		)	—
Other reimbursements to CBD ⁽⁸⁾	—			—		1,650			—
Total other transactions	$	713		$	1,294	$	(4,344	)	$	6,727


⁽¹⁾	Effective October 1, 2014, the monthly servicing fee to CBD was 0.496% of outstanding principal under the amended LSMS Agreement. The monthly servicing fee was 0.68% of outstanding principal for the first six months of fiscal 2014.


⁽²⁾	Effective on April 1, 2014, monthly fees for special services that are not included in the LSMS Agreement will be at a rate of 125% of the cost of such services.


⁽³⁾	Effective on April 1, 2014, $500,000 annual base fee, payable monthly to CBD.


⁽⁴⁾	The annual maximum for fiscal years 2015 and 2014 is $765,750. The maximum may be increased annually in June with an increase in the Consumer Price Index.


⁽⁵⁾	The monthly relationship fee ceased on March 31, 2014 with the amended LSMS Agreement. The monthly relationship fee was $2.82 for each loan owned at the prior fiscal year end for the six months ended March 31, 2014.


⁽⁶⁾	Effective October 1, 2014, we pay a $26.00 fee for each military loan purchased from CBD to reimburse CBD for loan origination costs. In fiscal 2014 the fee was $30.00 for each military loan purchased from CBD.


⁽⁷⁾	This allocation has a $1,877,636 annual maximum for fiscal year 2015 plus 7% per annum thereafter. $1,754,800 annual maximum for fiscal year 2014.


⁽⁸⁾	A one-time fee of $1,650,000 to implement a new consumer lending system that was paid over five monthly installments beginning on October 1, 2014.

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NOTE 4: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND INVESTMENTS

A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms.

Fair value estimates are made at a point in time, based on relevant market data and information about the financial instrument. Fair values should be calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. No readily available market exists for a significant portion of the Company’s financial instruments. Fair value estimates for these instruments are based on judgments regarding current economic conditions, interest rate risk characteristics, loss experience, and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect the estimates.

Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:


•	Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•

Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).


•	Level 3 — Unobservable inputs reflect the Company’s judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. The Company develops these inputs based on the best information available, including the Company’s own data.

For the first nine months of fiscal 2015 and the fiscal year ended September 30, 2014 there were no significant transfers in or out of Levels 1, 2 or 3.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and Cash Equivalents - Non-restricted and Restricted — The carrying value approximates fair value due to their liquid nature and is classified as Level 1 in the fair value hierarchy.

Investments — Fair value for U.S. government bond investments is based on quoted prices for similar assets in active markets and classified as Level 2 in the fair value hierarchy. The carrying value of certificates of deposit approximates fair value due to their liquid nature and is classified as Level 1 in the fair value hierarchy.

Finance Receivables — The fair value of finance receivables is estimated by discounting the receivables using current rates at which similar finance receivables would be made to borrowers with similar credit ratings and for the same remaining maturities as of the fiscal quarter or year end. In addition, the best estimate of losses inherent in the portfolio is deducted when computing the estimated fair value of finance receivables. If the Company’s finance receivables were measured at fair value in the financial statements these finance receivables would be classified as Level 3 in the fair value hierarchy.

Amortizing Term Notes — The fair value of the amortizing term notes with fixed interest rates is estimated using the discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. If the Company’s amortizing term notes were measured at fair value in the financial statements, these amortizing term notes would be categorized as Level 2 in the fair value hierarchy.

Investment Notes — The fair value of investment notes is estimated by discounting future cash flows using current rates at which similar investment notes would be offered to lenders for the same remaining maturities. If the Company’s investment notes were measured at fair value in the financial statements, these investment notes would be categorized as Level 2 in the fair value hierarchy.

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The carrying amounts and estimated fair values of our financial instruments at June 30, 2015 and September 30, 2014 are as follows:



	June 30, 2015				September 30, 2014
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(dollars in thousands)

Financial assets:
Cash and cash equivalents - non-restricted	$	5,206	$	5,206	$	7,656	$	7,656
Cash and cash equivalents - restricted	620		620		621		621
Investments	—		—		350		350
Net finance receivables	219,796		223,925		227,221		227,304

Financial liabilities:
Amortizing term notes	$	111,287	$	111,988	$	127,777	$	129,328
Investment notes	43,791		47,257		54,773		58,945

There were no investments outstanding as of June 30, 2015. Book value of investments outstanding as of September 30, 2014 was $0.35 million, $0.25 million of which was U.S. government bonds and the remaining $0.1 million was certificates of deposit. There were no unrealized gains or losses as of September 30, 2014 as carrying value approximated fair value.

During first nine months of fiscal 2015 and 2014, the Company received $0.35 million and $1.4 million, respectively, in proceeds from the maturity of U.S. government bonds and certificates of deposit. During the first nine months of fiscal 2015 and 2014 we did not recognize any material realized gains or losses or receive proceeds on the sale of investment securities.

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NOTE 5: BORROWINGS

Secured Senior Lending Agreement

On June 12, 2009, we entered into a Secured Senior Lending Agreement (the “SSLA”) with the lenders listed on the SSLA (“the lenders”) and UMB Bank, N.A. (the “Agent”). The term of the current SSLA ends on March 31, 2016 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 (the “Senior Debt”). The facility is an uncommitted credit 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 future fundings at any time without penalty. If a lender were to choose not to participate in future fundings, the outstanding amortizing notes would be repaid based on the original terms of the note. Any existing borrowings from that lender under the revolving credit line are payable in 12 equal monthly installments. As of June 30, 2015, we could request up to $44.2 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 June 30, 2015, the lenders have indicated a willingness to participate in fundings up to an aggregate of $171.9 million during the next 12 months, including $128.3 million that is currently outstanding. During the third quarter of fiscal 2015, two banks with aggregate funding availability of $16.4 million notified the Company that they would not be participating in future borrowings at this time. The two banks did not formally withdrawal from the SSLA and are considering future funding opportunities. One bank with a total funding participation of $10.0 million and $3.1 million in borrowings outstanding as of March 31, 2015, withdrew from the SSLA in the second quarter of fiscal 2015. Several other banks reduced their total funding participation by $29.4 million during the second fiscal quarter of 2015. Additionally, we received consent from the lenders to pay off the $19.4 million, as of March 31, 2015, in borrowings from withdrawing banks that previously participated in the SSLA. In April 2015, we paid off the $19.4 million in withdrawing bank borrowings with fundings from the remaining SSLA lenders.

Our SSLA allows additional banks to become parties to the SSLA under a non-voting role. We have identified each lender that has voting 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 a party to the same terms and conditions of the SSLA, all of the non-voting banks acknowledge and agree that they have no right to vote on any matter nor to prohibit or limit any action by us, or the voting banks. As of June 30, 2015, the principal balance outstanding to non-voting banks under the SSLA was $0.6 million.

