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EXCEL - IDEA: XBRL DOCUMENT - PIONEER FINANCIAL SERVICES INC | Financial_Report.xls |
EX-31.2 - EX-31.2 - PIONEER FINANCIAL SERVICES INC | ex-31263014.htm |
EX-32.2 - EX-32.2 - PIONEER FINANCIAL SERVICES INC | ex-32263014.htm |
EX-31.1 - EX-31.1 - PIONEER FINANCIAL SERVICES INC | ex-31163014.htm |
EX-32.1 - EX-32.1 - PIONEER FINANCIAL SERVICES INC | ex-32163014.htm |
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, 2014
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)
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, 2014 | |
Common Stock, no par value | One Share |
As of August 12, 2014, one share of the registrant’s common stock is outstanding. The registrant is a wholly owned subsidiary of MidCountry Financial Corp.
PIONEER FINANCIAL SERVICES, INC.
FORM 10-Q
June 30, 2014
TABLE OF CONTENTS
Item No. | Page | |
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
PIONEER FINANCIAL SERVICES, INC.
Consolidated Balance Sheets
As of June 30, 2014 and September 30, 2013
(unaudited)
June 30, 2014 | September 30, 2013 | ||||||
(dollars in thousands) | |||||||
ASSETS | |||||||
Cash and cash equivalents - non-restricted | $ | 8,426 | $ | 1,923 | |||
Cash and cash equivalents - restricted | 622 | 623 | |||||
Investments | 352 | 1,719 | |||||
Gross finance receivables | 287,982 | 364,198 | |||||
Less: | |||||||
Unearned fees | (10,413 | ) | (18,126 | ) | |||
Allowance for credit losses | (31,255 | ) | (31,400 | ) | |||
Net finance receivables | 246,314 | 314,672 | |||||
Furniture and equipment, net | 354 | 383 | |||||
Net deferred tax asset | 13,424 | 13,880 | |||||
Prepaid and other assets | 8,829 | 10,003 | |||||
Deferred acquisition costs | 1,374 | 2,509 | |||||
Goodwill | 31,474 | 31,474 | |||||
Intangibles, net | 2,866 | 3,798 | |||||
Total assets | $ | 314,035 | $ | 380,984 | |||
LIABILITIES AND STOCKHOLDER’S EQUITY | |||||||
Liabilities: | |||||||
Revolving credit line - banks | $ | — | $ | 19,240 | |||
Accounts payable | 114 | 191 | |||||
Accrued expenses and other liabilities | 4,455 | 5,391 | |||||
Amortizing term notes | 146,849 | 187,582 | |||||
Investment notes | 56,394 | 63,908 | |||||
Total liabilities | 207,812 | 276,312 | |||||
Stockholder’s equity: | |||||||
Common stock, no par value; 1 share issued and outstanding | 86,394 | 86,394 | |||||
Accumulated other comprehensive income | 1 | 9 | |||||
Retained earnings | 19,828 | 18,269 | |||||
Total stockholder’s equity | 106,223 | 104,672 | |||||
Total liabilities and stockholder’s equity | $ | 314,035 | $ | 380,984 |
See Notes to Consolidated Financial Statements
1
PIONEER FINANCIAL SERVICES, INC.
Consolidated Statements of Operations
For the three and nine months ended June 30, 2014 and 2013
(unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Interest income and fees | $ | 21,530 | $ | 26,739 | $ | 72,360 | $ | 82,699 | |||||||
Interest expense | 3,676 | 4,380 | 12,220 | 13,702 | |||||||||||
Net interest income before provision for credit losses | 17,854 | 22,359 | 60,140 | 68,997 | |||||||||||
Provision for credit losses | 8,323 | 8,476 | 28,671 | 25,990 | |||||||||||
Net interest income | 9,531 | 13,883 | 31,469 | 43,007 | |||||||||||
Debt protection income, net | |||||||||||||||
Debt protection revenue | 704 | 1,254 | 2,360 | 4,561 | |||||||||||
Claims paid and change in reserves | (203 | ) | (818 | ) | (458 | ) | (2,501 | ) | |||||||
Third party commissions | (76 | ) | (135 | ) | (254 | ) | (491 | ) | |||||||
Total debt protection income, net | 425 | 301 | 1,648 | 1,569 | |||||||||||
Other revenue | 5 | 43 | 16 | 107 | |||||||||||
Total non-interest income, net | 430 | 344 | 1,664 | 1,676 | |||||||||||
Non-interest expense | |||||||||||||||
Management and record keeping services | 5,603 | 8,763 | 22,355 | 28,117 | |||||||||||
Professional and regulatory fees | 523 | 785 | 1,516 | 1,860 | |||||||||||
Amortization of intangibles | 311 | 426 | 933 | 1,280 | |||||||||||
Other operating expenses | 641 | 793 | 2,056 | 2,212 | |||||||||||
Total non-interest expense | 7,078 | 10,767 | 26,860 | 33,469 | |||||||||||
Income before income taxes | 2,883 | 3,460 | 6,273 | 11,214 | |||||||||||
Provision for income taxes | 1,101 | 1,403 | 2,374 | 4,373 | |||||||||||
Net income | $ | 1,782 | $ | 2,057 | $ | 3,899 | $ | 6,841 |
See Notes to Consolidated Financial Statements
2
PIONEER FINANCIAL SERVICES, INC.
Consolidated Statements of Comprehensive Income
For the three and nine months ended June 30, 2014 and 2013
(unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Net income | $ | 1,782 | $ | 2,057 | $ | 3,899 | $ | 6,841 | |||||||
Other comprehensive loss: | |||||||||||||||
Unrealized losses on investment securities available for sale, gross: | (2 | ) | (37 | ) | (12 | ) | (69 | ) | |||||||
Tax benefit | 1 | 13 | 4 | 24 | |||||||||||
Total other comprehensive loss, net of tax | (1 | ) | (24 | ) | (8 | ) | (45 | ) | |||||||
Total comprehensive income | $ | 1,781 | $ | 2,033 | $ | 3,891 | $ | 6,796 |
See Notes to Consolidated Financial Statements
3
PIONEER FINANCIAL SERVICES, INC.
Consolidated Statements of Stockholder’s Equity
For the nine months ended June 30, 2014 and 2013
(unaudited)
Total | Common Stock | Retained Earnings | Accumulated Other Comprehensive Income | ||||||||||||
(dollars in thousands) | |||||||||||||||
Balance, September 30, 2012 | $ | 119,935 | $ | 86,394 | $ | 33,482 | $ | 59 | |||||||
Total comprehensive income | 6,796 | — | 6,841 | (45 | ) | ||||||||||
Dividends paid to parent | (23,589 | ) | — | (23,589 | ) | — | |||||||||
Balance, June 30, 2013 | $ | 103,142 | $ | 86,394 | $ | 16,734 | $ | 14 | |||||||
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 |
See Notes to Consolidated Financial Statements
4
PIONEER FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
For the nine months ended June 30, 2014 and 2013
(unaudited)
Nine Months Ended June 30, | |||||||
2014 | 2013 | ||||||
(dollars in thousands) | |||||||
Cash flows from operating activities: | |||||||
Net income | $ | 3,899 | $ | 6,841 | |||
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: | |||||||
Provision for credit losses on finance receivables | 28,671 | 25,990 | |||||
Depreciation and amortization | 1,023 | 1,379 | |||||
Gain on investments sold - non-restricted | — | (35 | ) | ||||
Deferred income taxes | 460 | (236 | ) | ||||
Interest accrued on investment notes | 2,043 | 1,935 | |||||
Changes in: | |||||||
Accounts payable and accrued expenses | (1,013 | ) | (3,938 | ) | |||
Deferred acquisition costs | 1,135 | 2,638 | |||||
Unearned debt protection fees | (2,797 | ) | (6,138 | ) | |||
Prepaid and other assets | 1,174 | (2,006 | ) | ||||
Net cash provided by operating activities | 34,595 | 26,430 | |||||
Cash flows from investing activities: | |||||||
Finance receivables purchased from affiliate | (111,681 | ) | (173,631 | ) | |||
Finance receivables purchased from retail merchants | (1,464 | ) | (10,232 | ) | |||
Finance receivables repaid | 155,629 | 181,793 | |||||
Capital expenditures | (121 | ) | (5 | ) | |||
Change in restricted cash | 1 | 103 | |||||
Investments matured and sold | 1,350 | 2,313 | |||||
Net cash provided by investing activities | 43,714 | 341 | |||||
Cash flows from financing activities: | |||||||
Net (repayments)/borrowings under lines of credit | (19,240 | ) | 17,050 | ||||
Proceeds from borrowings | 21,714 | 55,301 | |||||
Repayment of borrowings | (71,940 | ) | (72,090 | ) | |||
Dividends paid to parent | (2,340 | ) | (23,589 | ) | |||
Net cash used in financing activities | (71,806 | ) | (23,328 | ) | |||
Net increase in cash and equivalents | 6,503 | 3,443 | |||||
Cash and cash equivalents - non-restricted, Beginning of period | 1,923 | 2,137 | |||||
Cash and cash equivalents - non-restricted, End of period | $ | 8,426 | $ | 5,580 | |||
Additional cash flow information: | |||||||
Interest paid | $ | 10,942 | $ | 12,161 | |||
Income taxes paid | 1,812 | 6,769 |
See Notes to Consolidated Financial Statements
5
PIONEER FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2014 and September 30, 2013 and for the three and nine months ended June 30, 2014 and June 30, 2013
(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 were acquired on May 31, 2007 by MidCountry Financial Corp, a Georgia corporation (“MCFC”) as a wholly owned subsidiary (the “Transaction”). 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 generally accepted accounting principles.
