Registration Number 333-103293 
 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q  xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended:December 31, 2008  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
(State or other jurisdiction of incorporation or organization)
        44-0607504
(I.R.S. Employer 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 has (1) filed all documents and 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.YesxNo 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 definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.  Large accelerated filer o
        
        Non-accelerated filerxAccelerated filer o
        
        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
        Nox
  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 February 13, 2009Common Stock, no par value
        1 Share
  As of December 31, 2008, 1 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 December 31, 2008  TABLE OF CONTENTS  PART I FINANCIAL INFORMATION  Item No.
        Page1.
        Condensed Consolidated Financial Statements
        1Condensed Consolidated Balance Sheet at December 31, 2008 and September 30, 2008
        1Condensed Consolidated Statements of Operations for the three months ended December 31, 2008 and 2007
        2Condensed Consolidated Statements of Stockholders Equity for the three months ended December 31, 2008, and year ended September 30, 2008
        3Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2008 and 2007
        4Notes to Condensed Consolidated Financial Statements
        52.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        133.
        Quantitative and Qualitative Disclosures About Market Risk
        254.
        Controls and Procedures
        25PART II
OTHER INFORMATION1.
        Legal Proceedings
        266.
        Exhibits
        27
   2    PART I - FINANCIAL INFORMATION  ITEM 1.Condensed Consolidated Financial Statements PIONEER FINANCIAL SERVICES, INC. Condensed Consolidated Balance Sheets As of December 31, 2008 and September 30, 2008 (unaudited) ASSETS  December 31,
        
        September 30,2008
        
        2008Cash and cash equivalents - non-restricted
        
        $
        7,352,879
        
        $
        12,747,137Cash and cash equivalents - restricted
        
        
        416,020
        
        
        701,700Investments - restricted
        
        
        7,447,469
        
        
        6,840,531Investments - non-restricted
        
        
        130,000
        
        
        130,000Net finance receivables
        
        
        295,818,801
        
        
        271,729,886Furniture and equipment, net
        
        
        488,321
        
        
        556,604Deferred income tax asset
        
        
        3,310,288
        
        
        2,585,693Prepaid and other assets
        
        
        5,480,197
        
        
        6,319,812Deferred acquisition costs
        
        
        3,068,978
        
        
        2,917,548Goodwill
        
        
        31,474,280
        
        
        29,474,280Intangibles  net
        
        
        17,581,100
        
        
        18,639,800Total assets
        
        $
        372,568,333
        
        $
        352,642,991LIABILITIES AND STOCKHOLDERS EQUITYRevolving credit line  banks
        
        $
        32,109,586
        
        $
        23,586,000Accounts payable
        
        
        1,304,969
        
        
        1,667,373Accrued expenses and other liabilities
        
        
        6,767,934
        
        
        5,528,119Amortizing term notes
        
        
        206,657,447
        
        
        198,413,822Investment notes
        
        
        34,283,849
        
        
        34,903,686Total liabilities
        
        
        281,123,785
        
        
        264,099,000Stockholders equity:Common stock, no par value; 1 share issued andoutstanding
        
        
        86,394,200
        
        
        84,394,200Accumulated other comprehensive income
        
        
        166,551
        
        
        Retained earnings
        
        
        4,883,797
        
        
        4,149,791Total stockholders equity
        
        
        91,444,548
        
        
        88,543,991Total liabilities and stockholders equity
        
        $
        372,568,333
        
        $
        352,642,991
  See Notes to Condensed Consolidated Financial Statements   1    PIONEER FINANCIAL SERVICES, INC. Condensed Consolidated Statements of Operations For the three months ended December 31, 2008 and December 31, 2007 (unaudited)  Three Months EndedDecember 31,2008
        
        2007Interest income and fees
        
        $
        24,342,745
        
        $
        20,244,071Interest expense
        
        
        4,276,368
        
        
        4,186,990Net interest income before provision for credit losses
        
        
        20,066,377
        
        
        16,057,081Provision for credit losses
        
        
        7,137,181
        
        
        7,257,546Net interest income
        
        
        12,929,196
        
        
        8,799,535Noninterest income:Insurance premiums net of commissions
        
        
        1,143,789
        
        
        1,020,131Other
        
        
        165
        
        
        (670
        )Total noninterest income
        
        
        1,143,954
        
        
        1,019,461Noninterest expense:Compensation and benefits
        
        
        102,423
        
        
        149,766Management and record keeping services fee
        
        
        8,135,914
        
        
        6,559,853Occupancy and equipment
        
        
        189,644
        
        
        90,585Advertising
        
        
        8,207
        
        
        28,506Professional and regulatory fees
        
        
        370,311
        
        
        132,041Amortization of intangibles
        
        
        1,058,700
        
        
        1,327,800Other operating expenses
        
        
        460,257
        
        
        86,795Total noninterest expense
        
        
        10,325,456
        
        
        8,375,346Income before income taxes
        
        
        3,747,694
        
        
        1,443,650Provision for income taxes
        
        
        1,495,855
        
        
        541,244Net income
        
        $
        2,251,839
        
        $
        902,406Net income per share, basic and diluted
        
        $
        2,251,839
        
        $
        902,406
  See Notes to Condensed Consolidated Financial Statements   2    PIONEER FINANCIAL SERVICES, INC. Condensed Consolidated Statements of Stockholders Equity For the three months ended December 31, 2008 and year ended September 30, 2008 (unaudited)  Total
        