The aggregate notional balance outstanding under amortizing notes was $111.3 million and $127.8 million at June 30, 2015 and September 30, 2014, respectively. There were 216 and 320 amortizing term notes outstanding at June 30, 2015 and September 30, 2014, respectively, with a weighted-average interest rate of 5.82% and 6.09%, 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 may not be less than 5.25%. All amortizing notes have terms not to exceed 48 months, payable in equal monthly principal and interest payments. Interest on amortizing notes is payable monthly. 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. In the third fiscal quarter of 2015 and 2014, uncommitted availability fees were $0.10 million and $0.13 million, respectively.

Advances outstanding under the revolving credit line were $17.0 million and zero at June 30, 2015 and September 30, 2014, 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 4.00%, whichever is greater. Interest on borrowings was 4.00% at June 30, 2015.

Substantially all of our assets secure the 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 to MCFC direct and indirect expense allocation charges each year except as 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 management agreements with our affiliates.

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Under the SSLA, we are subject to certain financial covenants requiring 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 finance receivables, unless otherwise required by GAAP; (2) limit our senior indebtedness as of the end of each quarter to not greater than three and one half 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 70% of our consolidated net finance 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. 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 capital may be distributed as a dividend. Except as required by law, we may not stop purchasing small loans to military families from CBD, unless the lenders consent to such action.

In connection with the execution of the SSLA, MCFC entered into an Unlimited Continuing Guaranty and a Negative Pledge Agreement in favor of the Agent.

Investment Notes

We also have borrowings through the issuance of investment notes (with accrued interest) with an outstanding notional balance of $43.8 million, which includes a $0.06 million purchase adjustment at June 30, 2015, and $54.8 million, which includes a $0.12 million purchase adjustment at September 30, 2014. The purchase adjustments relate to fair value adjustments recorded as part of the purchase of the Company by MCFC. These investment notes are nonredeemable before maturity by the holders, issued at various rates and mature one to ten years from date of issue. At our option, we may redeem and retire any or all of the debt upon 30 days written notice. The average investment note payable was $52,435 and $53,062, with a weighted interest rate of 9.23% at June 30, 2015 and September 30, 2014, respectively.

On April 29, 2015, we filed with the Securities and Exchange Commission ("SEC") our post-effective amendment to remove from registration all securities that remain unsold under our amended registration statement originally filed with the SEC on January 28, 2011 (the "Registration Statement"). We subsequently filed a Form RW, on June 5, 2015, to withdraw Post-Effective Amendment No. 4 to the Registration Statement, pursuant to which no securities were sold and which was never declared effective by the SEC. We will no longer offer and sell investment notes pursuant to the Registration Statement.

Subordinated Debt - Parent

Our SSLA allows for a revolving line of credit with our parent. Funding on this line of credit is provided as needed at our request and dependent upon the availability of funds from our parent and repayment 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 June 30, 2015 and September 30, 2014 we did not have an outstanding balance.

Maturities

A summary of maturities for the amortizing notes and investment notes (net of purchase price adjustments) as of June 30, 2015, follows:



	Amortizing Notes SSLA Lenders		Amortizing Notes Non-Voting Banks		Investment Notes		Total
	(dollars in thousands)

2015	$	12,254	$	325	$	3,195	$	15,774
2016	43,938		280		16,707		60,925
2017	31,085		—		5,732		36,817
2018	14,440		—		634		15,074
2019	8,965		—		686		9,651
2020 and beyond	—		—		16,777		16,777
Total	$	110,682	$	605	$	43,731	$	155,018

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NOTE 6: VOLUNTARY REMEDIATION

In June 2013, MCB received a letter from the Office of the Comptroller of the Currency (the "OCC") regarding certain former business practices of CBD that the OCC alleged violated Section 5 of the Federal Trade Commission Act. In July 2013, MCB responded in writing to the OCC regarding its analysis of the former business practices and stated that it did not believe it engaged in practices that rose to the level of a violation of law. On July 22, 2014, MCB's Board of Directors directed management to develop a plan of self-remediation to address the sales and marketing practices in question. While developing the self-remediation plan, it was determined on September 1, 2014 that MCB's affiliates who benefited from the practices in question should also adopt self-remediation plans and participate proportionately in the execution of the overall plan of self-remediation.

On September 26, 2014, the Boards of Directors of MCB, Heights Finance Funding Co. and the Company approved self-remediation plans (the "Plans") and entered into an Affiliate Remediation Payment Agreement ("ARP Agreement"). In accordance with the Plans, remediation payments will be made to certain customers impacted by the practices in question. The ARP Agreement requires, among other provisions, that all professional fees and other costs to be split on a proportionate basis between affiliates based on customer remediation payments under the Plans, effective September 1, 2014.

Under the terms of the Plans, an independent administrator of the Plans has been engaged. The implementation of the Plans required an initial cash contribution to be placed with the administrator approximating the cash payments to customers, plus an additional 10%. On October 10, 2014, the Company deposited its portion of the cash contribution in the amount of approximately $8.4 million. The Company received a $9.0 million capital infusion from MCFC on October 10, 2014 prior to funding the $8.4 million cash remediation obligation.

Under the Plans, the Company's proportionate share of liability for customer remediation is approximately $13.5 million. The Company has accrued an additional $1.0 million related to the estimated proportionate share of further legal, administrator, audit and data fees. As of June 30, 2015, the Company's remaining liability for remediation was $1.5 million. All planned customer mailings and payments, under the Plans, have been completed as of June 30, 2015. The Company expects the completion of Plans in the first half of fiscal 2016.

The OCC has indicated acceptance of the Plans and management will continue to implement the Plans as outlined above.

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NOTE 7: CONSUMER LENDING SOFTWARE EXPENSE

The Company entered into a Master Services Agreement (the "MSA") with Fidelity Information Services, LLC ("FIS"), effective as of June 30, 2014, to provide products and services for the development of a new consumer lending software platform (the "FIS Platform"). The implementation and launch of the FIS Platform was expected to be completed during the second quarter of fiscal year 2015. On April 24, 2015, the Company notified FIS that it was terminating its relationship with FIS under the MSA. Effective June 10, 2015, the Company and FIS entered into a written settlement agreement whereby the parties released, waived and discharged one another and their affiliates from any and all liabilities arising out of or relating to the MSA. Pursuant to the settlement agreement, the Company also agreed, among other things, to make a one-time payment to FIS of $3.2 million, payable during the fourth quarter of fiscal 2015, a portion of which will constitute a license fee for FIS's Default Manager software. The $3.2 million payable was included in the accounts payable line of the balance sheet as of June 30, 2015. The settlement contains other customary settlement provisions, and no other payments are required by the parties under the settlement agreement or MSA.