All the information in these consolidated financial statements should be considered in conjunction with the consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K.
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 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. In October 2013, CBD closed its loan production offices to focus on Internet efforts to grow the business.
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, valuation of goodwill and separately identifiable intangible assets, debt protection claims and policy reserves, establishing the fair value of our financial instruments and the valuation of deferred tax assets and liabilities.
6
NOTE 2: FINANCE RECEIVABLES
Our finance receivables are comprised of military loans and retail installment contracts. During the third quarter of fiscal 2014, we purchased $51.5 million of military loans from CBD compared to $107.6 million during the third quarter of fiscal 2013. We acquired no retail installment contracts during the third quarter of fiscal 2014 compared to $1.3 million during the third quarter of fiscal 2013. Approximately 29.2% of the amount of military loans we purchased in the third quarter of fiscal 2014 were refinancings of outstanding loans compared to 35.9% during the third quarter of fiscal 2013.
We ceased the purchasing of retail installment contracts on March 31, 2014. Our retail merchant network will continue and be transitioned to assist customers, who wish to finance a retail purchase, with applying for a direct military loan from CBD.
In the normal course of business, we receive some customer payments through the Federal Government Allotment System on the first day of each month. If the first day of the month falls on a weekend or holiday, our customer payments are received on the last business day of the preceding month. These payments and use of cash are reflected on the balance sheet as a reduction of net finance receivables of and the corresponding accrued interest receivable. There were no Federal Government Allotment System payments received in advance of the payment due dates on June 30, 2014 and September 30, 2013.
The following table represents finance receivables for the periods presented:
June 30, 2014 | September 30, 2013 | ||||||
(dollars in thousands) | |||||||
Finance Receivables: | |||||||
Military loans | $ | 281,118 | $ | 348,544 | |||
Retail installment contracts | 6,864 | 15,654 | |||||
Gross finance receivables | 287,982 | 364,198 | |||||
Less: | |||||||
Net deferred loan fees and dealer discounts | (5,130 | ) | (8,381 | ) | |||
Unearned debt protection fees | (3,322 | ) | (6,119 | ) | |||
Debt protection claims and policy reserves | (1,961 | ) | (3,626 | ) | |||
Total unearned fees | (10,413 | ) | (18,126 | ) | |||
Finance receivables - net of unearned fees | 277,569 | 346,072 | |||||
Allowance for credit losses | (31,255 | ) | (31,400 | ) | |||
Net finance receivables | $ | 246,314 | $ | 314,672 |
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.
7
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 potential credit risk trends, growth rate and charge off data, when incorporating historical factors to estimate losses. These results and management’s judgment are used to project 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.
8
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, 2014 | For the Three Months Ended June 30, 2013 | ||||||||||||||||||||||
Military Loans | Retail Contracts | Total | Military Loans | Retail Contracts | Total | ||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Allowance for credit losses: | |||||||||||||||||||||||
Balance, beginning of period | $ | 29,964 | $ | 1,886 | $ | 31,850 | $ | 27,642 | $ | 1,208 | $ | 28,850 | |||||||||||
Finance receivables charged-off | (9,647 | ) | (569 | ) | (10,216 | ) | (8,591 | ) | (652 | ) | (9,243 | ) | |||||||||||
Recoveries | 1,127 | 171 | 1,298 | 830 | 87 | 917 | |||||||||||||||||
Provision | 8,099 | 224 | 8,323 | 7,935 | 541 | 8,476 | |||||||||||||||||
Balance, end of period | $ | 29,543 | $ | 1,712 | $ | 31,255 | $ | 27,816 | $ | 1,184 | $ | 29,000 | |||||||||||
For the Nine Months Ended June 30, 2014 | For the Nine Months Ended June 30, 2013 | ||||||||||||||||||||||
Military Loans | Retail Contracts | Total | Military Loans | Retail Contracts | Total | ||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Allowance for credit losses: | |||||||||||||||||||||||
Balance, beginning of period | $ | 30,058 | $ | 1,342 | $ | 31,400 | $ | 27,457 | $ | 1,543 | $ | 29,000 | |||||||||||
Finance receivables charged-off | (30,142 | ) | (2,127 | ) | (32,269 | ) | (27,136 | ) | (1,587 | ) | (28,723 | ) | |||||||||||
Recoveries | 3,036 | 417 | 3,453 | 2,430 | 303 | 2,733 | |||||||||||||||||
Provision | 26,591 | 2,080 | 28,671 | 25,065 | 925 | 25,990 | |||||||||||||||||
Balance, end of period | $ | 29,543 | $ | 1,712 | $ | 31,255 | $ | 27,816 | $ | 1,184 | $ | 29,000 | |||||||||||
Finance receivables | $ | 281,118 | $ | 6,864 | $ | 287,982 | $ | 344,430 | $ | 19,288 | $ | 363,718 | |||||||||||
Allowance for credit losses | (29,543 | ) | (1,712 | ) | (31,255 | ) | (27,816 | ) | (1,184 | ) | (29,000 | ) | |||||||||||
Balance net of allowance | $ | 251,575 | $ | 5,152 | $ | 256,727 | $ | 316,614 | $ | 18,104 | $ | 334,718 |
9
The accrual of interest income is suspended when a full payment (95% or more of the monthly payment amount) on either military loans or retail installment contracts has not been received for 90 days or more and the interest due exceeds 60 days of interest charges. Non-performing assets represent those finance receivables of 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, on a recency basis (95% or more of the contracted payment amount has not been received for 30 days after the last full payment). As of June 30, 2014, we had $8.2 million in military loans and $0.6 million in retail installment contracts that were non-performing assets compared to $11.2 million in military loans and $1.1 million in retail installment contracts as of September 30, 2013.
We did not have any finance receivables greater than 90 days past due accruing interest as of June 30, 2014 or 2013. The accrual of interest is resumed and the account is considered current, when a full payment is received. We consider a loan impaired after 180 days past due, on a recency basis, and it is removed from our finance receivable portfolio and charged against income. As of June 30, 2014, we had $0.7 million in military loans and $0.01 million in retail installment contracts of accrued interest for non-performing assets. As of September 30, 2013, we had $0.8 million in military loans and $0.03 million in retail installment contracts of accrued interest for non-performing assets. We do not restructure troubled debt as a form of curing delinquencies.