        Common Stock
        
        AccumulatedOtherComprehensiveIncome
        
        RetainedEarningsBalance, September 30, 2007
        
        $
        81,571,388
        
        $
        82,394,200
        
        $
        
        
        $
        (822,812
        )Net income
        
        
        7,774,111
        
        
        
        
        
        
        
        
        7,774,111Capital contribution by parent
        
        
        2,000,000
        
        
        2,000,000
        
        
        
        
        
        Adoption of FIN 48 (see note 6)
        
        
        (294,331
        )
        
        
        
        
        
        
        
        (294,331
        )Dividend paid to parent
        
        
        (2,507,177
        )
        
        
        
        
        
        
        
        (2,507,177
        )Balance, September 30, 2008
        
        $
        88,543,991
        
        $
        84,394,200
        
        $
        
        
        $
        4,149,791Comprehensive income:Net income
        
        
        2,251,839
        
        
        
        
        
        
        
        
        2,251,839Unrealized gain on investments,net of tax of $89,680
        
        
        166,551
        
        
        
        
        
        166,551
        
        
        Total comprehensive income
        
        
        2,418,390
        
        
        
        
        
        166,551
        
        
        2,251,839Capital contribution by parent
        
        
        2,000,000
        
        
        2,000,000
        
        
        
        
        
        Dividend paid to parent
        
        
        (1,517,833
        )
        
        
        
        
        
        
        
        (1,517,833
        )Balance, December 31, 2008
        
        $
        91,444,548
        
        $
        86,394,200
        
        $
        166,551
        
        $
        4,883,797
   See Notes to Condensed Consolidated Financial Statements  3    PIONEER FINANCIAL SERVICES, INC. Consolidated Statements of Cash Flows For the three months ended December 31, 2008 and 2007 (unaudited)  Three Months EndedDecember 31,2008
        
        
        
        2007Cash flows from operating activities:Net income
        
        $
        2,251,839
        
        
        
        $
        902,406Items not requiring (providing) cash:Provision for credit losses onfinance receivables
        
        
        7,137,181
        
        
        
        
        7,257,546Depreciation and amortization
        
        
        1,234,910
        
        
        
        
        887,166Deferred income taxes
        
        
        (814,275
        )
        
        
        
        (841,441
        )Interest accrued on investment notes
        
        
        448,545
        
        
        
        
        Changes in:Accounts payable and accrued expenses
        
        
        877,409
        
        
        
        
        416,611Deferred fees - net
        
        
        2,829,255
        
        
        
        
        1,718,282Unearned premium reserves
        
        
        (317,729
        )
        
        
        
        (99,260
        )Prepaids and other assets
        
        
        688,186
        
        
        
        
        1,330,064Net cash provided by operating activities
        
        
        14,335,321
        
        
        
        
        11,571,374Cash flows from investing activities:Finance receivables purchased from affiliate
        
        
        (69,009,320
        )
        
        
        
        (55,875,828
        )Finance receivables purchased fromretail merchants
        
        
        (3,807,289
        )
        
        
        
        (4,371,922
        )Finance receivables repaid
        
        
        38,997,258
        
        
        
        
        41,153,290Capital expenditures
        
        
        (3,105
        )
        
        
        
        (27,000
        )Change in restricted cash
        
        
        285,680
        
        
        
        
        (217,446
        )Investments purchased - restricted
        
        
        (1,068,394
        )
        
        
        
        (1,082,003
        )Investments matured - restricted
        
        
        701,000
        
        
        
        
        1,199,276Investments matured - non-restricted
        
        
        
        
        
        
        
        100,000Net cash used in investing activities
        
        
        (33,904,170
        )
        
        
        
        (19,121,633
        )Cash flows from financing activities:Net borrowing under lines of credit
        
        
        8,523,586
        
        
        
        
        716,495Proceeds from borrowings
        
        
        30,000,000
        
        
        
        
        31,000,000Repayment of borrowings
        
        
        (22,831,162
        )
        
        
        
        (20,000,996
        )Dividends paid to parent
        
        
        (1,517,833
        )
        
        
        
        Net cash provided by financing activities
        
        
        14,174,591
        
        
        
        
        11,715,499Net (decrease) increase in cash and equivalents
        
        
        (5,394,258
        )
        
        
        
        4,165,240Cash and cash equivalents Beginning of period
        
        
        12,747,137
        
        
        
        
        3,700,823Cash and cash equivalents End of period
        
        $
        7,352,879
        
        
        
        $
        7,866,063Additional cash flow information:Interest paid
        
        $
        3,764,136
        
        
        
        $
        3,571,138Income taxes paid
        
        $
        1,839,156
        
        
        
        $
        68,800Noncash financing activities:Capital contribution from parent
        
        $
        2,000,000
        
        
        
        $
        2,000,000Interest accrued on investment notes
        
        $
        448,545
        
        
        
        
        