The Company recorded a $2.3 million expense in the third quarter of fiscal 2015, which included $1.2 million for the FIS settlement and $1.1 million for previously capitalized consumer lending software development costs. The Company capitalized $2.0 million of the FIS settlement for the FIS Default Manager software and consumer lending software development and design costs. The Company is currently reviewing proposals for the development of a new consumer lending system with implementation expected to be completed in fiscal year 2016.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The discussion set forth below, in the quarterly report of Pioneer Financial Services, Inc. (“PFS”), with its wholly owned subsidiaries (collectively “we,” “us,” “our” or the “Company”), contains forward-looking statements within the meaning of federal securities law. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words, identify forward-looking statements. Forward-looking statements appear in a number of places in this report and include statements regarding our intent, belief or current expectation about, among other things, trends affecting the markets in which we operate our business, financial condition and growth strategies. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including, but not limited to, those risk factors set forth herein in Item 1A of Part II in our Annual Report on Form 10-K for the period ended September 30, 2014 under "Part I Item 1A. Risk Factors" and in our Quarterly Report on Form 10-Q for the period ended March 31, 2015, under "Part II Item 1A. Risk Factors." If any of these risk factors occur, they could have an adverse effect on our business, financial condition and results of operations. When considering forward-looking statements you should keep these risk factors in mind, as well as the other cautionary statements set forth in this report. These forward-looking statements are made as of the date of this filing. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements and will not update any forward-looking statements in this quarterly report on Form 10-Q to reflect future events or developments.

Overview

We are a wholly owned subsidiary of MidCountry Financial Corp., a Georgia corporation (“MCFC”). We purchase consumer loans made primarily to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. We purchase consumer loans from the Consumer Banking Division (“CBD”) of MidCountry Bank (“MCB”), a federally chartered savings bank and wholly owned subsidiary of MCFC, an affiliate who originates direct military loans via the internet.

The Amended and Restated Non-Recourse Loan Sale and Master Services Agreement (“LSMS Agreement”) with CBD outlines the terms of the sale and servicing of these loans. We also historically purchased retail installment contracts from retail merchants that sold consumer goods to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees. However, we terminated the purchasing of finance receivables from retail merchants on March 31, 2014. We plan to hold the military loans and retail installment contracts until repaid.

Our finance receivables are effectively unsecured and consist of loans originated by CBD or purchased from retail merchants. All finance receivables have fixed interest rates and typically have a maturity of less than 48 months. During the third quarter of fiscal 2015, the average size of a loan when acquired was $4,548 and had an average term of 36 months. A

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large portion of the loans we purchase are made to customers who are unable to obtain financing from traditional sources due to factors such as their time in grade, 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 quality of finance receivables we are able to acquire from CBD and upon the business and economic environments in the markets where we operate and in the United States as a whole.

We are not associated with, nor are we endorsed by, the U.S. military or U.S. Department of Defense. However, we do seek to maintain a positive, supportive relationship with the military community.

Critical Accounting Policies

In our 2014 Annual Report on Form 10-K, we identified the critical accounting policies which affect our significant estimates and assumptions used in preparing our consolidated financial statements. We have not changed these policies from those previously disclosed in our Annual Report.

Lending and Servicing Operations

Primary Supplier of Loans

We have retained CBD as our primary supplier of loans. We entered into the LSMS Agreement with CBD whereby we purchase loans originated by CBD and CBD services these loans on our behalf. Under the LSMS Agreement, we have the exclusive right to purchase loans originated by CBD that meet the following guidelines:


•	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 online via the internet; and


•	All loans must meet additional purchasing criteria that was developed from our past credit repayment experience and is periodically revalidated based on current portfolio performance.

Loans purchased from CBD are referred to as “military loans.” See our Annual Report under “Part I Item 1A. Risk Factors.”

Loan Purchasing

General. We have more than 26 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. In evaluating the creditworthiness of potential customers, CBD primarily examines the individual’s debt-to-income ratio, prior payment experience with us (if applicable), credit bureau attributes and job stability. On April 22, 2015, CBD modified its lending criteria and scoring model to use credit score information provided by the FICO Score 8 model, in combination with certain credit overlays. The Company modified its purchasing guidelines to accept loans originated by CBD with the FICO 8 model and certain credit overlays. Loans are limited to amounts that the customer could reasonably be expected to repay from discretionary income. However, when we purchase loans from CBD, we cannot predict when or whether a customer may unexpectedly leave the military or when or whether other events may occur that could result in a loan not being repaid prior to a customer’s departure from the military. The average customer loan balance was $3,121 at June 30, 2015, repayable in equal monthly installments and with an average remaining term of 17 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

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uses these guidelines to predict the relative likelihood of credit applicants repaying their obligation. We purchase loans made to consumers who fit our purchasing criteria. The amount and interest rate of the military loans purchased are set by CBD based upon our underwriting guidelines considering the estimated credit risk assumed.

As a customer service, we will purchase a new loan from CBD for an existing borrower who has demonstrated a positive payment history with us and where the transaction creates an economic benefit to the customer after fully underwriting the new loan request to ensure proper debt ratio, credit history and payment performance. We will not purchase refinanced loans made to cure delinquency or for the sole purpose of creating fee income. Generally, we purchase refinanced loans when a portion of the new loan proceeds is used to repay the balance of the existing loan and the remaining portion is advanced to the customer. Approximately 34.7% of the amount of military loans we purchased in the third quarter of fiscal 2015 were refinancings of outstanding loans compared to 29.2% during the third quarter of fiscal 2014.

Military Loans Purchased from CBD. We purchase military loans from CBD if they meet our purchasing criteria, which were developed with our extensive experience with lending to the military marketplace. Pursuant to the LSMS Agreement, we granted CBD rights to use our lending system; however, we retained ownership of the lending system. Using our proprietary lending criteria and scoring model and system, CBD originates these loans directly over the internet. During the first quarter of fiscal 2015, CBD launched a new loan production office concept focused on technology and customer service. Loan production office personnel are available to assist customers with questions and to facilitate their loan application via the internet. Under the new loan production office concept, three new offices were opened in the first nine months of fiscal 2015. Military loans typically had maximum terms of 48 months and had an average origination amount of $4,176 in the first nine months of fiscal 2015. We pay a $26.00 fee for each military loan purchased from CBD to reimburse CBD for loan origination costs. In the third quarter of fiscal 2015, we paid CBD $0.6 million in fees in connection with CBD's origination of military loans compared to $0.5 million in the third quarter of fiscal 2014.

Retail Installment Contracts. On March 31, 2014, we ceased purchasing retail installment contracts from our retail merchant network. CBD has assumed the relationships with members of our retail merchant network. We will purchase direct military loans made by CBD to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees that are customers of such retail merchants who wish to finance a retail purchase with a direct military loan from CBD.

Management and Recordkeeping Services

We have retained CBD to provide management and recordkeeping services in accordance with the LSMS Agreement. CBD services our finance receivables and we pay fees for these management and recordkeeping services. Also, as part of its compensation for performing these management and recordkeeping services, CBD retains a portion of ancillary revenue, including late charges and insufficient funds fees, associated with these loans and retail installment contracts.