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 the underwriting process. The following reflects the credit quality of the Company’s finance receivables portfolio:
June 30, 2014 | September 30, 2013 | ||||||
(dollars in thousands) | |||||||
Total finance receivables: | |||||||
Gross balance | $ | 287,982 | $ | 364,198 | |||
Performing | 279,232 | 351,877 | |||||
Non-performing (90 days delinquent) | 8,750 | 12,321 | |||||
Non-performing loans as a percent of gross balance | 3.04 | % | 3.38 | % | |||
Military loans: | |||||||
Gross balance | $ | 281,118 | $ | 348,544 | |||
Performing | 272,930 | 337,321 | |||||
Non-performing (90 days delinquent) | 8,188 | 11,223 | |||||
Non-performing loans as a percent of gross balance | 2.91 | % | 3.22 | % | |||
Retail installment contracts: | |||||||
Gross balance | $ | 6,864 | $ | 15,654 | |||
Performing | 6,302 | 14,556 | |||||
Non-performing (90 days delinquent) | 562 | 1,098 | |||||
Non-performing loans as a percent of gross balance | 8.19 | % | 7.01 | % |
10
Past due finance receivables as of June 30, 2014 and September 30, 2013 are as follows:
Age Analysis of Past Due Finance Receivables | |||||||||||||||||||
As of June 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 | $ | 3,846 | $ | 8,188 | $ | 12,034 | $ | 269,084 | $ | 281,118 | |||||||||
Retail installment contracts | 227 | 562 | 789 | 6,075 | 6,864 | ||||||||||||||
Total | $ | 4,073 | $ | 8,750 | $ | 12,823 | $ | 275,159 | $ | 287,982 |
Age Analysis of Past Due Finance Receivables | |||||||||||||||||||
As of September 30, 2013 | |||||||||||||||||||
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 | $ | 4,403 | $ | 11,223 | $ | 15,626 | $ | 332,918 | $ | 348,544 | |||||||||
Retail installment contracts | 342 | 1,098 | 1,440 | 14,214 | 15,654 | ||||||||||||||
Total | $ | 4,745 | $ | 12,321 | $ | 17,066 | $ | 347,132 | $ | 364,198 |
Additionally, CBD uses our underwriting criteria, which were developed from our past customer credit repayment experience and are periodically evaluated based on current portfolio performance. These criteria require the following:
• | All borrowers are primarily active duty, or career retired U.S. military personnel or U.S. Department of Defense employees; |
• | All potential borrowers must complete standardized credit applications via the Internet; and |
• | A review must be conducted on all applicants’ military service history, including a review of status, including rank and time in grade, and other review procedures may be conducted as deemed necessary. |
These indicators are used to help minimize the risk of unwillingness or inability to repay the loan. These guidelines were developed from past customer credit repayment experience and are periodically revalidated based on current portfolio performance. Loans are limited to amounts that the customer could reasonably be expected to repay from discretionary income.
11
NOTE 3: GOODWILL AND INTANGIBLES
Due to the Transaction, we recorded goodwill and amortizable intangible assets in the form of customer, agent and vendor relationships, trade name, technology for the lending system and the value of business acquired. Goodwill and intangible assets as of June 30, 2014 and September 30, 2013 are as follows:
June 30, 2014 | September 30, 2013 | ||||||||||||||||||||||
Gross | Net | Gross | Net | ||||||||||||||||||||
Carrying Amount | Accumulated Amortization | Carrying Value | Carrying Amount | Accumulated Amortization | Carrying Value | ||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
Customer relationships | $ | 11,000 | $ | (9,990 | ) | $ | 1,010 | $ | 11,000 | $ | (9,600 | ) | $ | 1,400 | |||||||||
Agent relationships | 700 | (612 | ) | 88 | 700 | (580 | ) | 120 | |||||||||||||||
Vendor relationships | 1,700 | (1,486 | ) | 214 | 1,700 | (1,409 | ) | 291 | |||||||||||||||
Trade name | 7,000 | (5,446 | ) | 1,554 | 7,000 | (5,013 | ) | 1,987 | |||||||||||||||
Technology | 4,000 | (4,000 | ) | — | 4,000 | (4,000 | ) | — | |||||||||||||||
Total amortizable intangibles | $ | 24,400 | $ | (21,534 | ) | $ | 2,866 | $ | 24,400 | $ | (20,602 | ) | $ | 3,798 | |||||||||
Goodwill | $ | 31,474 | $ | — | $ | 31,474 | $ | 31,474 | $ | — | $ | 31,474 |
Amortization expense was $0.3 million and $0.4 million in the third quarter of fiscal 2014 and fiscal 2013, respectively. Amortization expense of currently recorded amortizable intangibles is expected to be as follows:
Year Ended | Annual Amortization | ||||
September 30, | Expense | ||||
(dollars in thousands) | |||||
July to September 2014 | $ | 311 | |||
2015 | 1,027 | ||||
2016 | 847 | ||||
2017 | 681 | ||||
Total | $ | 2,866 |
Intangible assets other than goodwill, which are determined to have finite lives, are amortized on a straight-line or accelerated basis over their estimated useful lives between three and ten years.
Management evaluated goodwill and amortizable intangible assets at September 30, 2013, and determined that there was no impairment as the estimated fair value exceeded the carrying value. Management also evaluates amortizable intangible assets and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the fiscal quarter ended June 30, 2014, the Company determined there were no events or changes in circumstances that would trigger impairment testing of goodwill or amortizable intangible assets. The Company’s annual impairment testing of goodwill and amortizable intangible assets is conducted as of September 30th. Under the provisions of ASC-350, Intangibles - Goodwill and Other, a two-step impairment test is performed on goodwill. In the first step, we compare the fair value of our reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to the reporting unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If upon completing the second step of the impairment test the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
During the fourth fiscal quarter of 2014, there are operational and management discussions underway regarding underwriting criteria and other operational changes. In light of these recent business decisions, impairment of goodwill and amortizable
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intangible assets is probable but not estimable at this time. As such, management has engaged a third party valuation specialist to assist in the valuation of the Company’s fair value to determine if goodwill and amortizable intangible assets are impaired.
NOTE 4: RELATED PARTY TRANSACTIONS
We entered into an amended and restated Loan Sale and Master Services Agreement (“LSMS Agreement”) with CBD in June 2013. 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, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Loan purchasing: | |||||||||||||||
Loans purchased from CBD | $ | 34,364 | $ | 64,056 | $ | 111,681 | $ | 173,631 | |||||||
Management and record keeping services: | |||||||||||||||
Monthly servicing to CBD (1) | $ | 3,872 | $ | 7,379 | $ | 18,059 | $ | 23,931 | |||||||
Monthly special services fee to CBD (2) | 1,499 | — | 1,499 | — | |||||||||||
Monthly base fee to CBD (3) | 125 | — | 125 | — | |||||||||||
Monthly indirect cost allocations to MCFC (4) | 107 | 170 | 414 | 545 | |||||||||||
Monthly relationship fee to CBD (5) | — | 1,214 | 2,258 | 3,641 | |||||||||||
Total management and record keeping services | $ | 5,603 | $ | 8,763 | $ | 22,355 | $ | 28,117 | |||||||
Other transactions: | |||||||||||||||
Fees paid to CBD in connection with loans purchased ($30.00 each loan purchased) | $ | 513 | $ | 911 | $ | 1,685 | $ | 2,507 | |||||||
Tax payments to MCFC | 32 | 1,356 | 1,812 | 6,769 | |||||||||||
Dividends paid to MCFC | 479 | 21,106 | 2,340 | 23,590 | |||||||||||
Direct cost allocations to MCFC (6) | 270 | 381 | 890 | 692 | |||||||||||
Total other transactions | $ | 1,294 | $ | 23,754 | $ | 6,727 | $ | 33,558 |
(1) | Monthly servicing fee to CBD was 0.68% and 0.70% of outstanding principal for the first six months of fiscal 2014 and first nine months of fiscal 2013, respectively. Effective April 1, 2014, the monthly servicing fee to CBD became 0.43% under the amended LSMS Agreement. |
(2) | Effective on April 1, 2014, fees for special services performed by CBD under the amended LSMS Agreement. |
(3) | Effective April 1, 2014, $500,000 annual base fee, payable monthly to CBD. Prorated for fiscal 2014. |
(4) | $750,000 annual maximum for fiscal years 2014 and 2013. |
(5) | Monthly relationship fee to CBD is equal to $2.91 for each loan owned at the prior fiscal year end for the three and six months ended March 31, 2014. The monthly relationship fee was $2.82 for each loan owned at the prior fiscal year end for the three and nine months ended March 31, 2013. The monthly relationship fee ceased on March 31, 2014 with the amended LSMS Agreement. |
(6) | $1,754,800 annual maximum for fiscal year 2014. |
In June 2013, MCB received a letter from the Office of the Comptroller of the Currency ("OCC") (the “OCC Letter”) regarding certain former business practices of CBD that the OCC alleged violated Section 5 of the Federal Trade Commission Act of 1914, as amended. 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. Nevertheless, in its response letter, MCB did propose certain potential methods of financial remediation to certain customers, if deemed necessary by the OCC. At that time, MCB recorded an accrual in the amount of $5 million.