  See Notes to Condensed Consolidated Financial Statements  4    PIONEER FINANCIAL SERVICES, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2008 and September 30, 2008 and for the three months ended December 31, 2008 and December 31, 2007 (unaudited)  NOTE 1:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Basis of Presentation The accompanying unaudited condensed 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).  We are now a wholly-owned first-tier subsidiary of MCFC. Our accounting for the Transaction followed the requirements of Staff Accounting Bulletin (SAB) 54, Topic  5-J and Statement of Accounting Standards No. 141, Business Combinations, which required that purchase accounting treatment of the Transaction be pushed down to us resulting in the adjustment of all our net assets to their respective fair values as of the Transaction date. Although we continued as the same legal entity after the Transaction, the application of push down accounting represents the termination of the old accounting entity and the creation of a new one. Immediately subsequent to the Transaction, we declared and paid a dividend to MCFC of our business operation and certain assets and liabilities related to the origination and servicing of our finance receivables. MCFC contributed these operations to MidCountry Bank (MCB) which is a wholly-owned subsidiary of MCFC. MCB formed the Military Banking Division (MBD) which is composed exclusively of the assets and liabilities contributed from MCFC. This transaction is further described in Note 2:  Transaction and Dividend of Operations and Net Assets to MCFC.  As part of the dividend, we entered into a Loan Sale and Master Services Agreement (LSMS Agreement) with MBD. Under the LSMS Agreement, MBD is obligated to originate loans and we are obligated to purchase those loans that meet our business model and underwriting guidelines. Also, under the LSMS Agreement, MBD
will provide us with management and record keeping services. As part of the Transaction, substantially all of our employees became employees of MBD. We pay fees for loans purchased and originated by MBD and management and record keeping services provided by MBD. The LSMS Agreement is further described in Note 7:  Related Party Transactions. Nature of Operations and Concentration The Company is headquartered in Kansas City, Missouri. The Company purchases finance receivables from MBD. These receivables are exclusively to active-duty or career-retired U.S. military personnel or U.S. Department of Defense employees. We also purchase finance receivables from retail merchants that sell consumer goods to active-duty or career-retired U.S. military personnel or U.S. Department of Defense employees.  5    Use of Estimates The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the unaudited condensed consolidated financial statements and in disclosures of contingent assets and liabilities. The Company uses estimates and employs judgments in determining the amount of our allowance for credit losses, insurance claims and policy reserves, deferred loan origination costs, and establishing the fair value of our financial instruments. The Company also used estimates in assigning fair values to our assets and liabilities after the Transaction. While the consolidated financial statements and footnotes reflect the best estimates and judgments of management at the time, actual results could differ significantly from those estimates. Information with respect to December 31, 2008 and 2007, and the periods then ended, have not been audited by our independent auditors, but in the opinion of management reflect all adjustments (which include only normal recurring adjustments) necessary for the fair presentation of the financial condition and operations. The results of operations for the three months ended December 31, 2008 and 2007 are not necessarily indicative of results to be expected for the entire fiscal year. The condensed consolidated balance sheet as of September 30, 2008 and statement of stockholders equity for the year ended September 30, 2008 have been derived from the audited consolidated balance sheet and statement of stockholders equity. Adoption of Accounting Pronouncements In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with the exception of the application of the statement to the determination of fair value of nonfinancial assets and liabilities that are recognized or disclosed on a nonrecurring basis, which is effective for fiscal years beginning after November 15, 2008. The Company adopted the provisions of SFAS No. 157 for assets and liabilities recognized at fair value on a recurring and nonrecurring basis effective October 1, 2008. The
adoption of SFAS No. 157 did not have a material impact on the Companys Consolidated Financial Statements. Refer to Note 8: Fair Value Measurement for additional discussion.  6    NOTE 2:  TRANSACTION AND DIVIDEND OF OPERATIONS AND NET ASSETS TO MCFC In connection with the Transaction, MCFC paid the shareholders of PFI (the Sellers) approximately $68.8 million in cash and 882,353 shares of MCFCs common stock. Under the related purchase agreement, MCFC is also required to pay the Sellers an additional $5 million in contingent payments, of which $4 million will be contributed to us and $1 million to MBD, if we meet any one of certain financial performance goals which will be evaluated and paid in two installments over the 22 months following the acquisition. These goals pertain to net revenue, net income, finance receivables and the number of customer relationships for the calendar years ended December 31, 2007 and 2008. As of December 31, 2007 and 2008, we met our performance goals for both calendar years. MCFC paid the Sellers $2 million on March 31, 2008 and the 2008 payment required to be paid to the Sellers will be paid on March 31,
2009. This amount has been accrued for as of December 31, 2008. The Transaction was accounted for using the purchase method in accordance with SFAS 141, Business Combinations.  The components of the purchase price were as follows:  The components of the purchase price were as follows:  Stock in MCFC Financial Corp.
        