On June 21, 2013, we entered into an amended and restated LSMS Agreement with CBD. For the period April 1, 2013 to March 31, 2014, we paid CBD a monthly servicing fee in an amount equal to 0.68% (8.14% annually) of the outstanding principal balance of the military loans and retail installment contracts serviced as of the last day of each prior month. The fee may be adjusted annually on the basis of the annual increase or decrease in the Consumer Price Index (“CPI”). For the first six months in fiscal 2014, we also paid an annual relationship fee of $34.91 for each loan and retail installment contract owned by us at the end of the prior fiscal year. The relationship fee was terminated on March 31, 2014 with the amended and restated LSMS Agreement with CBD. The amended and restated LSMS agreement also includes a $500,000 annual base fee. The $500,000 base fee is prorated for fiscal 2014, paid monthly to CBD and may be adjusted annually on the basis of the annual increase in the CPI. Fees to CBD, under the LSMS for services not covered by the annual base fee and servicing fee, may be charged at a rate of 125% of their cost and may include special marketing campaigns, loan production office management and special collection strategies.

On November 17, 2014, the Company and the listed affiliated entities entered into the fourth amended and restated LSMS Agreement with MCB and the Agent. Effective on October 1, 2014, the Company pays fees for services under the LSMS Agreement that include: (1) a loan origination fee of $26.00 for each loan (not including retail installment contracts) originated by MCB and sold to the Company; (2) an annual base fee of $500,000 paid in equal monthly installments; (3) a monthly serving fee of 0.496% (5.95% annually) of the outstanding principal balance of loans serviced as of the last day of the prior month end; (4) a monthly special services fee at a rate of 125% of the cost for such services rendered in specific areas not included in the LSMS Agreement; and (5) a one-time implementation fee of $1.65 million to be paid to MCB for the costs to implement a new consumer lending system and its related system and infrastructure. The implementation fee was paid over five monthly installments, beginning October 1, 2014.

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To facilitate CBD’s servicing of the military loans and retail installment contracts, we have granted CBD: (1) the non-exclusive rights to use certain intellectual property, including our trade names and service marks; and (2) 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 customers. We retain all other borrower relationships.

We have an expense sharing agreement (the “Expense Sharing Agreement”) with MCFC and its subsidiaries, MCB and its subsidiaries, and Heights Finance Holding Co. and its subsidiaries, which governs the expenses to be shared among the parties, reimbursements to be paid by the parties to MCFC for services provided, as well as the services to be provided by the parties to MCFC and other parties. Under the Expense Sharing Agreement, direct expenses will be paid by the incurring party, while indirect expenses will be allocated using reliable cost indicators. The direct costs of MCFC’s services will not exceed the cost of a third-party to provide similar services. Under the Expense Sharing Agreement, MCFC may provide services such as, but not limited to, strategic planning, loan review services, risk management services, regulatory compliance support, tax department services, legal services and information technology services. The other parties to the Expense Sharing Agreement may provide office space rentals, technology support and servicing of loans and leases. On July 23, 2015, the Company entered into a new expense sharing agreement with MCFC and its subsidiaries that includes additional informational technology services provided by MCFC.

The Company recorded a $2.3 million expense in the third quarter of fiscal 2015 for the FIS settlement and previously capitalized consumer lending software development costs. The Company is currently reviewing proposals for the development of a new consumer lending system with implementation expected to be completed in fiscal year 2016.

Sources of Income

We generate revenues primarily from interest income and fees earned on the military loans purchased from CBD, which include refinanced loans, and retail installment contracts historically purchased from retail merchants. We also earn revenues from debt protection fees. For purposes of the following discussion, “revenues” means the sum of our finance income and debt protection fees.

The liability we establish for estimated losses related to our debt protection operations and the corresponding charges to our income to maintain this amount are actuarially evaluated annually and we consider this amount adequate. If our debt protection customers are killed, injured, divorced, unexpectedly discharged or have not received their pay, we will have payment obligations.

Finance Receivables

Our finance receivables are comprised of loans purchased from CBD (collectively referred to below as “military loans”) and retail installment contracts historically purchased from our network of retail merchants. The following table sets forth certain information about the components of our finance receivables as of the end of the periods presented:

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	June 30, 2015			September 30, 2014

Finance receivables:
Total finance receivables balance	$	258,103,845		$	268,521,634
Average note balance	$	3,121		$	2,704
Total number of notes	82,709			99,313

Military loans:
Total military receivables	$	256,685,191		$	263,674,895
Percent of total finance receivables	99.45		%	98.20		%
Average note balance	$	3,152		$	2,767
Number of notes	81,448			95,280

Retail installment contracts:
Total retail installment contract receivables	$	1,418,654		$	4,846,739
Percent of total finance receivables	0.55		%	1.80		%
Average note balance	$	1,125		$	1,202
Number of notes	1,261			4,033

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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 general market interest rate fluctuations. These general market fluctuations directly impact our cost of funds. CBD voluntarily capped the interest rate at 36% on the loans its originates to active-duty service members. Our inability to increase the annual percentage rate earned on new and existing finance receivables restricts our ability to react to increases in cost of funds. Accordingly, increases in market interest rates generally will narrow interest rate spreads and lower profitability, while decreases in market interest rates generally will widen interest rate spreads and increase profitability.

The following table presents important data relating to our net interest margin as of the end of the periods presented:



	Three Months Ended June 30,				Nine Months Ended June 30,
	2015		2014		2015		2014
	(dollars in thousands)

Total finance receivables balance	$	258,104	$	287,982	$	258,104	$	287,982
Average total finance receivables ⁽¹⁾	246,033		293,105		248,748		323,312
Average interest bearing liabilities ⁽¹⁾	161,717		210,614		166,260		232,249
Total interest income and fees	18,112		21,530		56,016		72,360
Total interest expense	2,635		3,676		8,448		12,220


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

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Total Finance Receivables. Our aggregate finance receivables decreased 10.4% or $29.9 million, to $258.1 million on June 30, 2015 from $288.0 million on June 30, 2014 due to the closure of all CBD loan production offices in October 2013, the cessation of purchasing retail installment contracts on March 31, 2014 and underwriting changes made by CBD in the first quarter of fiscal 2014. Our supplier of loans, CBD, saw a 104.2% or $53.7 million increase in military loan originations during the third quarter of fiscal 2015 compared to the third quarter of fiscal 2014. The increase in loan originations was due primarily to pricing and underwriting changes made in April 2015. In April 2015, CBD modified its lending criteria and scoring model to use credit score information provided by the FICO Score 8 model, in combination with certain credit overlays. The Company modified its purchasing guidelines to accept loans originated by CBD with the FICO Score 8 model with certain credit overlays. The three new loan production offices that opened in fiscal 2015 also contributed to the increase in loan originations. Due to our decision to no longer purchase retail installment contracts after March 31, 2014, we did not purchase any retail installment contracts during either the third quarter of fiscal 2015 or the third quarter of fiscal 2014. See further discussion in the sections titled “Loan Acquisition” and “Liquidity and Capital Resources.”

Interest Income and Fees. Interest income and fees represented 99.4% of our total revenue for the third quarter of fiscal 2015 and 98.0% for the third quarter of fiscal 2014. Interest income and fees decreased to $18.1 million in the third quarter of fiscal 2015 from $21.5 million for the third quarter of fiscal 2014, a decrease of $3.4 million or 15.8%. The decrease was due primarily to a decline in aggregate average finance receivables of 16.1%.

