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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended: September 30, 2010

OR

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)

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

Securities registered pursuant to section 12 (b) of the Act:  None

Securities registered pursuant to section 12 (g) of the Act:

Title of Each Class 
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  £ Yes  x No

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.  x Yes  o No

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 Regulation 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). o Yes  o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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):

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

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

As of September 30, 2010, 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-K

September 30, 2010

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PART I

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended September 30, 2010 (“report”) 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 those set forth in the “Item 1A.-Risk Factors” and “Item 7.-Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When considering forward-looking statements, you should keep these factors in mind as well as the other cautionary statements in this report.  You should not place undue reliance on any forward-looking statement.  We are not obligated to update forward-looking statements.

ITEM 1.                                                     BUSINESS

General

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

We purchase consumer loans and retail installment contracts primarily from two different sources.  Our largest source of consumer loans is the Military Banking Division (“MBD”) of MidCountry Bank (“MCB”), a federally chartered stock savings association and wholly owned subsidiary of our parent, MCFC.  MBD originates these through a network of loan production offices and via the Internet.  Military families use these loan proceeds to purchase consumer goods and services.  We also purchase retail installment contracts from retail merchants that sell consumer goods to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees.

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

As of September 30, 2010, Thomas H. Holcom, Jr., President and Chief Executive Officer, Laura V. Stack, Chief Financial Officer and Joseph B. Freeman, Chief Operating Officer were our executive officers and are responsible for our policy-making decisions.  None of these officers are compensated by us.  Each of these officers is an employee and officer of MBD.  MBD and MCFC provide compensation and remuneration for services to these executive officers and all the employees of MBD.  We pay fees to MBD for management and record keeping services.  Effective October 29, 2010, Mr. Freeman was elected as President.  Mr. Freeman will continue to serve as Chief Operating Officer of PFS and as a member of the Board.  Mr. Holcom assumed the position of Chairman of the PFS Board of Directors and remains the Chief Executive Officer and principal executive officer.  Mr. Holcom, for succession purposes, resigned as President.

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Lending and Servicing Operations

Primary Supplier of Loans

We have retained MBD as a primary supplier of loans.  We entered into a Loan Sale and Master Services Agreement (“LSMS”) with MBD whereby we purchase loans originated by MBD and MBD services these loans on our behalf.  Under the LSMS Agreement, MBD uses our underwriting criteria (which was developed from our past customer credit repayment experience and is periodically revalidated based on current portfolio performance).  These criteria require the following:

·                  All borrowers must be active duty or career retired U.S. military personnel or U.S. Defense Department employees.

·                  All potential borrowers must complete standardized credit applications either in person at one of MBD’s loan production offices or online via the Internet.

·                  A thorough review must be conducted on all applicants’ military service history.  This includes verification of status including rank and credit history using major credit reporting.  Other review procedures may be conducted as deemed necessary.

·                  Loan repayment terms must generally be structured to repay the entire loan prior to the customer’s estimated separation from the military.

To the extent MBD originates loans under these underwriting criteria, we have the exclusive right to purchase such loans.  Loans purchased from MBD and those previously originated by us are referred to as “military loans.”  See “Item 1A.  Risk Factor— MBD may modify underwriting and servicing standards and does not have to lend to the traditional customers who meet our business model and lending guidelines, which may materially adversely affect our business operations, cash flow, results of operations, financial condition and profitability.”

Loan Purchasing

Generally.  We have more than 20 years experience 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 which are currently utilized by MBD when originating loans in this market.   We incorporated the proprietary underwriting guidelines and scoring model into our loan origination system to facilitate auto-decisioning and risk-based pricing on our loans.

For the loans we purchase, MBD uses our proprietary underwriting guidelines and scoring model when it originates loans.  Under these guidelines, in evaluating the creditworthiness of potential customers, MBD primarily examines the individual’s debt to income ratio, discretionary income, military rank, time served in the military and prior credit experience. Loans are limited to amounts that the customer could reasonably be expected to repay from discretionary income.  Loan repayment terms are generally structured to repay the entire loan prior to the customer’s estimated separation from the military. However, when we purchase loans from MBD, we cannot predict when or whether a customer may unexpectedly leave the military or when or whether other events could occur which result in not being repaid prior to a customer’s departure from the military.  In general, the majority of finance receivables we own are under $10,000, repayable in equal monthly installments and have terms no longer than 48 months.

A risk in all consumer lending and retail sales financing transactions is the customer’s unwillingness or inability to repay obligations. Unwillingness to repay is usually evidenced by a consumer’s historical credit repayment record.  An inability to repay occurs after initial credit evaluation and funding and usually results from lower income due to early separation from the military or reduction in rank, major medical expenses, or divorce.  Occasionally, these types of events are so economically severe that the customer files for protection under the bankruptcy laws.  Standard 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 were developed from past customer credit repayment experience and are periodically revalidated based on current portfolio performance.  MBD uses these guidelines to predict the relative likelihood of credit applicants repaying their obligation to us.  We purchase loans made to consumers who fit our underwriting guidelines.  The amount and interest rate of the military loan or retail sales finance transaction purchased are set by MBD or the retail merchant based upon our underwriting guidelines considering the estimated credit risk assumed.

As a customer service, we consider purchasing a new loan from MBD 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 refinancings made to cure delinquency or for the sole purpose of creating fee income.  Generally, we purchase refinancing of existing 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.

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Approximately 25.0% of military loans we purchased in fiscal 2010 were refinancings from existing loans.

Military Loans Purchased from MBD.   We purchase military loans from MBD if they meet our lending guidelines.  We have given MBD rights to our lending guidelines and extensive experience with lending to the military marketplace.  Pursuant to the LSMS, we transferred rights to our underwriting model and lending system to MBD; however, we retained ownership of this model and the lending system.  Using our model and system, MBD originates these loans directly through its loan production offices and over the Internet.