        
        
        $
        15,000,000Cash
        
        
        
        
        68,800,473Direct acquisition costs
        
        
        
        
        492,000Consideration paid
        
        
        
        
        84,292,473Assumption of liabilities
        
        
        
        
        1,937,289Total purchase price
        
        
        
        
        86,229,762Contingent payment on March 31, 2008
        
        
        
        
        2,000,000Contingent accrual at December 31, 2008
        
        
        
        
        2,000,000Total purchase price as of December 31, 2008
        
        
        
        $
        90,229,762
   7    The fair value assigned to intangible assets acquired and assumed liabilities is supported by valuations using estimates and assumptions provided by management. The Company has also retained independent appraisers to assist in these valuations. The primary changes to the balance sheet are preliminary and reflect certain assets and liabilities as follows:  
        The recording of the fair value of the Companys intangibles including customer relationships, agent relationships, vendor relationships and system technology;
 
        The recording of the fair value of goodwill;
 
        Elimination of the accumulated earnings; and
 
        The recording of the fair value of fixed assets, investment notes, senior debt and finance receivables.
 The purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as follows:  Cash and other current assets
        
        
        
        $
        10,990,773Net finance receivables
        
        
        
        
        238,828,206Equipment and other assets
        
        
        
        
        10,388,206Goodwill
        
        
        
        
        42,614,842Intangible assets
        
        
        
        
        26,200,000Subtotal
        
        
        
        
        329,022,342Liabilities
        
        
        
        
        (230,213,810
        )Deferred income taxes
        
        
        
        
        (8,578,770
        )Total
        
        
        
        $
        90,229,762
   Immediately subsequent to the Transaction, the Company declared and paid a dividend to MCFC of its business operations and certain assets and liabilities related to the origination and servicing of finance receivables. MCFC contributed these operations to MCB which is a wholly-owned subsidiary of MCFC. MCB formed the MBD which is composed exclusively of the operation and assets and liabilities from the Company. Intangible assets were allocated to the operations and assets and liabilities as a dividend to MCFC based on relative fair values. The dividend is summarized as follows:  Cash and cash equivalents
        
        
        
        $
        811,651Furniture and equipment
        
        
        
        
        1,391,211Goodwill
        
        
        
        
        11,140,562Intangibles
        
        
        
        
        200,000Due to parent
        
        
        
        
        3,085,682Other assets
        
        
        
        
        687,559Total assets
        
        
        
        
        17,316,665Accrued expenses and other liabilities
        
        
        
        
        (5,976,103
        )Deferred tax liabilities, net
        
        
        
        
        (73,000
        )Total liabilities
        
        
        
        
        (6,049,103
        )Assets in excess of liabilities
        
        
        
        $
        11,267,562
   8    NOTE 3:  FINANCE RECEIVABLES Finance receivables at December 31, 2008 and September 30, 2008, consisted of the following:  December 31,
        
        September 30,2008
        
        2008(unaudited)Military receivables/loans
        
        $
        319,708,086
        
        $
        297,683,255Retail installment contracts
        
        
        27,248,821
        
        
        21,607,119Total finance receivables
        
        
        346,956,907
        
        
        319,290,374Purchase adjustment (1)
        
        
        
        
        
        (81,730
        )Net deferred loan fees and dealer discounts
        
        
        (19,057,836
        )
        
        (17,025,218
        )Unearned insurance premium reserves
        
        
        (7,254,911
        )
        
        (6,963,814
        )Insurance claims and policy reserves
        
        
        (534,103
        )
        
        (507,470
        )Finance receivables - net of unearned fees and premiums
        
        
        320,110,057
        
        
        294,712,142Allowance for credit losses
        
        
        (24,291,256
        )
        
        (22,982,256
        )Finance receivables - net of allowance
        
        $
        295,818,801
        
        $
        271,729,886
  (1) Relates to the fair value adjustments recorded to finance receivables as part of the Transaction.   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:   Balance as of September 30, 2008
        
        $
        22,982,256Charge-offs:Finance receivables charged-off
        
        
        (6,473,545
        )Recoveries
        
        
        645,365Net charge-offs
        
        
        (5,828,181
        )Provision for credit losses
        
        
        7,137,181Balance as of December 31, 2008
        
        $
        24,291,256
   9    NOTE 4:  GOODWILL AND INTANGIBLES  Due to the Transaction, the Company has recorded goodwill and amortizable intangible assets in the form of customer, agent and vendor relationships, trade name, technology for the lending system and the value of business acquired. Goodwill and intangible assets at December 31, 2008 and September 30, 2008 are as follows:  December 31, 2008
        
        
        
        September 30, 2008Gross
        
        
        
        Net
        
        
        
        Gross
        
        
        
        NetCarrying
        
        Accumulated
        
        Carrying
        
        
        
        Carrying
        
        Accumulated
        
        CarryingAmount
        
        Amortization
        
        Value
        
        
        
        Amount
        
        Amortization
        
        ValueCustomer relationships
        
        $
        11,000,000
        
        $
        (3,476,900
        )
        $
        7,523,100
        
        
        
        $
        11,000,000
        
        $
        (2,999,200
        )
        $
        8,000,800Agent relationships
        
        
        700,000
        
        
        (188,000
        )
        
        512,000
        
        
        
        
        700,000
        
        
        (161,000
        )
        
        539,000Vendor relationships
        
        
        1,700,000
        
        
        (456,500
        )
        
        1,243,500
        
        
        
        
        1,700,000
        
        
        (393,000
        )
        
        1,307,000Trade name
        
        
        7,000,000
        
        
        (1,436,300
        )
        
        5,563,700
        
        
        
        
        7,000,000
        
        
        (1,221,000
        )
        