Interest Expense. Interest expense in the third quarter of fiscal 2015 decreased 29.7% to $2.6 million compared to $3.7 million for the third quarter of fiscal 2014. This decrease was due to a decrease in average interest bearing liabilities of 23.2%. Investment notes decreased to $43.8 million as of June 30, 2015 compared to $56.4 million as of June 30, 2014, a decrease of $12.6 million or 22.3%. Amortizing term notes decreased to $111.3 million as of June 30, 2015 compared to $146.8 million as of June 30, 2014, a decrease of $35.5 million or 24.2%.

Provision for Credit Losses. The provision for credit losses in the third quarter of fiscal 2015 decreased to $5.6 million from $8.3 million in the third quarter of fiscal 2014, a decrease of $2.7 million or 32.5%. Net charge-offs decreased to

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$6.9 million in the third quarter of fiscal 2015 from $8.9 million in the third quarter of fiscal 2014, a decrease of $2.0 million or 22.5%. The net charge-off ratio decreased to 11.3% for the third quarter of fiscal 2015 compared to 12.2% for the third quarter of fiscal 2014. See further discussion in “Credit Loss Experience and Provision for Credit Losses.”

Debt Protection Income, net. Debt protection income, net consists of debt protection revenue, claims paid and change in benefit reserves and third-party commission expenses. Debt protection revenue decreased to $0.4 million in the third quarter of fiscal 2015 from $0.7 million in the third quarter of fiscal 2014, a decrease of $0.3 million or 42.9%. Claims paid and change in reserves were $0.2 million in the third quarter of fiscal 2015 and 2014. The decline in debt protection revenue is due primarily to the decrease in the aggregate finance receivables and reduction in the number of customers purchasing the product.

Non-Interest Expense. Non-interest expense in the third quarter of fiscal 2015 was $9.5 million compared to $7.1 million for the third quarter of fiscal 2014, an increase of $2.4 million or 33.8%. Non-interest expenses increased during the third quarter of fiscal 2015 due primarily to the $2.3 million expense recorded for the FIS settlement and previously capitalized consumer lending software development costs. See further discussion in "Lending and Servicing Operations." Non-interest expense in the third quarter of fiscal 2015 also included a decline in the amortization of intangibles of $0.3 million.

Provision for Income Taxes. The Company’s effective tax rate was 36.4% in the third quarter of fiscal 2015 compared to 38.2% in the third quarter of fiscal 2014, or a decrease of 1.8%. The decrease is primarily related to the fiscal 2014 return to provision adjustment recorded in the third quarter of fiscal 2015, which caused the federal tax liability to be slightly below a 35% marginal tax rate.

Nine Months Ended June 30, 2015 Compared to Nine Months Ended June 30, 2014

Total Finance Receivables. Our aggregate finance receivables decreased 10.4% or $29.9 million, to $258.1 million on June 30, 2015 from $288.0 million on June 30, 2014 due to the closure of all CBD loan production offices in October 2013, the cessation of purchasing retail installment contracts on March 31, 2014 and underwriting changes made by CBD in the first quarter of fiscal 2014. Our supplier of loans, CBD, saw a 24.8% or $45.5 million increase in military loan originations during the first nine months of fiscal 2015 compared to the first nine months of fiscal 2014. The increase in loan originations was due primarily to pricing and underwriting changes made in April 2015. In April 2015, CBD modified its lending criteria and scoring model to use credit score information provided by the FICO Score 8 model, in combination with certain credit overlays. The Company modified its purchasing guidelines to accept loans originated by CBD with the FICO Score 8 model with certain credit overlays. The three new loan production offices that opened in fiscal 2015 also contributed to the increase in loan originations. Our acquisition of retail installment contracts decreased during the first nine months of fiscal 2015 by $1.7 million or 100.0% compared to the first nine months of fiscal 2014 due to the cessation of purchasing retail installment contracts. See further discussion in the sections entitled “Loan Acquisition” and “Liquidity and Capital Resources.”

Interest Income and Fees. Interest income and fees represented 99.1% of our total revenue for the first nine months of fiscal 2015 compared to 97.8% for the first nine months of fiscal 2014. Interest income and fees decreased to $56.0 million in the first nine months of fiscal 2015 from $72.4 million for the first nine months of fiscal 2014, a decrease of $16.4 million or 22.7%. The decrease was due primarily due to a decline in aggregate average finance receivables of 23.1%.

Interest Expense. Interest expense in the first nine months of fiscal 2015 decreased 31.1% to $8.4 million compared to $12.2 million for the first nine months of fiscal 2014. This decrease was due to a decrease in average interest bearing liabilities of 28.4%. Investment notes decreased to $43.8 million as of June 30, 2015 compared to $56.4 million as of June 30, 2014, a decrease of $12.6 million or 22.3%. Amortizing term notes decreased to $111.3 million as of June 30, 2015 compared to $146.8 million as of June 30, 2014, a decrease of $35.5 million or 24.2%.

Provision for Credit Losses. The provision for credit losses in the first nine months of fiscal 2015 decreased to $19.1 million from $28.7 million in the first nine months of fiscal 2014, a decrease of $9.6 million or 33.4%. Net charge-offs also decreased to $21.9 million in the first nine months of fiscal 2015 from $28.8 million in the first nine months of fiscal 2014, a decrease of $6.9 million or 24.0%. The net charge-off ratio decreased to 11.8% for the first nine months of fiscal 2015 compared to 11.9% for the first nine months of fiscal 2014. See further discussion in “Credit Loss Experience and Provision for Credit Losses.”

Debt Protection Income, net. Debt protection income, net consists of debt protection revenue, claims benefit expenses and third-party commission expenses. Debt protection revenue decreased to $1.2 million in the first nine months of fiscal 2015 compared to $2.4 million in the first nine months of fiscal 2014, a decrease of $1.2 million or 50.0%. Claims paid and change in reserves increased to $0.6 million in the first nine months of fiscal 2015 compared to $0.5 million in the first nine months of

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fiscal 2014, an increase of $0.1 million or 20.0%. The decline in debt protection revenue is due primarily to the decrease in the aggregate finance receivables and reduction in the number of customers purchasing the product.

Non-interest expense. Non-interest expense in the first nine months of fiscal 2015 was $23.5 million compared to $26.9 million for the first nine months of fiscal 2014, a decrease of $3.4 million or 12.6%. Non-interest expenses decreased during the first nine months of fiscal 2015 due primarily to a $5.3 million decrease in management and record keeping services fees, the result of a 23.1% decline in average finance receivables and a reduced monthly servicing fee under the amended and restated LSMS Agreement. The decline in management and record keeping services fees is partially offset by the $2.3 million expense recorded in the third fiscal quarter for the FIS settlement and previously capitalized consumer lending software development costs.