Retail Installment Contracts.  We purchase retail installment contracts that  meet our quality standards and return on investment objectives from approximately 300 active retail merchant locations.  Retail installment contracts are finance receivable notes generated during the purchase of consumer goods by active-duty or retired career U.S. military personnel or U.S. Department of Defense employees.  These customers have demonstrated an apparent need to finance a retail purchase and a willingness to use credit.  We generally acquire these contracts without recourse to the originating merchant.  However, reserve agreements with many retail merchants allow us to withhold funds from the merchant’s proceeds to create reserves to be used in the event a customer defaults and the loan is deemed uncollectible.  Retail installment contracts generally have maximum terms of 48 months.

Management and Record Keeping Services

MBD provides management and record keeping services in accordance with the LSMS.  For these management and record keeping services, we pay MBD a monthly fee in an amount equal to .70% (8.4% annually) of the outstanding principal balance of the military loans and retail installment contracts serviced as of the last day of each month. The fee is adjusted annually on the basis of the annual increase or decrease in the Consumer Price Index (“CPI”).  Also, as part of its compensation for performing these management and recording keeping services, MBD retains all ancillary revenue, including late charges and insufficient fund fees, associated with these loans and retail installment contracts.  For these services, we also pay MBD an annual fee of $33.86 for each military loan and retail installment contract owned by us at the end of the prior fiscal year. The annual fee is paid in monthly installments.  This fee is adjusted annually on the basis of the annual increase or decrease in the CPI.

To facilitate MBD’s servicing of the military loans and retail installment contracts, we have granted MBD (i) the non-exclusive rights to use certain intellectual properties, including our trade names and service marks, and (ii) the right to use our Daybreak system and related hardware and software. We have also granted MBD non-exclusive rights to market additional products and services to our U.S. military borrowers. We retain all other borrower relationships.

Credit Loss Experience

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

Reinsurance Operations

Prior to June 2010, one of our wholly owned subsidiaries reinsured substantially all of the credit life and credit accident and health insurance policies sold by us and MBD on behalf of Assurant, an unaffiliated insurance carrier.  This line of business provided us with an additional source of income from the earned reinsurance premiums.  If a customer is killed, injured or becomes ill, including during war, our subsidiary will have payment obligations.  The liability we may have for possible losses related to our reinsurance operations and the corresponding charges to our income to maintain this amount are immaterial to our overall business.  See “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations—Sources of Income—Credit Reinsurance Premiums.”  In June 2010, MBD ceased selling reinsurance products.

Debt Protection Product

During the second quarter of fiscal 2010, MBD began offering a debt protection product to its customers.  The debt protection product is essentially a debt cancellation program.  If the customers who purchase this debt protection product are killed, injured, become ill among other protected events, we will have payment obligations.  The liability we establish for possible losses related to our debt protection product and the corresponding charges to our income to maintain this amount are immaterial to our overall business.

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Regulation

General

MBD and retail merchants who originate military loans and retail installment contracts are subject to extensive regulation, supervision and licensing by the Federal Trade Commission (“FTC”), the Office of Thrift Supervision (“OTS”), and other state and federal agencies.  Failure to comply with these requirements can lead to, among other sanctions, termination or suspension of licenses, consumer litigation and administrative enforcement actions. If MBD cannot make loans or dealers are unable to finance active-duty or career retired U.S. military personnel and U.S. Department of Defense employees, this will materially adversely impact our business, results of operations and cash flow.  See “Item 1A.  Risk Factors—MBD and retail merchants are subject to many laws and governmental regulations, and loss of licenses or any changes in these laws or regulations may materially adversely affect our results of operations, cash flow, financial condition and business operations.”  Also as a wholly owned subsidiary of MCFC, a thrift holding company, we are subject to oversight by the FTC and the OTS.   See “Item 1A.  Risk Factors-Potential regulatory changes may impact the lending practices of our vendors requiring us to make changes to our business model.”

Financial Reform Regulations

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010.  This financial reform law will materially change the current bank regulatory environment and affect the lending, deposit, investment, trading and operating activities of financial and depositary institutions and their holding companies and affiliates.  See “Item 1A.  Risk Factors-Financial reform legislation recently enacted by Congress will, among other things, eliminate the Office of Thrift Supervision, increase capital requirements, create a new Consumer Financial Protection Bureau and result in many new laws and regulations that will likely increase our costs of operations.”

Reinsurance Regulations

Our reinsurance subsidiary is subject to laws and regulations of the insurance authorities in the State of Nevada.  These regulations cover such matters as its capitalization, reserve requirements, affiliate transactions, and permitted investments.  They also place restrictions on the amount of dividends that the reinsurance subsidiary can pay to us and requires us to maintain a certain capital structure.  As of September 30, 2010, the reinsurance subsidiary had the ability to pay us up to $4.2 million in dividends pursuant to these laws and regulations.

Other Regulations

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

Compliance

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

MBD and the retail merchants who originate military loans and retail installment contracts purchased by us also must comply with both state and federal credit and trade practice statutes and regulations.  If retail merchants fail to comply with these statutes and regulations, consumers may have rights of rescission and other remedies.  In such cases, we have rights under our agreement with these merchants to require the merchant to repurchase the related retail installment contracts and to pay us for any damages we may incur or litigation costs, including attorney’s fees and costs.  However, if we are unable to enforce our agreement with the merchant,

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resulting consumer recession rights and remedies could have an adverse effect on our business, results of operation, financial condition and cash flow.

Employee Relations

MBD employees perform services for us and we pay management and record keeping services fees to MBD.  We had no employees as of September 30, 2010.  We do employ certain consultants on a contract basis.

Availability of Reports, Certain Committee Charters and Other Information

Our website address is www.pioneerservices.com. We do not make our Securities and Exchange Commission (“SEC”) public filings available on our website because our investment notes are not publicly traded and our only outstanding share of common stock is owned by MCFC.

The SEC maintains an internet site at www.sec.gov that contains reports and other information regarding us.

We will also provide printed copies of all our SEC filings to any shareholders upon request to Pioneer Financial Services, Inc., 4700 Belleview Ave, Suite 300, Kansas City, Missouri 64112, Attention: Investments.