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Management for MCB believes that it is probable that it will be required to make remediation payments above the $5 million accrual; however, MCB management is unable to reasonably estimate the potential additional exposure as no information has been received from the OCC nor is management able to predict when such information could be expected from the OCC. Therefore, MCB has not increased the $5 million accrual recorded in June 2013; however, the amount of this accrual is subject to change as discussions with the OCC continue.
NOTE 5: 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 2014 and the fiscal year ended September 30, 2013 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.
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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.
The carrying amounts and estimated fair values of our financial instruments at June 30, 2014 and September 30, 2013 are as follows:
June 30, 2014 | September 30, 2013 | ||||||||||||||
Carrying | Carrying | ||||||||||||||
Amount | Fair Value | Amount | Fair Value | ||||||||||||
(dollars in thousands) | |||||||||||||||
Financial assets: | |||||||||||||||
Cash and cash equivalents - non-restricted | $ | 8,426 | $ | 8,426 | $ | 1,923 | $ | 1,923 | |||||||
Cash and cash equivalents - restricted | 622 | 622 | 623 | 623 | |||||||||||
Investments | 352 | 352 | 1,719 | 1,719 | |||||||||||
Net finance receivables | 246,314 | 242,311 | 314,672 | 313,215 | |||||||||||
Financial liabilities: | |||||||||||||||
Amortizing term notes | $ | 146,849 | $ | 148,715 | $ | 187,582 | $ | 190,268 | |||||||
Investment notes | 56,394 | 58,769 | 63,908 | 66,987 |
The following table represents our recurring valuations of investments as of June 30, 2014 and September 30, 2013:
June 30, 2014 | September 30, 2013 | ||||||||||||||||||||||||||||||
Book Value | Gross Unrealized Gains (1) | Gross Unrealized (Losses) | Fair Value | Book Value | Gross Unrealized Gains (2) | Gross Unrealized (Losses) | Fair Value | ||||||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||||||
Investments: | |||||||||||||||||||||||||||||||
Certificates of deposit | $ | 100 | $ | — | $ | — | $ | 100 | $ | 100 | $ | — | $ | — | $ | 100 | |||||||||||||||
U.S. government bonds | 250 | 2 | — | 252 | 1,605 | 14 | — | 1,619 | |||||||||||||||||||||||
Total investments | $ | 350 | $ | 2 | $ | — | $ | 352 | $ | 1,705 | $ | 14 | $ | — | $ | 1,719 |
(1) The net unrealized gain on investments of $2 net of tax of $1 represents the accumulated other comprehensive income of $1 at June 30, 2014.
(2) The net unrealized gain on investments of $14 net of tax of $5 represents the accumulated other comprehensive income of $9 at September 30, 2013.
During first nine months of fiscal 2014 and 2013, the Company received $1.4 million and $1.3 million, respectively, in proceeds from the maturity of U.S. government bonds. During the first nine months of fiscal 2014 we did not recognize any material realized gains or losses or receive proceeds on the sale of investment securities. During the first nine months of fiscal 2013, the Company received $1.0 million in proceeds from the sale of U.S. government bonds and realized a gain of $0.04 million.
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NOTE 6: 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 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, 2015 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, 2014, we could request up to $76.2 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, 2014, the lenders have indicated a willingness to participate in fundings up to an aggregate of $267.0 million during the next 12 months, including $146.8 million that is currently outstanding. Included in this amount are borrowings of $16.2 million from withdrawing banks that previously participated in the SSLA. One bank, with a total funding participation of $15.0 million and $8.2 million in borrowings as of March 31, 2014, withdrew from the SSLA in the second quarter of fiscal 2014. In the second quarter of fiscal 2014, four banks reduced their future funding participation during the next 12 months by a combined $18.5 million.
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, 2014, the principal balance outstanding to non-voting banks under the SSLA was $7.3 million.
On June 21, 2013, the Company entered into the thirty-sixth amendment (the “Amendment”) to the SSLA. The Amendment accomplishes the following: (1) permitted the declaration and payment of a $20.0 million one-time unrestricted dividend from the Company to MCFC on or before June 30, 2013; (2) amended the revolving credit line interest rate to be 4% or prime, whichever is greater, for all new borrowings after June 21, 2013; (3) amended the amortizing term notes interest rate to be 5.25% or 270 basis points over the 90-day moving average of like-term treasury notes, whichever is greater, for all new borrowings after June 21, 2013; and (4) consented to the amended and restated LSMS Agreement. A one-time dividend of $20.0 million was paid to MCFC on June 28, 2013 and funded through the revolving credit line. Prior to June 21, 2013, the interest rate on the revolving credit line was 5% or prime, whichever was greater, and the interest rate on amortizing notes was 6.25% or 270 basis points over the 90-day moving average of like-term treasury notes, whichever was greater.
All amortizing notes have fixed interest rates and terms not to exceed 48 months, payable in equal monthly principal and interest payments. 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. For the quarter ended June 30, 2014, we incurred $0.1 million in uncommitted availability fees.
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 service charge fees 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.
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 generally accepted accounting principles (“GAAP”); (2) limit our senior indebtedness as of the end of each quarter to not
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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 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.
On May 5, 2014, the Company entered into the thirty-seventh amendment to the SSLA. The thirty-seventh amendment was effective on May 5, 2014 and changed two financial covenant ratios under the existing SSLA. The new financial covenant ratios require us to: (1) limit our senior indebtedness as of the end of each quarter to not be greater than three and a half times our tangible net worth and (2) limit our senior indebtedness to not be greater than 70% of our consolidated net finance receivables at any time after the effective date.
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 $56.4 million, which includes a $0.1 million purchase adjustment at June 30, 2014, and $63.9 million, which includes a $0.2 million purchase adjustment at September 30, 2013. The purchase adjustments relate to fair value adjustments recorded as part of the Transaction. 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 $53,221 and $51,834, with a weighted interest rate of 9.20% and 9.15% at June 30, 2014 and September 30, 2013, respectively.
On January 23, 2014, the Securities and Exchange Commission ("SEC") declared effective our post-effective amendment to our amended registration statement originally filed with the SEC in January 2011 (“2014 Registration Statement”). Pursuant to this 2014 Registration Statement, along with the accompanying prospectus, we registered an offering of our investment notes, with a maximum aggregate offering price of $50 million, on a continuous basis with an expected termination date of January 28, 2015, unless terminated earlier at our discretion. As of June 30, 2014, we have issued 470 investment notes in conjunction with this offering since 2011 with an aggregate value of $28.3 million.
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 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, 2014 and September 30, 2013 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, 2014, follows:
Amortizing Notes SSLA Lenders | Amortizing Notes Withdrawing Banks | Amortizing Notes Non-Voting Banks | Investment Notes | Total | |||||||||||||||
(dollars in thousands) | |||||||||||||||||||
2014 | $ | 13,721 | $ | 2,576 | $ | 2,776 | $ | 2,141 | $ | 21,214 | |||||||||
2015 | 50,056 | 8,511 | 4,224 | 15,364 | 78,155 | ||||||||||||||
2016 | 36,773 | 3,694 | 280 | 15,854 | 56,601 | ||||||||||||||
2017 | 21,081 | 1,350 | — | 5,428 | 27,859 | ||||||||||||||
2018 | 1,704 | 103 | — | 608 | 2,415 | ||||||||||||||
2019 and beyond | — | — | — | 16,859 | 16,859 | ||||||||||||||
Total | $ | 123,335 | $ | 16,234 | $ | 7,280 | $ | 56,254 | $ | 203,103 |
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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 in our Annual Report on Form 10-K for the period ended September 30, 2013 under “Part I—Item 1A—Risk Factors” and our Quarterly Report on Form 10-Q for the period ended March 31, 2014, 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, on a worldwide basis, made primarily to active-duty, career retired U.S. military personnel or U.S. Department of Defense employees. Our largest source of military loans is the Consumer Banking Division (“CBD”) of MidCountry Bank (“MCB”), a federally chartered stock savings bank and wholly owned subsidiary of MCFC, an affiliate who originates direct military loans via the Internet. Military personnel use these loan proceeds to purchase goods and services.