Provision for Income Taxes. The Company’s effective tax rate was 38.6% in the first nine months of fiscal 2015 compared to 37.8% in the first nine months of fiscal 2014, or an increase of 0.8%. The net increase is due to the recognition of a state tax benefit in the first nine months of fiscal 2014 related to refunds received from state tax audit settlements and continued changes in state apportionment factors, driven by a shift in business mix as a result of the mix of product revenue. This increase is offset by the fiscal 2014 return to provision adjustment for its federal tax liability which was recorded in the first nine months of fiscal 2015.

Delinquency Experience

Our customers are required to make monthly payments of interest and principal. Our servicer, CBD, under our supervision, analyzes our delinquencies on a recency delinquency basis utilizing our guidelines. A loan is delinquent under the recency method when a full payment (95% or more of the contracted payment amount) has not been received for 30 days after the last full payment.

The following table sets forth our delinquency experience as of the end of the periods presented for accounts for which payments are 60 days or more past due, on a recency basis.



	June 30, 2015			September 30, 2014			June 30, 2014
	(dollars in thousands)

Total finance receivables	$	258,104		$	268,522		$	287,982
Total finance receivables balances 60 days or more past due	11,268			14,830			12,823
Total finance receivables balances 60 days or more past due as a percent of total finance receivables	4.37		%	5.52		%	4.45		%

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 a loan. There is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. See our Annual Report “Part I Item 1A. Risk Factors.”

Military Loans. Our charge-off policy is to charge-off loans at 180 days recency past due and greater than 30 days contractually past due. From time to time, our customers remit several loan payments in advance of the payment due date, where the loan is contractually current, but recency past due. 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. When purchasing loans 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.

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The following table presents net charge-offs on military loans and net charge-offs as a percentage of military loans as of the end of the periods presented:



	Three Months Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
	(dollars in thousands)

Military loans:
Military loans charged-off	$	8,146		$	9,647		$	25,095		$	30,142
Less recoveries	1,269			1,127			3,633			3,036
Net charge-offs	$	6,877		$	8,520		$	21,462		$	27,106
Average military receivables ⁽¹⁾	$	244,396		$	285,490		$	246,131		$	312,875
Percentage of net charge-offs to average military receivables (annualized)	11.26		%	11.94		%	11.63		%	11.55		%


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

Retail Installment Contracts. Historically, we purchased retail installment contracts from our retail merchant network. Under many of our arrangements with retail merchants, we withheld 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 were recorded in a specific reserve account. Any losses incurred on the retail installment contracts purchased from that retail merchant are charged against its reserve account. Upon the retail merchant’s request, and no more often than annually, we will pay the retail merchant the amount by which its reserve account exceeds 15% of the aggregate outstanding balance on all retail installment contracts purchased from them, less losses we have sustained, or reasonably could sustain, due to debtor defaults, collection expenses, delinquencies and breaches of our agreement with the retail merchant. On March 31, 2014, we ceased purchasing retail installment contracts from our retail merchant network.

Our allowance for credit losses is utilized to the extent that the loss on any individual retail installment contract exceeds the retail merchant’s aggregate reserve account at the time of the loss.

The following table presents net charge-offs on retail installment contracts and net charge-offs as a percentage of retail installment contracts as of the end of the periods presented:



	Three Months Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
	(dollars in thousands)

Retail installment contracts:
Contracts charged-off	$	172		$	569		$	832		$	2,127
Less recoveries	116			171			355			417
Net charge-offs	$	56		$	398		$	477		$	1,710
Average retail installment contract receivables ⁽¹⁾	$	1,637		$	7,615		$	2,618		$	10,437
Percentage of net charge-offs to average retail installment contract receivables (annualized)	13.68		%	20.91		%	24.29		%	21.85		%


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

Former Military. As of June 30, 2015 and September 30, 2014, we had approximately $10.6 million, or 4.1% of our total portfolio, and $12.5 million, or 4.6% of our total portfolio, respectively, from customers who had advised us of their separation from the military prior to repaying their loan. As of June 30, 2014, we had approximately $11.9 million, or 4.6% of our total portfolio from customers who had advised us of their separation from the military prior to repaying their loan. Net charge-offs, from customers who had advised us of their separation from the military, were $3.0 million and represented 43.6% of net charge-offs in the third quarter of fiscal 2015 compared to $4.9 million and 55.1% in the third quarter of fiscal 2014. See

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our Annual Report “Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Nonperforming Assets.”

Allowance for Credit Losses. The following table presents our allowance for credit losses on finance receivables as of the end of the periods presented:



	Three Months Ended June 30,				Nine Months Ended June 30,
	2015		2014		2015		2014
	(dollars in thousands)

Balance, beginning of period	$	30,347	$	31,850	$	31,850	$	31,400
Finance receivables charged-off	8,318		10,216		25,927		32,269
Less recoveries	1,385		1,298		3,988		3,453
Net charge-offs	6,933		8,918		21,939		28,816
Provision for credit losses	5,573		8,323		19,076		28,671
Balance, end of period	$	28,987	$	31,255	$	28,987	$	31,255

We maintain an allowance for credit losses, which represents management’s 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, homogeneous accounts, the finance receivables are evaluated for impairment as two separate components: military loans and retail installment contracts. Management considers numerous factors in estimating losses in our credit portfolio, including the following:

•Prior credit losses and recovery experience;

•Current economic conditions;

•Current finance receivable delinquency trends; and

•Demographics of the current finance receivable portfolio.

The following table sets forth certain information about our allowance for credit losses on finance receivables as of the end of the periods presented:



	Three Months Ended June 30,						Nine Months Ended June 30,
	2015			2014			2015			2014
	(dollars in thousands)

Average total finance receivables ⁽¹⁾	$	246,033		$	293,105		$	248,748		$	323,312
Provision for credit losses	5,573			8,323			19,076			28,671
Net charge-offs	6,933			8,918			21,939			28,816
Net charge-offs as a percentage of average total finance receivables (annualized)	11.27		%	12.17		%	11.76		%	11.88		%
Allowance for credit losses	$	28,987		$	31,255		$	28,987		$	31,255
Allowance as a percentage of average total finance receivables	11.78		%	10.66		%	11.65		%	9.67		%


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

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Loan Acquisition

Asset growth is an important factor in determining our future revenues. We are dependent upon CBD to increase its originations for our future growth. In connection with purchasing the loans, we pay CBD a fee in the amount of $26.00 for each military loan originated by CBD and purchased by us. This fee may be adjusted annually on the basis of the annual increase or decrease in CBD’s deferred acquisition cost analysis. Our loan acquisitions increased for the first nine months of fiscal 2015 to $228.8 million from $185.0 million in the first nine months of fiscal 2014 due to increased loan originations by the CBD. The increase in loan originations and average loan amounts was due primarily to pricing and underwriting changes made in April 2015. In April 2015, CBD modified its lending criteria and scoring model to use credit score information provided by the FICO Score 8 model, in combination with certain credit overlays. We modified our purchasing guidelines to accept loans originated by CBD with the FICO Score 8 model with certain credit overlays. Three new loan production offices that opened in the first nine months of fiscal 2015 also contributed to the increase in loan originations. CBD also launched a new loan production office concept in the first quarter of fiscal 2015, which is focused on technology and customer service.