ITEM 1A. — Risk Factors

We have identified important risks and uncertainties that could affect our results of operations, financial position, cash flow or business and that could cause them to differ materially from our historical results of operations, financial position, cash flow or business, or those contemplated by forward-looking statements made herein or elsewhere, by or on behalf of us.  The risks described below are not the only risks we face.  Our results of operations, financial position, cash flow and business could be harmed by any of the following risks or risks that are not presently known to us or that we currently deem immaterial.  The risks described below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Financial reform legislation recently enacted by Congress will, among other things, eliminate the Office of Thrift Supervision, increase capital requirements, create a new Consumer Financial Protection Bureau and result in many new laws and regulations that will likely increase our costs of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010.  This financial reform law will materially change the current bank regulatory environment and affect the lending, deposit, investment, trading and operating activities of financial and depositary institutions and their holding companies and affiliates.

Certain provisions of the Dodd-Frank Act will have an impact on us, and such impact may be significant.  The Dodd-Frank Act will eliminate the Office of Thrift Supervision (“OTS”), which currently is the primary federal regulator for MCB and its affiliates, including our parent, which is a thrift holding company.  Oversight of federally chartered thrift institutions, like MCB, will be transferred to the Comptroller of the Currency (the “OCC”), the primary federal regulator for national banks.  The Board of Governors of the Federal Reserve System (the “Federal Reserve”) will have exclusive authority to regulate all bank and thrift holding companies.  As a result, MCB and our parent will become subject to regulation and supervision by the OCC and Federal Reserve, respectively, instead of the OTS.  These changes to our regulators will occur on the transfer date, which is expected to be one year from the enactment of the Dodd-Frank Act (unless extended by up to six months).  Under OTS supervision, our parent is not subject to specific capital requirements, however, the new law will require the creation of new regulatory capital requirements that our parent must maintain.  The new law also mandates that the Federal Reserve conduct regular examinations of activities of non-bank affiliates similar to that currently conducted with respect to bank subsidiaries.  This will likely mean that the Federal Reserve will examine our activities. The Dodd-Frank Act also creates a Consumer Financial Protection Bureau authorized to promulgate and enforce consumer protection regulations relating to financial products, which could affect both bank and non-bank finance companies.

The Dodd-Frank Act also weakens the federal preemption of state laws and regulations previously available to national banks and federal thrifts.  Most importantly to us, it eliminates federal preemption for subsidiaries, affiliates and agents of national banks and federal thrifts.  These changes to federal preemption may have a significant impact upon us and may require us to change our current business operations.  We are in the process of analyzing how we comply with the state laws that may become applicable to our business and are considering various alternatives.  The changes may require us to change our business model.

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While the Dodd-Frank Act has been signed into law, a number of provisions of the law remain to be implemented through the rulemaking process at various regulatory agencies.  We are unable to predict what the final form of those rules will be when implemented by the respective agencies, but management believes that certain aspects of the new legislation, including, without limitation, the costs of compliance with disclosure and reporting requirements and examinations, could have a significant impact on our business, financial condition and results of operations.  Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes would affect us.

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

We currently fund our operations through bank debt.  The profitability and growth of our business and our ability to purchase loans currently depends on our ability to access bank debt at competitive rates, and we cannot guarantee that such financing will be available in the future.  Our bank debt is comprised of individual loans from lenders, which are party to our Secured Senior Lending Agreement (the “SSLA”).  The SSLA is an uncommitted credit facility that provides common terms and conditions pursuant to which individual banks that are a party to this agreement may choose to make loans to us in the future.  No lender has an obligation to make any additional future loans to us.  As of September 30, 2010, we could request up to $35.2 million in additional funds and remain in compliance with the terms of the SSLA.  No lender has a contractual obligation to lend us these additional funds.  In addition, we have borrowings of $34.3 million from withdrawing banks who previously participated in our credit facility.  With the ongoing strains in the financial markets, we see liquidity, capital and earnings challenges for some banks in our credit group that may reduce their ability to participate in the credit or may cause a decrease in their willingness to lend at the current levels.  If our existing sources of liquidity become insufficient to satisfy our financial needs or our access to these sources become further restricted, we will need to raise capital from other sources if needed.  If such an event were to occur, we can give no assurance that such alternate sources of liquidity would be available to us.

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

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

MBD may modify underwriting and servicing standards and does not have to lend to the traditional customers who meet our business model and lending guidelines, which may materially adversely affect our business operations, cash flow, results of operations, financial condition and profitability.

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

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MCB and MCFC have each entered into a separate confidential Memorandum of Understanding (each, a “MOU” and together, the “MOUs”) with the OTS, which such MOUs contain requirements that MCB and MCFC may not be able to continue to satisfy.

MCB and MCFC entered into separate confidential MOUs with the OTS.  The MOUs are each effective as of February 26, 2009.  The MOUs are informal agreements and are not available to the public.  Among other things, MCB’s MOU requires it to closely monitor its capital levels, allowance for loan and lease losses, risks and problem assets as well as to obtain the approval of the OTS to pay dividends and to increase brokered deposits above levels existing as of the date of the MOU.  MCFC’s MOU requires it, among other things, to closely monitor its liquidity and to obtain approval of OTS to conduct certain activities including payment of dividends and increasing debt levels above those existing as of the effective date of the MOU.  The provisions of the MOU may limit the funds available to MCB to originate loans.  Our vendor, MBD, is a division of MCB.  Non-compliance with the MOUs could result in formal enforcement actions and could limit MBD’s ability to originate military loans.  This would have a material adverse impact on the business, results of operations, financial condition and cash flow and would require us to change our business model.  See “Item 7-Management Discussion and Analysis of Financial Conditions and Results of Operations — Loan Acquisition/Origination.”

We, MBD and our retail merchants are subject to extensive laws, regulations and governmental supervision by federal and state agencies in the conduct of our business operations, which regulations are costly, time consuming and intended to protect depositors; failure to comply with regulatory policies and rules could result in further restrictions on our business and reputation.

We, as a wholly owned subsidiary of a thrift holding company, and MBD, as a division of a federal savings bank, are regulated by the OTS.  Our loan purchasing operations, MBD’s lending operations as well as our retail merchants  are also subject to regulation by federal and state finance and consumer protection authorities and various laws and judicial and administrative decisions imposing various requirements and restrictions on our operations, including the requirement to obtain and maintain certain licenses and qualifications.  These regulations are primarily designed to protect depositors, borrowers and the financial system as a whole.  We are also regulated by state and federal securities regulators as long as our investment notes are outstanding.

Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we may offer and increasing the ability of competitors to offer competing financial services and products.  Compliance with these regulations is expensive and requires the time and attention of management.  These costs divert capital and focus away from efforts intended to grow our business.  If we do not successfully comply with laws, regulations or policies, our compliance costs could increase, our operations could be limited and we may suffer damage to our reputation.

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

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

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

When they deem it to be in the best interest of their personnel, military commanders and supervisors of federal employees may instruct their personnel, formally or informally, not to patronize a business.  If military commanders or federal employee supervisors at any given level determine one or more of MBD’s loan production offices or its Internet site to be off limits, we and MBD would be unable to do new business with the potential customers they command or supervise.  Additionally, approximately 55% of our borrowers make their monthly loan payments through the Government Allotment System.  Military commanders or federal employee supervisors could deny those they command or supervise access to these programs, increasing our credit risk on the loans we own.  Without access to sufficient new customers or to the Government Allotment System, MBD may be forced to discontinue lending to the U.S. military and we may be forced to liquidate our portfolio of military loans and retail installment contracts.

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

The terms of repayment on the loans we purchase are generally structured so the entire loan amount is repaid prior to the customer’s estimated separation from the military.  If, however, a customer unexpectedly leaves the military or other events occur that result in the loan not being repaid prior to the customer’s departure from the military, there is an increased chance that the loan will not be repaid.  Because we do not know whether or when a customer will leave the military early, we cannot institute policies or procedures to ensure that the entire loan is repaid before the customer leaves the military.  As of September 30, 2010, we had approximately 3,400 customers, which represented 2.2% of our total customers, who separated from the military prior to repaying their loan and who in the aggregate owed us approximately $5.9 million.  Based on historical charge-off models, management believes this could result in approximately $3.7 million in charge-offs.  If that amount increases or the number of customers who separate from the military prior to their scheduled separation date materially increases, our charge-offs will increase.  This would have a materially adverse effect on our business, cash flow, results of operations and financial condition.

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

As of September 30, 2010, our sole shareholder, MCFC, owned the outstanding share of our common stock.  Accordingly, MCFC is able to exercise significant control over our affairs including, but not limited to, the election of directors, operational decisions and decisions regarding the investment notes.  The SSLA, among other things, limits the amounts that we can pay to MCFC each year.  In fiscal 2010, the SSLA prohibits us from paying MCFC more than $735,000 for strategic planning services, professional services, product identification and branding and service charges.  Other than the covenants contained in the SSLA, there are no significant contractual limits on the amounts we can pay to our parent or other affiliates.

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

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

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

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

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

Our wholly owned subsidiary reinsures credit life and credit accident and health insurance policies sold by us and MBD on the borrowers for the loans we own.  Our debt protection product includes all-cause death and disability protection.  These policies pay the loan payments as they become due during a customer’s disability due to illness or injury, including war-related injuries, and pay the balance in the event of death including war-related fatalities.  Therefore, if a large number of borrowers are injured and disabled in combat, our profitability would be impaired, which could have a material adverse impact on our business, results of

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operation, financial condition and cash flow and may impair our ability to pay interest and principal on our outstanding investment notes.

ITEM 2.                                                     PROPERTIES

As of September 30, 2010, we do not own any property.

ITEM 3.                                                     LEGAL PROCEEDINGS

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

PART II

ITEM 5.                                                 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

All of our outstanding common stock is held by MCFC and, accordingly, there is no established public trading market for it.  We have not sold or repurchased any of our common stock since our acquisition by MCFC.  During fiscal 2010 and fiscal 2009, we declared and paid a dividend to MCFC in the amount of $10.6 million and $3.5 million, respectively.  Our ability to pay dividends is limited by the terms and conditions of the SSLA.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity—Senior Indebtedness.”

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ITEM 6.                SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and the related notes, with other financial data included in this report and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  The data as of and for fiscal years ended September 30, 2010, 2009 and 2008, as of and for the periods ended September 30 and May 31, 2007, and fiscal year ended September 30, 2006 has been derived from our audited consolidated financial statements and related notes.

(1)  Includes debt to our parent under a revolving line of credit of $1.4 million as of September 30, 2006.

(2)  Number of shares outstanding is one and 17,136 in the successor and predecessor period, respectively.

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ITEM 7.               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

Finance receivables, whether originated or purchased, are effectively unsecured and consist of loans previously originated by us or purchased from MBD and retail merchants.  All finance receivables have fixed interest rates and typically have a maturity of less than 48 months.  At acquisition, the size of the average finance receivable was approximately $3,322 during fiscal year 2010. A large portion of our customers are unable to obtain financing from traditional sources due to factors such as age, frequent relocations and lack of credit history.  These factors may not allow them to build relationships with traditional sources of financing.

Improvement of our profitability is dependent upon the growth in amount of aggregate finance receivables we are able to acquire from MBD and retail merchants, as well as the maintenance of loan quality.

Sources of Income

We generate revenues primarily from interest earned on the military loans purchased from MBD, loans previously originated by us and retail installment contracts purchased from retail merchants. We also earn revenues from credit reinsurance premiums and the sale of debt protection products. For purposes of the following discussion, “revenues” means the sum of our finance income, reinsurance premiums and debt protection income.

Finance Income.  Finance income consists of interest and origination revenue earned on the military loans and retail installment contracts we own (referred to throughout individually as “loan” or collectively as “loans” or “finance receivables”).  Our interest revenue is based on the risk adjusted interest rates charged customers for loans that we purchase.  Interest rates vary by loan and are based on many factors, including the overall degree of credit risk assumed and the interest rates allowed in the state where the loan is originated.  Finance income comprised approximately 94.4% of our total revenues in fiscal 2010.

Credit Reinsurance Premiums and Debt Protection Products.  Prior to the second quarter of fiscal 2010, one of our wholly owned subsidiaries reinsured substantially all of the credit life, credit accident and health insurance sold by us and MBD on behalf of Assurant, an unaffiliated insurance carrier.  During the second quarter of fiscal 2010, MBD began offering a debt protection product to our customers.  During the third quarter of fiscal 2010, our subsidiary ceased assuming the reinsurance policies.  Credit reinsurance premiums and debt protection fee income comprised approximately 5.6% of our total revenues in fiscal 2010.