        5,779,000Technology
        
        
        4,000,000
        
        
        (1,439,200
        )
        
        2,560,800
        
        
        
        
        4,000,000
        
        
        (1,223,000
        )
        
        2,777,000Valuation of business acquired -unearned premium
        
        
        1,600,000
        
        
        (1,422,000
        )
        
        178,000
        
        
        
        
        1,600,000
        
        
        (1,363,000
        )
        
        237,000Total amortizable intangibles
        
        $
        26,000,000
        
        $
        (8,418,900
        )
        $
        17,581,100
        
        
        
        $
        26,000,000
        
        $
        (7,360,200
        )
        $
        18,639,800Goodwill
        
        $
        31,474,280
        
        $
        
        
        $
        31,474,280
        
        
        
        $
        29,474,280
        
        $
        
        
        $
        29,474,280
  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 at September 30, 2008, in accordance with SFAS No. 142 and determined that there was no impairment. The company includes its goodwill in its only segment. Management also evaluates amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairments of amortizable intangible assets, as of September 30, 2008, and no events or changes in circumstances that indicate the carrying amount of an asset may not be recoverable.  10    NOTE 5: NET INCOME PER SHARE Net income per share is computed based upon the weighted-average common shares outstanding of 1 for the three month period from October 1, 2008 to December 31, 2008 and the three month period from October 1, 2007 to December 31, 2007. There are no potentially dilutive securities issued and outstanding. NOTE 6: INCOME TAXES We adopted the provisions of FIN 48 on October 1, 2007. FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained assuming examination by tax authorities. The amount recognized represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess.  The total gross liability for unrecognized tax benefits as of December 31, 2008 was approximately $1.2 million. The unrecognized tax benefits are included in other liabilities in the condensed consolidated balance sheet as of December 31, 2008. Interest and penalties are recorded as a component of income tax expense. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain tax positions will increase or decrease during the next 12 months; however, the Company does not expect the change to have a significant effect on the consolidated results of operations or financial position.  NOTE 7: RELATED PARTY TRANSACTIONS  Due to the Transaction, we entered into a LSMS Agreement with MBD. Under the LSMS Agreement, we buy certain military loans that MBD originates and receive management and record keeping services. During the first quarter of fiscal 2009, the total loans we purchased from MBD pursuant to the LSMS Agreement were $69.0 million. We have paid $8.1 million to MBD for management and record keeping services pursuant to the LSMS for the first quarter of fiscal 2009.  11     NOTE 8:  RESTRICTED INVESTMENTS We hold our restricted investments at fair market value. The following table represents the restricted investments as of December 31, 2008 and September 30, 2008:  December 31, 2008
        
        
        
        September 30, 2008Gross
        
        Gross
        
        
        
        
        
        
        
        Gross
        
        GrossUnrealized
        
        Unrealized
        
        Market
        
        
        
        
        
        Unrealized
        
        Unrealized
        
        MarketBook Value
        
        Gains (1)
        
        (Losses) (1)
        
        Value
        
        
        
        Book Value
        
        Gains
        
        (Losses)
        
        ValueRestricted Investments:Certificates of Deposit
        
        $
        600,000
        
        $
        11,772
        
        $
        
        
        $
        611,772
        
        
        
        $
        800,000
        
        $
        
        
        $
        
        
        $
        800,000Government Bonds
        
        
        6,088,470
        
        
        286,196
        
        
        
        
        
        6,374,666
        
        
        
        
        5,537,444
        
        
        
        
        
        
        
        
        5,537,444Corporate Bonds
        
        
        502,768
        
        
        
        
        
        (41,737
        )
        
        461,031
        
        
        
        
        503,087
        
        
        
        
        
        
        
        
        503,087$
        7,191,238
        
        $
        297,968
        
        $
        (41,737
        )
        $
        7,447,469
        
        
        
        $
        6,840,531
        
        $
        
        
        $
        
        
        $
        6,840,531
  (1)
        The unrealized gain on investments of $256,231, net of tax of $89,680 represents the accumulated other comprehensive income of $166,551.
  NOTE 9:  FAIR VALUE MEASUREMENTS Restricted investments in debt and equity securities measured and reported at fair value are classified and disclosed in one of the following categories under SFAS 157:  
        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.
 The following table summarizes the Companys restricted investments recognized in the Consolidated Balance Sheet and measured at fair value on a recurring basis as of December 31, 2008:  Input Levels for Fair Value MeasurementsDescription
        