In June 2013, we entered into an Amended and Restated Non-Recourse Loan Sale and Master Services Agreement (“LSMS Agreement”) with CBD that outlines the terms of the sale and servicing of these loans. We also 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 2014, the average size of a loan when acquired was $3,012 and had an average term of 27 months. A 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.
During the fourth fiscal quarter of 2014, there are operational and management discussions underway regarding underwriting criteria and other operational changes. In light of these recent business decisions, impairment of goodwill and amortizable intangible assets is probable but not estimable at this time.
Critical Accounting Policies
In our 2013 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.
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Lending and Servicing Operations
Primary Supplier of Loans
We have retained CBD as our primary supplier of loans. We entered into the LSMS Agreement with CBD whereby we purchase loans originated by CBD and CBD services these loans on our behalf. Under the LSMS Agreement, PFS has the exclusive right to purchase loans originated by CBD that meet our lending criteria (which was developed from our past customer credit repayment experience and is periodically revalidated based on current portfolio performance). These criteria require the following:
• | All borrowers are primarily active-duty, 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 |
• | A review must be conducted on all applicants’ military service history. |
To the extent CBD originates loans under these underwriting criteria, we have the exclusive right to purchase such loans. Loans purchased from CBD are referred to as “military loans.” See our Annual Report under “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. Under these guidelines, in evaluating the creditworthiness of potential customers, CBD primarily examines the individual’s debt-to-income ratio, discretionary income, military rank, time served in the military and prior credit experience. Loans are limited to amounts that the customer could reasonably be expected to repay from discretionary income. 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 $2,759 at June 30, 2014, repayable in equal monthly installments and with an average remaining term of 16 months.
A risk in all consumer lending and retail sales financing transactions is the customer’s unwillingness or inability to repay obligations. Unwillingness to repay is usually evidenced by a consumer’s historical credit repayment record. An inability to repay occurs after initial credit evaluation and funding and usually results from lower income due to early separation from the military or reduction in rank, major medical expenses, or divorce. Occasionally, these types of events are so economically severe that the customer files for protection under the bankruptcy laws. Underwriting guidelines are used at the time the customer applies for a loan to help minimize the risk of unwillingness or inability to repay. These guidelines are developed from past customer credit repayment experience and are periodically revalidated based on current portfolio performance. CBD uses these guidelines to predict the relative likelihood of credit applicants repaying their obligation. We purchase loans made to consumers who fit our lending criteria. The amount and interest rate of the military 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 29.2% of the amount of military loans we purchased in the third quarter of fiscal 2014 were refinancings of outstanding loans compared to 35.9% during the third quarter of fiscal 2013.
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Military Loans Purchased from CBD. We purchase military loans from CBD if they meet our lending criteria. We have granted CBD rights to use our lending criteria, which was developed with our extensive experience with lending to the military marketplace. Pursuant to the LSMS Agreement, we granted CBD rights to use our underwriting model and lending system; however, we retained ownership of this model and the lending system. Using our model and system, CBD originates these loans directly over the Internet. Military loans typically have maximum terms of 48 months and had an average origination amount of $3,262 in the first nine months of fiscal 2014. We pay a $30.00 fee for each military loan purchased from CBD to reimburse CBD for loan origination costs. In the third quarter of fiscal 2014, we paid CBD $0.5 million in fees connected with CBD origination of the military loans compared to $0.9 million in the third quarter of fiscal 2013.
Retail Installment Contracts. In the first six months of fiscal 2014, we purchased retail installment contracts that met our quality standards and return on investment objectives from 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 demonstrated an apparent need to finance a retail purchase and a willingness to use credit. We generally acquired these contracts without recourse to the originating merchant. However, reserve agreements with many retail merchants allow us to withhold funds from the merchant’s proceeds to create reserves to be used in the event a customer defaults and the loan is deemed uncollectible. Retail installment contracts typically have maximum terms of 48 months and had an average origination amount of $2,774 for the first six months of fiscal 2014.
CBD has focused resources on a direct-to-consumer loan product and servicing and on March 31, 2014, we ceased purchasing of retail installment contracts from our retail merchant network. Our retail merchant network will continue and be transitioned to assist customers, who wish to finance a retail purchase, with applying for a direct military loan from CBD, where we would then purchase the 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. Beginning on April 1, 2014, the monthly servicing fee is 0.43% (5.14% 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 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. Prior to April 1, 2013, we paid a monthly fee equal to 0.7% (8.4% annually). For the first nine 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. In fiscal 2013, the relationship fee was $33.86 for each loan and retail installment contract owned by us at the end of the prior fiscal year. The relationship fee for July 1, 2013 through September 30, 2013 was based on our portfolio as of June 20, 2013. 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, are charged at a rate of 125% of their cost and may include special marketing and collection strategies.
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.
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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 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 possible 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 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:
June 30, 2014 | September 30, 2013 | ||||||
Finance receivables: | |||||||
Total finance receivables balance | $ | 287,981,610 | $ | 364,197,688 | |||
Average note balance | $ | 2,759 | $ | 2,817 | |||
Total number of notes | 104,371 | 129,305 | |||||
Military loans: | |||||||
Total military receivables | $ | 281,117,380 | $ | 348,544,188 | |||
Percent of total finance receivables | 97.62 | % | 95.70 | % | |||
Average note balance | $ | 2,840 | $ | 2,956 | |||
Number of notes | 98,975 | 117,900 | |||||
Retail installment contracts: | |||||||
Total retail installment contract receivables | $ | 6,864,230 | $ | 15,653,500 | |||
Percent of total finance receivables | 2.38 | % | 4.30 | % | |||
Average note balance | $ | 1,272 | $ | 1,373 | |||
Number of notes | 5,396 | 11,405 |
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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. 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, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Total finance receivables balance | $ | 287,982 | $ | 363,718 | $ | 287,982 | $ | 363,718 | |||||||
Average total finance receivables (1) | 293,105 | 360,627 | 323,312 | 377,533 | |||||||||||
Average interest bearing liabilities (1) | 210,614 | 252,776 | 232,249 | 260,030 | |||||||||||
Total interest income and fees | 21,530 | 26,739 | 72,360 | 82,699 | |||||||||||
Total interest expense | 3,676 | 4,380 | 12,220 | 13,702 |
(1) | Averages are computed using month-end balances and exclude any early allotment payments. |
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Results of Operations and Financial Condition
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
Total Finance Receivables. Our aggregate finance receivables decreased 20.8% or $75.7 million, to $288.0 million on June 30, 2014 from $363.7 million on June 30, 2013 due to lower demand for military loans, the closure of CBD loan production offices in October 2013, the cessation of purchasing retail installment contracts on March 31, 2014 and underwriting changes made by CBD. Demand has been impacted by the fragile state of the United States’ economic recovery and uncertainty among our military customers regarding the future of the United States Military. Our primary supplier of loans, CBD, saw a 52.1% or $56.0 million decrease in military loan originations during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. Our acquisition of retail installment contracts decreased during the third quarter of fiscal 2014 by $1.3 million or 100.0% compared to the third quarter of fiscal 2013. See further discussion in the sections entitled “Loan Acquisition” and “Liquidity and Capital Resources.”
Interest Income and Fees. Interest income and fees represented 98.0% of our total revenue for the third quarter of fiscal 2014 and 98.7% for the third quarter of fiscal 2013. Interest income and fees decreased to $21.5 million in the third quarter of fiscal 2014 from $26.7 million for the third quarter of fiscal 2013, a decrease of $5.2 million or 19.5%. The decrease was due primarily to a decline in aggregate average finance receivables of 18.7%.