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Finance Receivables

Our finance receivables are comprised of loans previously originated by us or purchased from MBD (collectively referred to below as “military loans”) and retail installment contracts. The following table sets forth certain information about the components of our finance receivables as of the end of the periods presented:

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.  General inability to increase the interest rates earned on new and existing finance receivables restricts our ability to react to increases in cost of funds.  Accordingly, increases in market interest rates generally will narrow interest rate spreads and lower profitability, while decreases in market interest rates generally will widen interest rate spreads and increase profitability.  The following table presents a three-year history of data relating to our net interest margin as of and for the fiscal years ended September 30, 2010, 2009 and 2008.

(1)  Averages are computed using month-end balances.

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Results of Operations

Year Ended September 30, 2010 Compared to Year Ended September 30, 2009

Total Finance Receivables.  Our aggregate finance receivables increased 6.1% to $387.0 million on September 30, 2010 from $364.8 million on September 30, 2009.  We increased our loan acquisitions from MBD and retailers by 6.7% during fiscal 2010 over the same period in fiscal 2009.  Our aggregate average finance receivables also increased during this period to $369.3 million in fiscal 2010 from $349.5 million in fiscal 2009, an increase of $19.8 million or 5.7%.

Total Interest Income and Fees.  Total interest income and fees in fiscal 2010 represented 94.4% of our revenue compared to 94.7% in fiscal 2009.  Interest income and fees increased to $105.5 million from $99.7 million in fiscal 2009, an increase of $5.8 million or 6.0%.  This increase is primarily due to an increase in aggregate average finance receivables.

Interest Expense.  Interest expense in fiscal 2010 increased slightly to $18.0 million from $17.9 million in fiscal 2009, an increase of $0.1 million or 0.6%.  While our average interest bearing liabilities increased by $6.9 million or 2.6%, our weighted average interest rate on our amortizing note debt decreased to 6.38% in fiscal 2010 compared to 6.54% in fiscal 2009.  We pay our lenders a minimum interest rate per annum of 5.00% for our revolving facility and 6.25% per annum for our amortizing notes. In addition, we pay our lenders a quarterly uncommitted availability fee in an amount equal to ten basis points multiplied by the average, aggregate outstanding principal amount of all amortizing notes held by the lenders.  We paid our lenders $0.6 million in uncommitted availability fees during fiscal 2010 compared to $0.5 million in fiscal 2009.  Also, during fiscal 2010, we converted our parent notes allowable under the SSLA from a term facility to revolving line of credit and began drawing on this line of credit.  As of September 30, 2010, we had subordinated parent debt to MCFC of $11.9 million with an interest rate of 5.0%.

Provision for Credit Losses.  The provision for credit losses in fiscal 2010 decreased to $22.4 million from $23.5 million in fiscal 2009, a decrease of $1.1 million or 4.7%.  This decrease is primarily due to positive trends in net charge-offs and delinquency, as well as increased collection efforts in fiscal 2010.  We also saw a decline in our net charge-offs as a percentage of our average total finance receivables to 6.11% in fiscal 2010 compared to 6.24% in fiscal 2009.  See further discussion in “Allowance for Credit Losses” section.

Noninterest Income.  Noninterest income consists of revenue from credit reinsurance premiums and debt protection income which replaced credit reinsurance in June 2010.  Combined credit reinsurance premiums and debt protection income totaled $6.3 million in fiscal 2010 compared to $4.4 million in fiscal 2009, an increase of $1.9 million or 43.2%.  The increase in noninterest income is directly related to the increase in our loan acquisitions.

Noninterest Expenses.  Noninterest expenses in fiscal 2010 increased to $45.5 million compared to $42.0 million in fiscal 2009, an increase of $3.5 million or 8.3%.  The increase was primarily due to the increase in our management and record keeping services fees for the year.  Management and record keeping services fees in fiscal 2010 increased by $2.8 million from fiscal 2009 due to a 5.7% increase in our aggregate finance receivables.

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Year Ended September 30, 2009 Compared to September 30, 2008.

Total Finance Receivables.  Our aggregate finance receivables increased 14.2% to $364.8 million on September 30, 2009 from $319.3 million on September 30, 2008.  Our primary supplier of loans, MBD, saw a 7.8% increase in its originations of military loans during fiscal 2009 over the same period in fiscal 2008, thus increasing the availability of loans for us to purchase in fiscal 2009.  Our acquisitions from retail merchants increased by 103.6% during this same period.  The increase in the acquisitions of retail installment contracts from retail merchants is due to an increase in our network of retail merchants as well as new relationships with larger regional merchants.  See further discussion in the section entitled “Loan Acquisition/Origination.”  Our aggregate average finance receivables also increased during this period to $349.5 million in fiscal 2009 from $295.5 million in fiscal 2008, an increase of $54.0 million or 18.3%.

Total Interest Income and Fees.  Total interest income and fees in fiscal 2009 increased to $99.7 million from $83.8 million in fiscal 2008, an increase of $15.9 million or 19.0%.  This increase is primarily due to an increase in aggregate average finance receivables of $54.0 million or 18.3%.

Interest Expense.  Interest expense in fiscal 2009 increased to $17.9 million from $16.4 million in fiscal 2008, an increase of $1.5 million or 9.1%.  Our average interest bearing liabilities increased to $234.3 in fiscal 2009 from $230.6 in fiscal 2008, an increase of $3.7 million or 1.6%.  In January 2009, we started paying our lenders a minimum interest rate per annum of 5.00% for our revolving facility and 6.25% per annum for our amortizing notes.  In addition, we are paying our lenders a quarterly uncommitted availability fee in an amount equal to ten basis points multiplied by the average, aggregate outstanding principal amount of all amortizing notes held by the lenders.  As of September 30, 2009, we paid our lenders $0.5 million in uncommitted availability fees.  The addition of the floor interest rates and uncommitted availability fee increased our cost of funds to 7.6% in fiscal 2009 compared to the cost of funds of 7.1% in fiscal 2008.