The following table sets forth our overall purchases of military loans and retail installment contracts, including those refinanced, as of the end of the periods presented:



	Three Months Ended June 30,				Nine Months Ended June 30,
	2015		2014		2015		2014

Total loans acquired:
Gross balance	$	105,217,502	$	51,529,340	$	228,766,323	$	184,964,567
Number of finance receivable notes	23,137		17,109		54,781		56,800
Average note amount	$	4,548	$	3,012	$	4,176	$	3,256

Military loans:
Gross balance	$	105,217,502	$	51,529,340	$	228,766,323	$	183,272,557
Number of finance receivable notes	23,137		17,109		54,781		56,190
Average note amount	$	4,548	$	3,012	$	4,176	$	3,262

Retail installment contracts:
Gross balance	$	—	$	—	$	—	$	1,692,010
Number of finance receivable notes	—		—		—		610
Average note amount	$	—	$	—	$	—	$	2,774

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, historically, retail installment contracts. We use borrowings to fund the difference, if any, between the cash used to purchase military loans and retail installment contracts and the cash generated from loan repayments and operations. An increasing portfolio balance generally leads to cash being used in investing activities. A decreasing portfolio balance generally leads to cash provided by investing activities. Cash used in investing activities in the first nine months of fiscal 2015 was approximately $13.1 million and cash used in financing activities was $5.0 million, which was funded from $15.6 million in operating activities and a $9.0 million capital contribution from the Company's parent. Cash provided by investing activities in the first nine months of fiscal 2014 was approximately $43.7 million and cash used in financing activities was $71.8 million, which was funded by operating activities of $34.6 million.

Financing activities primarily consist of borrowing and repayments of debt incurred under our SSLA. With the ongoing uncertainty in the financial markets and the general economic conditions, some lenders within our credit group, at their discretion, may reduce their willingness to lend at the current levels.

We keep our SSLA lenders informed of any material developments with the Company and MCB regulators. Our SSLA lenders have been informed that MCB reviewed and responded to letters from the OCC regarding certain former business practices of the CBD that the OCC believes may have violated Section 5 of the Federal Trade Commission Act. MCB responded to the OCC that it does not believe the business practices rose to the level of a violation of law. On September 26,

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2014, our Board adopted and approved a voluntary Remediation Action Plan (the "Plan") developed in cooperation with MCB to address certain issues identified by the OCC with respect to certain loans and related products that were originated by MCB and later sold to us or our subsidiaries. The OCC has indicated acceptance of the Plans and management will continue to implement the Plans.

Our lenders have also been informed that in May 2012 and April 2013, as part of its scheduled exams of MCB, the OCC posed questions regarding compliance with fair lending laws. MCB timely responded to those questions. Based on its review of the responsive information, the OCC sent a letter to MCB, dated February 28, 2014, requesting additional information regarding compliance matters and asserting potential violations of the Equal Credit Opportunity Act, and its implementing regulations at Regulation B, with respect to CBD's lending practices and the use of rank in pricing. The letter sought additional information to enable the OCC to determine what, if any, action might be taken. In March 2014, MCB responded in writing to the OCC regarding its analysis of the former business practices and stated that it did not believe it engaged in practices that rose to the level of a violation of law, and to date, the OCC has not taken further action in connection with this matter. See “Item 1A. Risk Factors.”

Because the SSLA is an uncommitted facility, individual banks that are party to this agreement have no obligation to make any future loans to us. If our lenders perceive that as a result of the issues raised by the OCC, the CBD’s ability to originate and service consumer loans will be adversely affected, or any financial or other remediation must be made by MCB, one or more of our lenders may choose to reduce or cease their participation in the SSLA. As a result, we may experience diminished availability under the SSLA as a result of material developments with MCB’s or our regulators that adversely affect our business and operations.

Senior Indebtedness - Bank Debt. On June 12, 2009, we entered into the SSLA with certain lenders. The term of the current SSLA ends on March 31, 2016 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 (the “Senior Debt”). The facility is an uncommitted credit 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 future fundings at any time without penalty. If a lender were to choose not to participate in future fundings, the outstanding amortizing notes would be repaid based on the original terms of the note. Any existing borrowings from that lender under the revolving credit line are payable in 12 equal monthly installments. As of June 30, 2015, we could request up to $44.2 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 June 30, 2015, our credit facility had a 74.4% utilization, which may restrict future growth in our loan receivable portfolio. If we cannot secure new borrowings or increased funding participation from our SSLA lenders, our future growth will be limited, which could have a material adverse effect on our results of operations and financial condition. As of June 30, 2015, we had $111.3 million of senior debt outstanding, compared to $127.8 million at September 30, 2014, a decrease of $16.5 million, or 12.9%. Overall indebtedness, including senior and subordinated indebtedness, decreased $10.5 million to $172.1 million at June 30, 2015 from $182.6 million at September 30, 2014. The decrease in overall indebtedness coincides with the $10.4 million decrease in gross finance receivables from September 30, 2014 to June 30, 2015. As of June 30, 2015 we were in compliance with all covenants under the SSLA.

Advances outstanding under the revolving credit line were $17.0 million as of June 30, 2015, compared to zero at September 30, 2014, an increase of $17.0 million, or 100%. 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.

As of June 30, 2015, the lenders have indicated a willingness to participate in fundings up to an aggregate of $171.9 million during the next 12 months, including $128.3 million that is currently outstanding. During the third quarter of fiscal 2015, 2 banks with aggregate funding availability of $16.4 million notified the Company that they would not be participating in future borrowings at this time. The two banks did not formally withdrawal from the SSLA and are considering future funding opportunities. One bank with a total funding participation of $10.0 million and $3.1 million in borrowings outstanding as of March 31, 2015, withdrew from the SSLA in the second quarter of fiscal 2015. Several other banks reduced their total funding participation by $29.4 million during the second fiscal quarter of 2015. Additionally, we received consent from the le

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nders to pay off the $19.4 million in withdrawing bank borrowings as of March 31, 2015. In April 2015, we paid off the $19.4 million in withdrawing bank borrowings with fundings from the remaining SSLA lenders.

Our SSLA allows additional banks to become parties to the SSLA in a non-voting role. We have identified each lender that has voting rights under the SSLA as a “voting bank.” and each lender that does not have voting rights under the SSLA as a “non-voting bank.” While all voting and non-voting banks have the same rights to the collateral and are a party to the same terms and conditions of the SSLA, all of the non-voting banks acknowledge and agree that they have no right to vote on any matter nor to prohibit or restrict any action by us, or the voting banks.