        Level 1
        
        Level 2
        
        Level 3
        
        TotalAssets:Restricted Investments
        
        $
        7,447,469
        
        $
        
        
        $
        
        
        $
        7,447,469Total
        
        $
        7,447,469
        
        $
        
        
        $
        
        
        $
        7,447,469
   12    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 include statements regarding our managements 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, 2008 (annual report) under Item 1ARisk Factors. Other factors not identified herein could also have such an effect. If any of these risk factors occur, they could have an adverse effect on our business, financial condition and results of operation. When considering forward-looking statements keep these risk factors in mind. 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 to reflect future events or developments. Overview We are a wholly-owned subsidiary of MidCountry Financial Corp., a Georgia corporation (MCFC). Prior to May 31, 2007, we were a wholly-owned subsidiary of Pioneer Financial Industries, Inc., a Nevada corporation (PFI). We purchase consumer loans, on a worldwide basis, made exclusively to active-duty or retired career U.S. military personnel or U.S. Department of Defense employees. We purchase primarily from two different types of sources. Our largest source of military loans is MidCountry Bank (MBD), an affiliate who originates military loans through a network of loan production offices and via the internet. Military families use these loan proceeds to purchase goods and services. We also purchase retail installment contracts from retail merchants that sell consumer goods to active-duty or retired career U.S. military personnel or U.S. Department of Defense employees. We plan to hold these military loans and retail installment contracts until repaid. We have entered into a Loan Sale and Master Services Agreement (LSMS) with MBD which outlines the terms of the sale and servicing of these loans. Our finance receivables, whether originated or purchased, are effectively unsecured and consist of loans originated by us or purchased from MBD and retail merchants. All finance receivables have fixed interest rates and typically have a maturity of less than 48 months. During the first quarter of fiscal 2009, the average size of a loan when purchased was approximately $3,135. A large portion of our customers are unable to obtain financing from traditional sources due to factors such as their age, frequent relocations and lack of credit history. These factors may not allow them to build relationships with sources of financing. Improvement of our profitability is dependent upon the growth in amount of finance receivables we are able to acquire from MBD or retail merchants and the maintenance of loan quality.  13    Lending and Servicing Operations Primary Supplier of Loans We have retained MBD as a primary supplier of loans. Under the LSMS Agreement, MBD is obligated to use our underwriting criteria (which was developed from our past customer credit repayment experience and is periodically revalidated based on current portfolio performance). These criteria primarily require the following:  
        All borrowers must be U.S. military personnel or U.S. Department of Defense employees.
 
        All potential borrowers must complete standardized credit applications either in person at one of MBDs loan production offices or online via the internet.
 
        A thorough review must be conducted on all applicants military service history. This includes verification of status including rank and credit history using major credit reporting. Other review procedures may be conducted as deemed necessary.
 
        Loan repayment terms must generally be structured to repay the entire loan prior to the customers estimated separation from the military.
  To the extent MBD originates loans under these standards, MBD is obligated to sell such loans to us and we are obligated to purchase such loans. Loans purchased from MBD and those previously originated by us prior to the Transaction are referred to as military loans.  See our annual report under Item 1A. Risk FactorsMBD may modify underwriting and servicing standards and does not have to lend to the traditional customers who meet our business model and lending guidelines. Each of these may materially adversely affect our business operations, cash flow, results of operations, financial condition and profitability.  Loan Purchasing Generally.We have 20+ years experience underwriting, originating, monitoring and servicing consumer loans to the military market and have developed a deep understanding of the military and the military lifestyle. Through this extensive knowledge of our customer base, we had developed a proprietary scoring model that focuses on the unique characteristics of the military market, as well as traditional credit scoring variables which are currently utilized by MBD when originating loans in this market.  We incorporated these proprietary underwriting guidelines and scoring model into our loan origination system to facilitate auto-decisioning and risk-based pricing on our loans. For the loans we purchase, MBD now uses our proprietary underwriting guidelines and scoring model when it originates loans. Under these guidelines, in evaluating the creditworthiness of potential customers, MBD primarily examines the individuals debt to income ratio, discretionary income, military rank, time served in the military and prior credit experience. Loans are limited to amounts that the customer could reasonably be expected to repay from that discretionary income. Loan repayment terms are generally structured to repay the entire loan prior to the customers estimated separation from the military. However, when we purchase loans from MBD, we can not predict when or whether a customer may unexpectedly leave the military or when or whether other events could occur which result in not being repaid prior to a customers departure from the military. We only purchase loans made to consumers who fit our business model and underwriting guidelines. When we purchase loans from MBD, we use our standard underwriting guidelines to predict the relative likelihood of credit applicants repaying their obligation to us. In general, the majority of finance receivables we own are under $10,000, repayable in equal monthly installments and have terms no longer than 48 months. A risk in all consumer lending and retail sales financing transactions is the customers unwillingness or inability to repay obligations. Unwillingness to repay is usually evidenced by a consumers historical credit repayment record. An inability to repay occurs after initial credit evaluation and funding and usually results from lower income due to early separation from the military or reduction in rank, major medical expenses, or divorce. Occasionally, these types of events are so economically severe that the customer files for protection under the bankruptcy laws. Standard underwriting guidelines are used at the time the customer applies for a loan to help minimize the risk of unwillingness or inability to repay. These guidelines were developed from past customer credit repayment experience and are periodically revalidated based on current portfolio performance. We use these
guidelines to predict the relative likelihood of credit applicants repaying their obligation to us. We purchase loans made to consumers who fit our underwriting guidelines. The amount and interest rate of the military loan or retail sales finance transaction purchased are set by MBD or the retail merchant based upon our underwriting guidelines considering the estimated credit risk assumed.  14    As a customer service, we consider purchasing a new loan from MBD if an existing borrower has demonstrated a positive payment history with us and where the transaction created an economic benefit to the customer after fully underwriting the new loan request to ensure proper debt ratio, credit history and payment performance. We will not purchase refinancings made to cure delinquency or for the sole purpose of creating fee income. Generally, we purchase refinancing of existing loans when a portion of the new loan proceeds is used to repay the balance of the existing loan and the remaining portion is advanced to the customer. Approximately 28.3% of the amount of military loans purchased in the first quarter were refinanced from outstanding loans. Military Loans Purchased from MBD.We purchase military loans from MBD if they meet our lending guidelines. In connection with the Transaction, MBD was provided the rights to our lending guidelines and extensive experience with lending to the military marketplace. Pursuant to the LSMS, we transferred the use of our underwriting model and system to MBD. However, we retained ownership of this model and the lending system. MBD now originates these loans directly through its loan production offices and over the internet. Retail Installment Contracts.We also purchase retail installment contracts, which meet our quality standards and return on investment objectives from approximately 100 retail merchants. Retail installment contracts are finance receivable notes generated during the purchase of consumer goods by active-duty or retired career U.S. military personnel or U.S. Department of Defense employees. These customers have demonstrated an apparent need to finance a retail purchase and a willingness to use credit. We generally acquire these contracts without recourse to the originating merchant. However, some retail merchant reserve agreements allow us to withhold funds from the merchants proceeds to create reserves to be used in the event a customer defaults and the loan is deemed uncollectible. Retail installment contracts generally have maximum terms of 48 months. Management and Record Keeping Services We have retained MBD to provide management and record keeping services. MBD will service our finance receivables in the same manner as we did prior to the Transaction. For these management and record keeping services, we pay MBD a monthly fee in an amount equal to .70% (8.4% annually) of the outstanding principal balance of the military loans and retail installment contracts serviced as of the last day of each month. The fee will be adjusted annually on the basis of the annual increase or decrease in the Consumer Price Index. Also, as part of its compensation for performing these management and recording keeping services, MBD retains all ancillary revenue, including late charges and NSF fees, associated with these loans and retail installment contracts. For these services, we also pay MBD an annual fee of $33.86 for each military loan and retail installment contract owned by us at the end of
the prior fiscal year. The annual fee will be paid in monthly installments. This fee will be adjusted annually on the basis of the annual increase or decrease in the Consumer Price Index. To facilitate MBDs servicing of the military loans and retail installment contracts, we have granted MBD (i) the non-exclusive rights to use certain intellectual properties, including our trade names and service marks, and (ii) the right to use our Daybreak loan processing system and related hardware and software. We have also granted MBD non-exclusive rights to market additional products and services to our U.S. military borrowers. We retain all other borrower relationships. Sources of Income We generate revenues primarily from interest earned on the military loans purchased from MBD, loans previously originated by us and retail installment contracts purchased. We also earn revenues from credit reinsurance premiums. For purposes of the following discussion, revenues means the sum of our finance income and reinsurance premiums. In the first quarter of fiscal 2009, our revenues and resulting income came primarily from interest income earned on the military loans purchased from MBD, loans previously originated by us and retail installment contracts purchased. We also earn revenues from credit reinsurance premiums.  15    Finance Receivables Our finance receivables are comprised of loans previously originated by us or purchased from MBD (collectively referred to below as military loans) and retail installment contracts. The following table sets forth certain information about the components of our finance receivables as of the end of the periods presented:  December 31,
        