Provision for Credit Losses.  The provision for credit losses in fiscal 2009 increased to $23.5 million from $21.9 million in fiscal 2008, an increase of $1.6 million or 7.3%.  The increase is primarily due to the increase in aggregate finance receivables.  While the provision increased, we saw a decline in our net charge-offs as a percentage of our average total finance receivables to 6.24% compared to 6.96% in fiscal 2008.  Loans that are 60 days or more delinquent have also increased to $10.8 million at September 30, 2009 from $9.7 million at September 30, 2008, an increase of $1.1 million or 11.3%; however, loans that are 60 days or more delinquent as a percentage of total loans has decreased to 2.97% in fiscal 2009 compared to 3.02% in fiscal 2008.  See further discussion in “Allowance for Credit Losses” section.

Noninterest Income.  Noninterest income consists of revenue from credit reinsurance premiums which increased to $4.4 million from $3.9 million in fiscal 2008, an increase of $0.5 million or 12.8%.  The increase in credit reinsurance premiums is directly related to the increase in our loan acquisitions.

Noninterest Expenses.  Noninterest expenses in fiscal 2009 increased to $42.0 million compared to $36.4 million in fiscal 2008, an increase of $5.6 million or 15.4%.  The increase was primarily due to the increase in our management and record keeping services fees for the year.  Management and record keeping services fees in fiscal 2009 increased by $6.7 million from fiscal 2008 due to a 14.2% increase in our aggregate finance receivables and an increase in the CPI on which these fees are based.

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Delinquency Experience

Our customers are required to make monthly payments of interest and principal.  Our servicer, MBD, 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.  We rarely grant extensions or deferments, or allow account revision, rewriting, renewal or rescheduling in order to bring otherwise delinquent accounts current.

The following sets forth the three-year history of our delinquency experience for accounts for which payments are 60 days or more past due and allowance for credit losses for finance receivables.

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 estimated future losses. We utilize a statistical model based on potential credit risk trends incorporating both historical and prospective factors to estimate losses.  These results and management’s judgment are used to estimate future losses and in establishing the current provision and allowance for credit losses. These estimates are influenced by factors outside our control, such as economic conditions, current or future military deployments and completion of military service prior to repayment of loan. There is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term.  See “Item 1A. Risk Factors—If a customer leaves the military prior to repaying loans, there is an increased risk loans will not be repaid.”

Military Loans.  Our charge-off policy is based on an account-by-account review of delinquent receivables on a recency basis.  Our primary sources of charge-offs occur when a customer leaves the military prior to repaying the finance receivable or is subject to longer term and more frequent deployments.  Generally, loans purchased or originated by us are structured so that the entire amount is repaid prior to a customer’s estimated separation from the military. When buying loans, however, we cannot predict when or whether a customer may depart from the military early.  Accordingly, we cannot implement policies or procedures for MBD to follow to ensure that we will be repaid in full prior to a customer leaving the military.  Nor can we predict when a customer may be subject to deployment at a duration or frequency that causes a default on their loans. Another source of loss is when a customer declares bankruptcy.  See “Item 7. — Nonperforming Assets.”

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

(1) Averages are computed using month-end balances.

Retail Installment Contracts.  Under most of our arrangements with retail merchants, we typically withhold a percentage (usually between five and ten percent) of the principal amount of the retail installment contract purchased.  The amounts withheld from a particular retail merchant are recorded in a specific reserve account.  As of September 30, 2010, the aggregate amount of retail merchant reserves totaled $2.4 million, a decrease of $2.0 million or 45%, from the same period last year.  The decrease is due to reduced acquisitions of retail installment contracts as well as increased utilization of the dealer reserve for non performing contracts.  This represents a 5.3% reserve as a percentage of average retail installment contract receivables.  Any losses incurred on the retail installment contracts purchased from that retail merchant are charged against its specific reserve account.  Upon the retail merchant’s request, and no more often than annually, we will pay the retail merchant the amount by which its specific reserve account exceeds 15% of the aggregate outstanding balance on all retail installment contracts purchased from them, less losses we have sustained, or reasonably could sustain, due to debtor defaults, collection expenses, delinquencies and breaches of our agreement with the retail merchant.  Our allowance for credit losses is charged only to the extent that the loss on a retail installment contract exceeds the originating retail merchant’s specific reserve account at the time of the loss.

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

(1) Averages are computed using month-end balances.

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Allowance for Credit Losses.  The following table sets forth the three-year history of our allowance for credit losses:

(1) Averages are computed using month-end balances.

The allowance for credit losses in fiscal 2010 remained consistent at $24.5 million from $24.6 million at the end of fiscal 2009.

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

Nonperforming Assets

The accrual of interest income is suspended when a full payment has not been received for 90 days or more, and the interest due exceeds an amount equal to 60 days of interest charges.  The accrual is resumed when a full payment (95% or more of the contracted payment amount) is received.  Nonperforming assets represent those finance receivables on which both the accrual of interest income has been suspended and for which no full payment of principal or interest has been received for more than 90 days.

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Loan Acquisition / Origination

Asset growth is the most important factor in determining our future revenues.  We are dependent upon MBD and retail merchants to increase their originations for our future growth.  In connection with purchasing the loans, we pay MBD a fee in the amount of $32.00 for each military consumer loan originated by MBD and purchased by us. This fee is adjusted annually on the basis of the annual increase or decrease in MBD’s deferred acquisition cost analysis.  For fiscal 2010, loans purchased from MBD and retail merchants increased to $419.1 million from $395.8 million in fiscal 2009, an increase of $23.3 million or 5.9%.  The average note amount increased by $257.00, or 8.4%.  This is primarily due to an 11.9% increase in Internet loans over the prior year.  Our Internet customers are typically higher ranked, have lower risk and qualify for larger loans.  See “Item 1: Business—General.”