Interest Expense. Interest expense in the third quarter of fiscal 2014 decreased 16.0% to $3.7 million compared to $4.4 million for the third quarter of fiscal 2013. This decrease was due to a decrease in average interest bearing liabilities of 16.7%. Investment notes decreased to $56.4 million as of June 30, 2014 compared to $64.9 million as of June 30, 2013, a decrease of $8.5 million or 13.1%. Amortizing term notes decreased to $146.8 million as of June 30, 2014 compared to $173.8 million as of June 30, 2013, a decrease of $27.0 million or 15.5%.
Provision for Credit Losses. The provision for credit losses in the third quarter of fiscal 2014 decreased to $8.3 million from $8.5 million in the third quarter of fiscal 2013, a decrease of $0.2 million or 2.4%. Net charge-offs increased to $8.9 million in the third quarter of fiscal 2014 from $8.3 million in the third quarter of fiscal 2013, an increase of $0.6 million or 7.2%. The net charge-off ratio increased to 12.2% for the third quarter of fiscal 2014 compared to 9.2% for the third quarter of fiscal 2013. 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 commissions. Debt protection revenue decreased to $0.7 million in the third quarter of fiscal 2014 from $1.3 million in the third quarter of fiscal 2013, a decrease of $0.6 million or 46.2%. Claims paid and change in reserves decreased to $0.2 million in the third quarter of fiscal 2014 compared to $0.8 million in the third quarter of fiscal 2013, a decrease of $0.6 million or 75.0%. The decline in debt protection revenue and claims benefit expenses is due primarily to a 52.1% decrease in military loan originations and a reduction in the number of customers purchasing the product.
Non-Interest Expense. Non-interest expense in the third quarter of fiscal 2014 was $7.1 million compared to $10.8 million for the third quarter of fiscal 2013, a decrease of $3.7 million or 34.3%. Non-interest expenses decreased during the third quarter of fiscal 2014 due primarily to a $3.2 million decrease in management and record keeping services which is the result of a 18.7% decline in average finance receivables and a reduced monthly servicing fee under the amended and restated LSMS Agreement, as well as a decrease in the amortization of intangibles of $0.1 million.
Provision for Income Taxes. The Company’s effective tax rate was 38.2% in the third quarter of fiscal 2014 compared to 40.5% in the third quarter of fiscal 2013, or a decrease of 2.3%. The decrease is primarily due to a $0.1 million greater net increase in uncertain tax positions in third quarter of fiscal 2013 than fiscal 2014 and, a change in state apportionment factors driven by a shift in business mix as a result of the mix of product revenue.
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Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013
Total Finance Receivables. Our aggregate finance receivables decreased 20.9% or $76.2 million, to $288.0 million on June 30, 2014 from $364.2 million on September 30, 2013 due to lower demand for military loans, the closure of CBD loan production offices in October 2013, the cessation of purchasing retail installment contracts on March 31, 2014 and underwriting changes made by CBD. Demand has been impacted by the fragile state of the United States’ economic recovery and uncertainty among our military customers regarding the future size of the United States Military. Our primary supplier of loans, CBD, saw a 35.5% or $101.0 million decrease in military loan originations during the first nine months of fiscal 2014 compared to the first nine months of fiscal 2013. Our acquisition of retail installment contracts decreased during the first nine months of fiscal 2014 by $9.6 million or 85.0% compared to the first nine months of fiscal 2013. See further discussion in the sections entitled “Loan Acquisition” and “Liquidity and Capital Resources.”
Interest Income and Fees. Interest income and fees represented 97.8% of our total revenue for the first nine months of fiscal 2014 compared to 98.0% for the first nine months of fiscal 2013. Interest income and fees decreased to $72.4 million in the first nine months of fiscal 2014 from $82.7 million for the first nine months of fiscal 2013, a decrease of $10.3 million or 12.5%. The decrease was due primarily due to a decline in aggregate average finance receivables of 14.4%.
Interest Expense. Interest expense in the first nine months of fiscal 2014 decreased 11.0% to $12.2 million compared to $13.7 million for the first nine months of fiscal 2013. This decrease was due to a decrease in average interest bearing liabilities of 10.7%. Investment notes decreased to $56.4 million as of June 30, 2014 compared to $64.9 million as of June 30, 2013, a decrease of $8.5 million or 13.1%. Amortizing term notes decreased to $146.8 million as of June 30, 2014 compared to $173.8 million as of June 30, 2013, a decrease of $27.0 million or 15.5%.
Provision for Credit Losses. The provision for credit losses in the first nine months of fiscal 2014 increased to $28.7 million from $26.0 million in the first nine months of fiscal 2013, an increase of $2.7 million or 10.4%. Net charge-offs increased to $28.8 million in the first nine months of fiscal 2014 from $26.0 million in the first nine months of fiscal 2013, an increase of $2.8 million or 10.8%. The net charge-off ratio increased to 11.9% for the first nine months of fiscal 2014 compared to 9.2% for the first nine months of fiscal 2013. 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 commissions. Debt protection revenue decreased to $2.4 million in the first nine months of fiscal 2014 compared to $4.6 million in the first nine months of fiscal 2013, a decrease of $2.2 million or 47.8%. Claims paid and change in reserves decreased to $0.5 million in the first nine months of fiscal 2014 compared to $2.5 million in the first nine months of fiscal 2013, a decrease of $2.0 million or 80.0%. The decline in debt protection income is due primarily to a 35.5% decrease in military loan originations and a decrease in the number of customers purchasing the product.
Non-interest expense. Non-interest expense in the first nine months of fiscal 2014 was $26.9 million compared to $33.5 million for the first nine months of fiscal 2013, a decrease of $6.6 million or 19.7%. Non-interest expenses decreased during the first nine months of fiscal 2014 due primarily to a $5.7 million decrease in management fees, the result of a 14.4% decline in average finance receivables and a reduced monthly servicing fee under the amended and restated LSMS Agreement.
Provision for Income Taxes. The Company’s effective tax rate was 37.8% in the first nine months of fiscal 2014 compared to 39.0% in the first nine months of fiscal 2013, or a decrease of 1.2%. The decrease is primarily due to a $0.1 million greater net increase in uncertain tax positions in the first nine months of fiscal 2013 than fiscal 2014 and, a change in state apportionment factors driven by a shift in business mix as a result of the mix of product revenue.
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Delinquency Experience
Our customers are required to make monthly payments of interest and principal. Our servicer, CBD, under our supervision, analyzes our delinquencies on a recency delinquency basis utilizing our guidelines. A loan is delinquent under the recency method when a full payment (95% or more of the contracted payment amount) has not been received for 30 days after the last full payment.
The following table sets forth our delinquency experience as of the end of the periods presented for accounts for which payments are 60 days or more past due.
June 30, 2014 | September 30, 2013 | June 30, 2013 | |||||||||
(dollars in thousands) | |||||||||||
Total finance receivables | $ | 287,982 | $ | 364,198 | $ | 363,718 | |||||
Total finance receivables balances 60 days or more past due | 12,823 | 17,066 | 14,150 | ||||||||
Total finance receivables balances 60 days or more past due as a percent of total finance receivables | 4.45 | % | 4.69 | % | 3.89 | % |
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 past due, on a recency delinquency basis, or earlier if management deems it appropriate. Charge-offs can occur when a customer leaves the military prior to repaying the finance receivable or is subject to longer term and more frequent deployments. 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, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Military loans: | |||||||||||||||
Military loans charged-off | $ | 9,647 | $ | 8,591 | $ | 30,142 | $ | 27,136 | |||||||
Less recoveries | 1,127 | 830 | 3,036 | 2,430 | |||||||||||
Net charge-offs | $ | 8,520 | $ | 7,761 | $ | 27,106 | $ | 24,706 | |||||||
Average military receivables (1) | $ | 285,490 | $ | 340,080 | $ | 312,875 | $ | 352,924 | |||||||
Percentage of net charge-offs to average military receivables (annualized) | 11.94 | % | 9.13 | % | 11.55 | % | 9.33 | % |
(1) | Averages are computed using month-end balances and exclude any early allotment payments. |
Retail Installment Contracts. Under many of our arrangements with retail merchants, we may withhold a percentage (usually between five and ten percent) of the principal amount of the retail installment contract purchased. The amounts withheld from a particular retail merchant are recorded in a specific reserve account. Any losses incurred on the retail installment contracts purchased from that retail merchant are charged against its reserve account. Upon the retail merchant’s request, and no more often than annually, we will pay the retail merchant the amount by which its reserve account exceeds 15% of the aggregate outstanding balance on all retail installment contracts purchased from them, less losses we have sustained, or reasonably could sustain, due to debtor defaults, collection expenses, delinquencies and breaches of our agreement with the retail merchant.