Senior Indebtedness Table - Bank Debt. As of June 30, 2015 and September 30, 2014, the total borrowings and availability under the SSLA consisted of the following amounts for the end of the periods presented:




	June 30, 2015			September 30, 2014
	(dollars in thousands)

Revolving credit line:
Total facility	$	20,750		$	37,750
Balance at end of period	16,980			—
Maximum available credit ⁽¹⁾	3,770			37,750

Term notes: ⁽²⁾
Voting banks	$	151,142		$	205,750
Withdrawing banks	—			13,658
Non-voting banks	605			4,504
Total facility	$	151,747		$	223,912
Balance at end of period	111,287			127,777
Maximum available credit ⁽¹⁾	40,460			96,135

Total revolving and term notes: ⁽²⁾
Voting banks	$	171,892		$	243,500
Withdrawing banks	—			13,658
Non-voting banks	605			4,504
Total facility	$	172,497		$	261,662
Balance, end of period	128,267			127,777
Maximum available credit ⁽¹⁾	44,230			133,885
Credit facility available ⁽³⁾	44,230			52,793
Percent utilization of voting banks	74.3		%	45.0		%
Percent utilization of the total facility	74.4		%	48.8		%


⁽¹⁾	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 70.0%.


⁽²⁾	Includes 48-month amortizing term notes.


⁽³⁾	Credit facility available is based on the existing asset borrowing base and maintaining a senior indebtedness to consolidated net notes receivable ratio of 70.0%.

Subordinated Debt - Parent. Our SSLA allows for a revolving line of credit with our parent. Funding on this line of credit is provided as needed at our request and dependent upon the availability of our parent with a maximum principal balance of $25.0 million. Interest is payable monthly and is based on prime or 5.0%, whichever is greater. During the first nine months of fiscal 2015, there were no borrowings or repayments on this debt. As of June 30, 2015 and September 30, 2014, there was no outstanding balance.

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Outstanding Investment Notes. We fund certain capital and financial needs through the sale of investment notes. These notes have varying fixed interest rates and are subordinate to all senior indebtedness. We can redeem these notes at any time upon 30 days written notice. As of June 30, 2015, we had outstanding $43.8 million of these notes (with accrued interest), which includes a $0.06 million purchase adjustment. The purchase adjustment relates to a fair value adjustment recorded as part of the purchase of the Company by MCFC. These notes had a weighted average interest rate of 9.23%.

Off-Balance Sheet Arrangements. As of the end of the fiscal quarter we had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our shareholder.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Information about market risks for the three months ended June 30, 2015, does not differ materially from that discussed under Item 7A of the registrant’s 2014 Annual Report on Form 10-K. As of June 30, 2015, we have no material market risk sensitive instruments entered into for trading or other purposes, as defined by U.S. generally accepted accounting principles.

Our finance income is generally not sensitive to fluctuations in market interest rates. We currently do not experience interest rate sensitivity on our borrowings. Our revolving grid notes bear interest per annum at the prime rate of interest; however, the minimum interest rate per annum cannot be less than 4.00% in accordance with our SSLA. The prime rate as of June 30, 2015 was 3.25%. The prime rate would need to increase more than 75 basis points to have any effect on our borrowing rate for our revolving grid notes. Our amortizing notes bear interest based on the 90 day moving average rate of treasury notes plus 270 basis points; however, the minimum interest rate per annum cannot be less than 5.25% in accordance with our SSLA. The 90 day moving average rate of treasury notes as of June 30, 2015 was 1.25%. The 90 day moving average rate of treasury notes would need to increase by 130 basis points to affect our amortizing notes. A 10% increase or decrease in the prime rate or the 90 day moving average rate of treasury notes would not have any effect on our earnings.

ITEM 4. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There were no changes to our internal control over financial reporting during the quarter ended June 30, 2015 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. During the period covered by this quarterly report, there were no legal proceedings brought against the Company nor were there material changes in current legal proceedings that management believes would have a material adverse effect on the financial position or results of operations of the Company.

ITEM 1A. Risk Factors

In our 2014 Annual Report on Form 10-K and in our March 31, 2015 Form 10-Q, we identified important risks and uncertainties that could affect our results of operations, financial position, cash flow or business. Except as discussed below, there have been no material changes from the risk factors disclosed in our 2014 Annual Report on Form 10-K and March 31, 2015 Form 10-Q.

We rely on debt funding to provide us with liquidity, which contains limits on the amount of available credit from our bank group facility. We have a maximum amount of available credit, which limits the amount of debt funding we receive from our bank group and could have a material adverse effect on our results of operations and financial condition.

We use debt financing to provide us with liquidity. To procure and maintain this financing, we are required to comply with various restrictive covenants and limits on the amount of available credit. Our bank facility is an uncommitted credit facility where our lenders have indicated a willingness to participate in fundings up to an aggregate maximum amount. As of June 30, 2015, the lenders have indicated a willingness to participate in fundings up to an aggregate of $171.9 million during the next 12 months, including $128.3 million that is currently outstanding. As of June 30, 2015, our credit facility had a 74.4% utilization, which may restrict future growth in our loan receivable portfolio. If we cannot secure new borrowings or increased funding participation from our SSLA lenders, our future growth will be limited, which could have a material adverse effect on our results of operations and financial condition. Available credit limits may inhibit the way we operate our business and thus have a material adverse effect on our results of operations and financial condition. Any lender may elect not to participate in future fundings at any time without penalty. The banks that are party to the SSLA may choose not to make loans to us in the future, in such case, we may need to raise capital from other sources. There is no assurance that alternative sources of liquidity will be available to us.

ITEM 6. Exhibits



Exhibit No.		Description

31.1		Certifications of Chief Executive Officer pursuant to Rule 15d-15e.
31.2		Certifications of Chief Financial Officer pursuant to Rule 15d-15e.
32.1		18 U.S.C. Section 1350 Certification of Chief Executive Officer.
32.2		18 U.S.C. Section 1350 Certification of Chief Financial Officer.
101		The following financial information from Pioneer Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, filed with the SEC on August 12, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Operations for the three and nine months ended June 30, 2015 (ii) the Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014, (iii) the Consolidated Statement of Cash Flows for the nine months ended June 30, 2015 and June 30, 2014 and (iv) Notes to Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Name	Title	Date

/s/ Timothy L. Stanley	Chief Executive Officer and Vice	August 12, 2015
Timothy L. Stanley	Chairman (Principal Executive Officer)

/s/ Laura V. Stack	Chief Operating Officer, Chief Financial	August 12, 2015
Laura V. Stack	Officer, Treasurer and Asst. Secretary and Director (Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX



Exhibit No.		Description

31.1		Certifications of Chief Executive Officer pursuant to Rule 15d-15e.
31.2		Certifications of Chief Financial Officer pursuant to Rule 15d-15e.
32.1		18 U.S.C. Section 1350 Certification of Chief Executive Officer.
32.2		18 U.S.C. Section 1350 Certification of Chief Financial Officer.
101		The following financial information from Pioneer Financial Services, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, filed with the SEC on August 12, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Operations for the three and nine months ended June 30, 2015 (ii) the Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014, (iii) the Consolidated Statement of Cash Flows for the nine months ended June 30, 2015 and June 30, 2014 and (iv) Notes to Consolidated Financial Statements.