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

(1) dollars in thousands

Liquidity and Capital Resources

A relatively high ratio of borrowings to invested capital is customary in the consumer finance industry.  Our principal use of cash is to purchase military loans and retail installment contracts.  We use borrowings to fund the difference, if any, between the cash used to purchase military loans and retail installment contracts and operations, and the cash generated from loan repayments and operations.  Cash used in investing activities in fiscal 2010 was approximately $41.6 million and cash used in financing activities was $3.5 million which was funded from operating activities of $43.8 million.  Cash used in investing activities in fiscal 2009 was approximately $70.8 million, which was funded from $48.3 million of cash from operating activities and $13.1 million from financing activities.

The majority of our liquidity requirements are secured by our funding through our SSLA. Additional sources of funds are generated through our sales of investment notes and borrowings with our parent.  We have increased our liquidity position this fiscal year with additional senior funding of $29.8 million under the SSLA from one new voting bank and ten new nonvoting banks.  Further, we have issued over $8 million in investment notes and $11.9 million in subordinated borrowings from our parent.  These new sources of funds have offset the diminished capacity from our withdrawing banks and provided us with additional liquidity in fiscal 2010 as well as fiscal 2011, allowing us the liquidity necessary to grow our finance receivables.  We plan to continue to attract new banks to the SSLA and sell additional investment notes to fund our growth in fiscal 2011.  As of our filing date, we have raised additional bank funding of $11.0 million since September 30, 2010, by adding four new nonvoting banks to our SSLA facility.  See further discussion below under “Senior Indebtedness — Bank Debt.”

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Senior Indebtedness-Bank Debt.

On June 12, 2009, we entered into the SSLA with the lenders listed on the SSLA (“the lenders”) and UMB Bank, N.A. (the “Agent”).  The SSLA replaces and supersedes the Senior Lending Agreement, dated as of June 9, 1993, as subsequently amended and restated (the “SLA”).  The term of the current SSLA ends on March 31, 2011 and is automatically extended annually unless any lender gives written notice of its objection by March 1 of each calendar year.  Our assets secure the loans extended under the SSLA for the benefit of the lenders and other holders of the notes issued pursuant to the SSLA or the SLA (the “Senior Debt”).  The facility is an uncommitted facility that provides common terms and conditions pursuant to which the individual lenders that are a party to the SSLA may choose to make loans to us in the future.  Any lender may elect not to participate in any future fundings at any time without penalty.  As of September 30, 2010, we could request up to $35.2 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 September 30, 2010, the lenders have indicated a willingness to participate in fundings up to an aggregate of $232.9 million during the next 12 months, including $197.8 million which is currently outstanding.  In addition, the Company has borrowings of $34.3 million from withdrawing banks who had previously participated in the SLA.

The aggregate notional balance outstanding under amortizing notes was $210.7 million and $221.2 million at September 30, 2010 and 2009, 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 6.25%.  All amortizing notes have terms not to exceed 48 months, payable in equal monthly principal and interest payments.  There were 338 and 321 amortizing term notes outstanding at September 30, 2010 and 2009, respectively, with a weighted-average interest rate of 6.39% and 6.54%, respectively.  In addition, we are paying our lenders a quarterly uncommitted availability fee in an amount equal to ten basis points multiplied by the average, aggregate outstanding principal amount of all amortizing notes held by the lenders.  As of September 30, 2010, we paid our lenders $0.6 million in uncommitted availability fees.

Advances outstanding under the revolving credit line were $21.4 million and $20.8 million at September 30, 2010 and 2009, respectively. When a lender elects not to participate in future fundings, any existing borrowings from that lender under the revolving credit line are payable in 12 equal monthly installments. Interest on borrowings under the revolving credit line is payable monthly and is based on prime or 5.00%, whichever is greater.  Interest on borrowings was 5.00% at September 30, 2010 and 2009, respectively.

Substantially all of our assets secure this debt under the SSLA.  The SSLA also limits, among other things, our ability to (1) incur additional debt from the lenders beyond that allowed by specific financial ratios and tests, (2) borrow or incur other additional debt except as permitted in the SSLA, (3) pledge assets, (4) pay dividends, (5) consummate certain asset sales and dispositions, (6) merge, consolidate or enter into a business combination with any other person, (7) pay fees to MCFC each year except as provided in the SSLA, (8) purchase, redeem, retire or otherwise acquire any of our outstanding equity interests, (9) issue additional equity interests, (10) guarantee the debt of others without reasonable compensation and only in the ordinary course of business or (11) enter into agreements with our affiliates.

Under the SSLA, we are subject to certain financial covenants that require that we, among other things, maintain specific financial ratios and satisfy certain financial tests.  In part, these covenants require us to: (1) maintain an allowance for credit losses equal to or greater than the allowance for credit losses shown on our audited financial statements as of the end of our most recent fiscal year and at no time less than 5.25% of our consolidated net receivables, unless otherwise required by GAAP, (2) limit our senior indebtedness as of the end of each quarter to not greater than four times our tangible net worth, (3) maintain a positive net income in each fiscal year, (4) limit our senior indebtedness as of the end of each quarter to not greater than 80% of our consolidated receivables, and (5) maintain a consolidated total required capital of at least $75 million plus 50% of the cumulative positive net income earned by us during each of our fiscal years ending after September 30, 2008, which approximates $89.9 million as of September 30, 2010.  Any part of the 50% of positive net income not distributed by us as a dividend for any fiscal year within 120 days after the last day of such fiscal year must be added to our consolidated total required capital and may not be distributed as a dividend or otherwise.  No part of the consolidated total required may be distributed as a dividend.

We may not make any payment to MCFC in any fiscal year for services performed or reasonable expenses incurred in an aggregate amount greater than $735,000 plus reimbursable expenses.  Such amount may be increased on each anniversary of the SSLA by the percentage increase in the CPI published by the United States Bureau of Labor for the calendar year then most recently ended.  Except as required by law, we may not stop purchasing small loans to military families from MBD, unless the lenders consent to such action.

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The breach of any of these covenants could result in a default under the SSLA, in which event the lenders could seek to declare all amounts outstanding to be immediately due and payable.  As of September 30, 2010, we were in compliance with all loan covenants.