        
        
        
        September30,2008
        
        
        
        
        2008(dollars in thousands, except average note balance)Finance receivables:Total finance receivables balance
        
        $
        346,957
        
        
        
        $
        319,290Average note balance
        
        $
        2,602
        
        
        
        $
        2,608Total number of notes
        
        
        133,343
        
        
        
        
        122,449Military loans:Total military receivables
        
        $
        319,708
        
        
        
        $
        297,683Percent of total finance receivables
        
        
        92.15
        %
        
        
        
        93.23
        %Average note balance
        
        $
        2,662
        
        
        
        $
        2,655Number of notes
        
        
        120,117
        
        
        
        
        112,110Retail installment contracts:Total retail installment contract receivables
        
        $
        27,249
        
        
        
        $
        21,607Percent of total finance receivables
        
        
        7.85
        %
        
        
        
        6.77
        %Average note balance
        
        $
        2,060
        
        
        
        $
        2,090Number of notes
        
        
        13,226
        
        
        
        
        10,339
   16     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. In addition, competitive market conditions also impact the interest rates. Our interest expense is sensitive to general market interest rate fluctuations. These general market fluctuations directly impact our cost of funds. General inability to increase the interest rates earned on new and existing finance receivables restricts our ability to react to increases in cost of funds. Accordingly, increases in market interest rates generally will narrow interest rate spreads and lower profitability, while decreases in market interest rates generally will widen interest rate spreads and increase profitability. The following table presents important data relating to our net interest margin as of the end of the periods presented:  Three Months EndedDecember 31,2008
        
        2007(dollars in thousands)Total finance receivables balance
        
        $
        346,957
        
        $
        293,174Average total finance receivables (1)
        
        $
        334,903
        
        $
        288,066Average interest bearing liabilities (1)
        