Our allowance for credit losses is utilized to the extent that the loss on any individual retail installment contract exceeds the retail merchant’s aggregate reserve account at the time of the loss.
The following table presents net charge-offs on retail installment contracts and net charge-offs as a percentage of retail installment contracts as of the end of the periods presented:
Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Retail installment contracts: | |||||||||||||||
Contracts charged-off | $ | 569 | $ | 652 | $ | 2,127 | $ | 1,587 | |||||||
Less recoveries | 171 | 87 | 417 | 303 | |||||||||||
Net charge-offs | $ | 398 | $ | 565 | $ | 1,710 | $ | 1,284 | |||||||
Average retail installment contract receivables (1) | $ | 7,615 | $ | 20,548 | $ | 10,437 | $ | 24,609 | |||||||
Percentage of net charge-offs to average retail installment contract receivables (annualized) | 20.91 | % | 11.00 | % | 21.85 | % | 6.96 | % |
(1) | Averages are computed using month-end balances and exclude any early allotment payments. |
Former Military. As of June 30, 2014 and September 30, 2013, we had approximately $11.9 million, or 4.1% of our total portfolio, and $12.5 million, or 3.4% 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, 2013, we had approximately $11.3 million, or 3.1% of our total portfolio from customers who had advised us of their separation from the military prior to repaying their loan. Military loans net charge-offs, from customers who had advised us of their separation from the military, were $4.9 million and represented 55.1% of net charge-offs in the third quarter of fiscal 2014 compared to $5.1 million and 61.6% in the third quarter
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of fiscal 2013. See our Annual Report “Part II—Item 7—Management 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, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Balance, beginning of period | $ | 31,850 | $ | 28,850 | $ | 31,400 | $ | 29,000 | |||||||
Finance receivables charged-off | 10,216 | 9,243 | 32,269 | 28,723 | |||||||||||
Less recoveries | 1,298 | 917 | 3,453 | 2,733 | |||||||||||
Net charge-offs | 8,918 | 8,326 | 28,816 | 25,990 | |||||||||||
Provision for credit losses | 8,323 | 8,476 | 28,671 | 25,990 | |||||||||||
Balance, end of period | $ | 31,255 | $ | 29,000 | $ | 31,255 | $ | 29,000 |
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, homogenous accounts, the finance receivables are evaluated for impairment as two separate components: military loans and retail installment contracts. Management considers numerous factors in estimating losses in our credit portfolio, including the following:
•Prior credit losses and recovery experience;
•Current economic conditions;
•Current finance receivable delinquency trends; and
•Demographics of the current finance receivable portfolio.
The following table sets forth 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, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in thousands) | |||||||||||||||
Average total finance receivables (1) | $ | 293,105 | $ | 360,627 | $ | 323,312 | $ | 377,533 | |||||||
Provision for credit losses | 8,323 | 8,476 | 28,671 | 25,990 | |||||||||||
Net charge-offs | 8,918 | 8,326 | 28,816 | 25,990 | |||||||||||
Net charge-offs as a percentage of average total finance receivables (annualized) | 12.17 | % | 9.24 | % | 11.88 | % | 9.18 | % | |||||||
Allowance for credit losses | $ | 31,255 | $ | 29,000 | $ | 31,255 | $ | 29,000 | |||||||
Allowance as a percentage of average total finance receivables | 10.66 | % | 8.04 | % | 9.67 | % | 7.68 | % |
(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 their originations for our future growth. In connection with purchasing the loans, we pay CBD a fee in the amount of $30.00 for each military 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 decreased for the first nine months of fiscal 2014 to $185.0 million from $295.6 million in the first nine months of fiscal 2013 due to lower demand for military loans, the closure of the CBD's loan production offices, the cessation of retail contract purchases and underwriting changes made by CBD.
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, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Total loans acquired: | |||||||||||||||
Gross balance | $ | 51,529,340 | $ | 108,888,688 | $ | 184,964,567 | $ | 295,614,139 | |||||||
Number of finance receivable notes | 17,109 | 30,852 | 56,800 | 88,806 | |||||||||||
Average note amount | $ | 3,012 | $ | 3,529 | $ | 3,256 | $ | 3,329 | |||||||
Military loans: | |||||||||||||||
Gross balance | $ | 51,529,340 | $ | 107,559,196 | $ | 183,272,557 | $ | 284,285,934 | |||||||
Number of finance receivable notes | 17,109 | 30,364 | 56,190 | 83,580 | |||||||||||
Average note amount | $ | 3,012 | $ | 3,542 | $ | 3,262 | $ | 3,401 | |||||||
Retail installment contracts: | |||||||||||||||
Gross balance | $ | — | $ | 1,329,492 | $ | 1,692,010 | $ | 11,328,205 | |||||||
Number of finance receivable notes | — | 488 | 610 | 5,226 | |||||||||||
Average note amount | $ | — | $ | 2,724 | $ | 2,774 | $ | 2,168 |
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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 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 from $34.6 million in operating activities. Cash provided by investing activities in the first nine months of fiscal 2013 was approximately $0.3 million and cash used in financing activities was $23.3 million, which was funded by operating activities of $26.4 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 have borrowings as of June 30, 2014 of $16.2 million from withdrawing banks who previously participated in the SSLA.
We keep our SSLA lenders informed of any material developments with PFS and CBD regulators. Our SSLA lenders have been informed that MCB has reviewed and responded to letters from the Office of the Comptroller of the Currency (“OCC”) (the “OCC Letter”) regarding certain former business practices of the CBD that the OCC believes may have violated Section 5 of the Federal Trade Commission Act of 1914, as amended. MCB responded to the OCC that it does not believe the former business practices rose to the level of a violation of law, and to date, the OCC has not taken further action in connection with this matter.
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 consumer protection 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 past 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.
Furthermore, we informed our lenders that on February 21, 2014, we received a Civil Investigative Demand (“CID”) from the Consumer Financial Protection Bureau (the “CFPB”). The CID states that “the purpose of this investigation is to determine whether lenders, loan servicers or other unnamed persons have engaged or are engaging in unlawful acts or practices in connection with the marketing, sale, servicing and collection of loans in violation of Sections 1031 and 1036 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act, 12 U.S.C. §§ 5531 and 5536, the Fair Credit Reporting Act, 15 U.S.C. § 1681, its implementing regulation, or any other federal consumer financial law. The purpose of this investigation is also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest.”
The CID contains broad requests for production of documents and answers to interrogatories related to our products and services, marketing, servicing and collection of loans, our agreements with the CBD and numerous other aspects of our business. We have evaluated the CID and have provided the information requested to the CFPB. We believe our marketing, sales, servicing and collection practices are lawful.
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. In addition, our lenders may perceive that we may be the subject of legal or equitable action by the CFPB that could adversely affect our business and operations and choose to reduce or cease their participation. 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.
On January 23, 2014, the SEC declared effective our post-effective amendment to our registration statement originally filed with the SEC in January 2011 (“2014 Registration Statement”). Pursuant to this 2014 Registration Statement, along with the accompanying prospectus, we registered an offering of our investment notes, with a maximum aggregate offering price of $50 million, on a continuous basis with an expected termination date of January 28, 2015, unless terminated earlier at our
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discretion. As of June 30, 2014, we have issued 470 investment notes in conjunction with this offering since 2011 with an aggregate value of $28.3 million.