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

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

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

In the third quarter of fiscal 2010, we amended the SSLA to allow additional banks to become parties to the SSLA under a modified non-voting role.  We have identified each lender that has voting rights under the SSLA as “voting bank(s)” and lenders that do not have voting rights under the SSLA, as “non-voting bank(s)”.  While all voting and non-voting banks have the same rights to the collateral and are party to the same terms and conditions of the SSLA, all of the non-voting banks acknowledge and agree that they have no right to vote on any matter nor to prohibit or hinder any action by us, or the voting banks.  As of September 30, 2010, we had ten non-voting banks from whom we borrowed $19.8 million. The balance of these notes as of September 30, 2010 was $19.4 million.

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

(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 80.0%.

(2)  Includes 48-month amortizing term notes.

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

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Subordinated Debt - Parent.  In the second quarter of fiscal 2010, we amended our SSLA to convert the parent note from a term facility to a revolving line of credit.  Funding on this line of credit is provided as needed at our discretion and dependent upon the availability of our parent with a maximum principal balance of $25.0 million.  Interest is payable monthly and is based on prime or 5.0%, whichever is greater.  Interest on borrowings was 5.0% at September 30, 2010.  As of September 30, 2010, the outstanding balance was $11.9 million.

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.  On January 21, 2010, the Securities and Exchange Commission (“SEC”) declared effective our registration statement on Form S-1 (Amendment No. 1) registering $25 million of investment notes.  We filed our final prospectus and prospectus supplement containing certain pricing information on January 21, 2010.  We began offering these investment notes on January 22, 2010.  As of September 30, 2010, we had outstanding $40.0 million of these notes (with accrued interest), of which $8.0 million is from our recent offering.  The amount includes a $0.5 million purchase adjustment relating to fair value adjustments recorded as part of the Transaction.  These notes had a weighted average interest rate of 9.38% as of September 30, 2010.

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

Impact of Inflation and General Economic Conditions

Although inflation has not had a material adverse effect on our financial condition or results of operations, increases in the inflation rate generally are associated with increased interest rates.  A significant and sustained increase in interest rates could unfavorably impact our profitability by reducing the interest rate spread between the rate of interest we receive on military loans and retail installment contracts and interest rates paid under our SSLA and investment notes.  Inflation also may negatively affect our operating expenses.  With the ongoing strains in the financial markets, we see liquidity, capital and earnings challenges for some lenders in our credit group which may reduce their ability to participate in the credit or may cause a decrease in their willingness to lend at the current levels.  In addition, we have borrowings of $34.3 million from withdrawing banks who previously participated in the SLA.  See “Liquidity and Capital Resources.”

Critical Accounting Policies

General. Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the finance company industry.  The significant accounting policies used in the preparation of the consolidated financial statements are discussed in Note 1 to the Consolidated Financial Statements.  Critical accounting policies require management to make estimates and assumptions, which affect the reported amounts of assets, liabilities, income and expenses.  As a result, changes in these estimates and assumptions could significantly affect our financial position and results of operations.

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

We utilize a statistical model which incorporates both historical and prospective estimates to better forecast potential credit risk trends to determine the appropriate amount of allowance for credit losses.

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

·                  Prior credit losses and recovery experience

·                  Current economic conditions

·                  Current finance receivable delinquency trends

·                  Demographics of the current finance receivable portfolio

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

·                  Delinquency ratio — finance receivables 60 days or more past due as a percentage of finance receivables

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

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

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

In addition to these models, we exercise our judgment, based on our experience in the consumer finance industry, when determining the amount of the allowance for finance receivable losses.  We consider this estimate to be a critical accounting estimate that affects its net income in total and the pretax operating income of our business.  See “Item 7. Management Discussion and Analysis of Financial Conditions and Results of Operations—Credit Loss Experience and Provision for Credit Losses.”

Goodwill and Other Intangible Assets.  Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as purchases. Other intangible assets represent other identifiable assets.  Goodwill is not amortized over an estimated useful life, but rather tested at least annually for impairment. Intangible assets other than goodwill, which are determined to have finite lives, continue to be amortized on straight-line or accelerated bases over their estimated useful lives. Amortizing intangibles are currently evaluated for impairment. Recoverability of these assets is assessed only when events have occurred that may give rise to an impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets, including such intangibles, are written down to their respective fair values.

Contractual Obligations

We have the following payment obligations under current financing and leasing arrangements as of September 30, 2010:

(1) Interest on long term debt is calculated using the weighted average interest rate of 6.38% for amortizing term notes and 9.38% for investment notes as of September 30, 2010.

(1) Interest on lines of credit is calculated using the fixed rate of 5.00% as of September 30, 2010.

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Impact of New and Emerging Accounting Pronouncements Not Yet Adopted

In July 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. This guidance is intended to improve transparency in financial reporting by public and nonpublic companies that hold financing receivables, which includes loans and other long-term receivables.  As this guidance amends only the disclosure requirements for loans and the allowance for credit losses, we do not believe the adoption of this pronouncement will have a significant impact on our consolidated financial statements.  We will adopt this guidance during the first quarter of fiscal 2011.

In October 2010, FASB issued new accounting guidance regarding accounting for costs associated with acquiring or renewing insurance contracts. This guidance is intended to address the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This guidance will be effective for us in fiscal 2012 and we do not expect the adoption of this guidance to have a material impact on the financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

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 5.00% in accordance with our SSLA.  The prime rate as of September 30, 2010 was 3.25%.  In order for any impact to occur, the prime rate will need to increase more than 175 basis points.  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 6.25% in accordance with our SSLA.  The 90 day moving average rate of treasury notes as of September 30, 2010 was 1.14%.  In order for any impact to occur, the 90 day moving average rate of treasury notes would need to increase by 241 basis points.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010, 2009 AND 2008

(WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING REPORTS THEREON)

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Index to Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Pioneer Financial Services, Inc.

Kansas City, MO.

We have audited the accompanying consolidated balance sheets of Pioneer Financial Services, Inc. (the “Company”) as of September 30, 2010 and 2009, and the related consolidated statements of operations, stockholder’s equity, and cash flows for each of the three years ended September 30, 2010, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2010 and 2009, and the results of their operations and their cash flows for each of the three years ended September 30, 2010, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Minneapolis, MN

November 30, 2010

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PIONEER FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2010 AND 2009

ASSETS