Senior Indebtedness - Bank Debt. On June 12, 2009, we entered into the SSLA with certain lenders. The SSLA replaced and superseded the Senior Lending Agreement, dated as of June 9, 1993, as subsequently amended and restated. On June 21, 2013, the Company entered into the thirty-sixth amendment to the SSLA, which: (1) permitted the declaration and payment of a $20.0 million one-time unrestricted dividend from the Company to MCFC on or before June 30, 2013; (2) amended the revolving credit line interest rate to be 4% or prime, whichever is greater, for all new borrowings after June 21, 2013; (3) amended the amortizing term notes interest rate to be 5.25% or 270 basis points over the 90-day moving average of like-term treasury notes, whichever is greater, for all new borrowings after June 21, 2013; and (4) consented to the amended and restated LSMS Agreement. A one-time dividend of $20.0 million was paid to MCFC on June 28, 2013. Prior to June 21, 2013, the interest rate on the revolving credit line was 5% or prime, whichever was greater, and the interest rate on amortizing notes was 6.25% or 270 basis points over the 90-day moving average of like-term treasury notes, whichever was greater. The term of the current SSLA ends on March 31, 2015 and is automatically extended annually unless any lender gives written notice of its objection by March 1 of each calendar year.
On May 5, 2014, the Company entered into the thirty-seventh amendment to the SSLA. The thirty-seventh amendment was effective on May 5, 2014 and changed two financial covenant ratios under the existing SSLA. The new financial covenant ratios require us to: (1) limit our senior indebtedness as of the end of each quarter to not be greater than three and a half times our tangible net worth and (2) limit our senior indebtedness to not be greater than 70% of our consolidated net finance receivables at any time after the effective date.
As of June 30, 2014, we had $146.8 million of senior debt outstanding, compared to $187.6 million at September 30, 2013, an decrease of $40.8 million, or 21.7%. The SSLA is an uncommitted facility that provides common terms and conditions pursuant to which individual lenders that are a party to the SSLA may choose to make loans to us in the future. Any lender may elect not to participate in any future fundings at any time without penalty. The term of the current SSLA ends on March 31, 2014 and is automatically extended annually unless any lender gives written notice of its objection by March 1 of each calendar year. As of June 30, 2014, we could request up to $76.2 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, 2014 we were in compliance with all covenants under the SSLA.
Advances outstanding under the revolving credit line were zero as of June 30, 2014, compared to $19.2 million at September 30, 2013, a decrease of $19.2 million, or 100%. This decrease is due primarily to the $76.2 million decrease in finance receivables from September 30, 2013. 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, 2014, the lenders have indicated a willingness to participate in fundings up to an aggregate of $267.0 million during the next 12 months, a decrease of $41.9 million from September 30, 2013, of which $146.8 million is currently outstanding. Included in this amount are borrowings of $16.2 million from withdrawing banks who previously participated in the SSLA. One bank, with a total funding participation of $15.0 million and $8.2 million in borrowings as of March 31, 2014, withdrew from the SSLA in the second quarter of fiscal 2014. In the second quarter of fiscal 2014, four banks reduced their future funding participation during the next 12 months by a combined $18.5 million.
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.
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Senior Indebtedness Table - Bank Debt. As of June 30, 2014 and September 30, 2013, the total borrowings and availability under the SSLA consisted of the following amounts for the end of the periods presented:
June 30, 2014 | September 30, 2013 | ||||||
(dollars in thousands) | |||||||
Revolving credit line: | |||||||
Total facility | $ | 37,750 | $ | 43,250 | |||
Balance at end of period | — | 19,240 | |||||
Maximum available credit (1) | 37,750 | 24,010 | |||||
Term notes: (2) | |||||||
Voting banks | $ | 205,750 | $ | 233,750 | |||
Withdrawing banks | 16,234 | 15,119 | |||||
Non-voting banks | 7,280 | 16,788 | |||||
Total facility | $ | 229,264 | $ | 265,657 | |||
Balance at end of period | 146,849 | 187,582 | |||||
Maximum available credit (1) | 82,415 | 78,075 | |||||
Total revolving and term notes: (2) | |||||||
Voting banks | $ | 243,500 | $ | 277,000 | |||
Withdrawing banks | 16,234 | 15,119 | |||||
Non-voting banks | 7,280 | 16,789 | |||||
Total facility | $ | 267,014 | $ | 308,908 | |||
Balance, end of period | 146,849 | 206,822 | |||||
Maximum available credit (1) | 120,165 | 102,086 | |||||
Credit facility available (3) | 76,242 | 74,680 | |||||
Percent utilization of voting banks | 50.7 | % | 63.1 | % | |||
Percent utilization of the total facility | 55.0 | % | 67.0 | % |
(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 facility available is based on the existing asset borrowing base and maintaining a senior indebtedness to consolidated net notes receivable ratio of 80.0%. |
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 quarter of fiscal 2014, there were no borrowings or repayments on this debt. As of June 30, 2014 and September 30, 2013, there was no outstanding balance.
Outstanding Investment Notes. We fund certain capital and financial needs through the sale of investment notes. These notes have varying fixed interest rates and are subordinate to all senior indebtedness. We can redeem these notes at any time upon 30 days written notice. As of June 30, 2014, we had outstanding $56.4 million of these notes (with accrued interest), which includes a $0.1 million purchase adjustment. The purchase adjustments relate to fair value adjustments recorded as part of the Transaction. These notes had a weighted average interest rate of 9.20%. Included in the $56.4 million is approximately $28.3 million of funds from our most recent offering. See discussion in “Item 1 Notes to Consolidated Financial Statements.”
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2014, 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, 2014 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, 2014 was 1.26%. The 90 day moving average rate of treasury notes would need to increase by 129 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, 2014. 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, 2014 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
Pioneer Financial Services, Inc. and its wholly owned subsidiaries (collectively “we,” “us,” “our” or 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 2013 Annual Report on Form 10-K and in our March 31, 2014 Form 10-Q, we identified important risks and uncertainties that could affect our results of operations, financial position, cash flow or business. There have been no material changes from the risk factors disclosed in our 2013 Annual Report on Form 10-K and March 31, 2014 Form 10-Q.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 23, 2014, the SEC declared effective our post-effective amendment to our amended registration statement originally filed with the SEC in January 2011 (“2014 Registration Statement”). Pursuant to this 2014 Registration Statement, along with the accompanying prospectus, we registered an offering of our investment notes, with a maximum aggregate offering price of $50 million, on a continuous basis with an expected termination date of January 28, 2015, unless terminated earlier at our discretion. As of June 30, 2014, we have issued 470 investment notes in conjunction with this offering since 2011 with an aggregate value of $28.3 million.
We estimate the net proceeds of the $50 million offering will be approximately $49.2 million after deducting offering expenses of approximately $800,000. We expect to use the net cash proceeds of the note offering first to fund the purchase of military loans and for working capital and other general corporate purposes.
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ITEM 6. Exhibits
Exhibit No. | Description | |
10.1 | Amendment No. 37 dated May 5, 2014 to Secured Senior Lending Agreement dated as of June 12, 2009, among Pioneer Financial Services, Inc., the listed lenders and UMB Bank, N.A. (incorporated by reference from Exhibit 10.1 to the Form 8-K filed with the SEC on May 8, 2014). | |
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, 2014, filed with the SEC on August 12, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Operations for the three and nine months ended June 30, 2014 and June 30, 2013, (ii) the Consolidated Balance Sheets as of June 30, 2014 and September 30, 2013, (iii) the Consolidated Statement of Cash Flows for the nine months ended June 30, 2014 and June 30, 2013 and (iv) Notes to Consolidated Financial Statements. |
*Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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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/ Joseph B. Freeman | Chief Executive Officer and | August 12, 2014 | ||
Joseph B. Freeman | Director (Principal Executive Officer) | |||
/s/ Laura V. Stack | Chief Financial Officer, | August 12, 2014 | ||
Laura V. Stack | Treasurer and Asst. Secretary and Director (Principal Financial Officer and Principal Accounting Officer) |
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EXHIBIT INDEX
Exhibit No. | Description | |
10.1 | Amendment No. 37 dated May 5, 2014 to Secured Senior Lending Agreement dated as of June 12, 2009, among Pioneer Financial Services, Inc., the listed lenders and UMB Bank, N.A. (incorporated by reference from Exhibit 10.1 to the Form 8-K filed with the SEC on May 8, 2014). | |
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, 2014, filed with the SEC on August 12, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statement of Operations for the three and nine months ended June 30, 2014 and June 30, 2013, (ii) the Consolidated Balance Sheets as of June 30, 2014 and September 30, 2013, (iii) the Consolidated Statement of Cash Flows for the nine months ended June 30, 2014 and June 30, 2013 and (iv) Notes to Consolidated Financial Statements. |
*Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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