        $
        260,712
        
        $
        226,952Total interest income and fees
        
        $
        24,343
        
        $
        20,244Total interest expense
        
        $
        4,276
        
        $
        4,187
  (1)
        Averages are computed using month-end balances.
  17    Results of Operations  Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007  Total Finance Receivables.Our aggregate finance receivables increased 18.3% to $347.0 million on December 31, 2008 from $293.2 million on December 31, 2007. Our primary supplier of loans, MBD, saw a 34.2% increase in its originations of loans during the first quarter of fiscal 2009 over the same period in fiscal 2008, thus increasing our ability to acquire more loans in the first quarter of fiscal 2009. Now that we acquire loans that are originated by a bank we have the opportunity to reach more customers than we have in years past. Our aggregate average finance receivables also increased during this period to $334.9 million in the first quarter fiscal 2009 from $288.1 million in the first quarter fiscal 2008, an increase of $46.8 million or 16.2%. Interest Income and Fees.Interest income and fees represent 95.5% of our total revenue. In the first quarter of fiscal 2009, interest income and fees increased to $24.3 million from $20.2 million for the first quarter of fiscal 2008, an increase of $4.1 million or 20.2%. This increase was primarily due to an increase in aggregate average finance receivables as discussed above. Interest Expense.Interest expense in first quarter of 2009 increased to $4.3 million from $4.2 million in the first quarter of fiscal 2008, an increase of $0.1 million or 2.1%. While our average interest bearing liabilities increased to $260.7 million in fiscal 2009 from $227.0 million in fiscal 2008, an increase of $33.7 million or 14.8%, our weighted average interest rate declined to 6.6% from 7.4% due to decreases in the market interest rates we use to place new borrowings. Provision for Credit Losses.The provision for credit losses in the first quarter of fiscal 2009 decreased to $7.1 million from $7.3 million in the first quarter of fiscal 2008, a decrease of $0.2 million or 1.7%. The decrease is primarily due to positive trends in net charge-offs.  During the first quarter of 2009, we saw a decline in our net charge-offs to 6.96% compared to 8.39% during the first quarter 2008. In addition, there has been a decline in loans that are 60 days or more delinquent. As a percentage of our aggregate finance receivables, these loan balances declined to 3.32% in first quarter fiscal 2009 from 3.87% in first quarter fiscal 2008. See further discussion in Allowance for Credit Losses section. Noninterest Income. Noninterest income consists of income from credit reinsurance premiums which increased to $1.1 million in the first quarter of fiscal 2009 compared to $1.0 million in the first quarter of fiscal 2008, an increase of $.1 million or 12.2%. The increase in credit reinsurance premiums is directly related to the increase in our loan acquisitions. Noninterest Expense. Noninterest expenses in the first quarter of fiscal 2009 increased to $10.3 million from $8.4 million in the first quarter of fiscal 2008, an increase of $1.9 million or 23.3%. The increase is primarily due to the increase in our management and record keeping services fees for the quarter. Management and record keeping services fees in the first quarter 2009 increased by $1.6 million from the first quarter of the 2008, due to a 18.3% increase in our aggregate finance receivables.  18     Delinquency Experience  Our customers are required to make monthly payments of interest and principal.  Our servicer, MBD, under our supervision, analyzes our delinquencies on a recency delinquency basis utilizing our guidelines. A loan is delinquent under the recency method when a full payment (95% or more of the contracted payment amount) has not been received for 30 days after the last full payment. We rarely grant extensions or deferments, or allow account revision, rewriting, renewal or rescheduling in order to bring otherwise delinquent accounts current. The following 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 and allowance for credit losses for finance receivables.  As of
        
        
        
        Asof
        
        
        
        AsofDecember 31
        
        
        
        September30,
        
        
        
        December31,2008
        
        
        
        2008
        
        
        
        2007(dollars in thousands)Total finance receivables
        
        $
        346,957
        
        
        
        $
        319,290
        
        
        
        $
        293,174Total finance receivables balances 60 daysor more past due
        
        $
        11,509
        
        
        
        $
        9,658
        
        
        
        $
        11,345Total finance receivables balances 60 daysor more past due as a percent of totalfinance receivables
        
        
        3.32
        %
        
        
        
        3.02
        %
        
        
        
        3.87
        %
   Credit Loss Experience and Provision for Credit Losses  General.The allowance for credit losses is maintained at an amount which management considers sufficient to cover estimated future losses. We utilize a statistical model based on potential credit risk trends incorporating both historical and prospective factors to estimate losses. These results and managements judgment are used to estimate future losses and in establishing the current provision and allowance for credit losses. These estimates are influenced by factors outside our control, such as economic conditions, current or future military deployments and completion of military service prior to repayment of loan. There is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. See our annual report Item 1A. Risk Factors  If a customer leaves the military prior to repaying loans,
there is an increased risk loans will not be repaid.  19    Military Loans.Our charge-off policy is based on an account-by-account review of delinquent receivables on a recency basis. Our primary sources of  charge-offs occur when a customer leaves the military prior to repaying the finance receivable or is subject to longer term and more frequent deployments. Generally, loans purchased or originated by us are structured so that the entire amount is repaid prior to a customers estimated separation from the military. When buying loans, however, we cannot predict when or whether a customer may depart from the military early. Accordingly, we cannot implement policies or procedures for MBD to follow to ensure that we will be repaid in full prior to a customer leaving the military. Nor can we predict when a customer may be subject to deployment at a duration or frequency that causes a default on their loans.
Another source of loss is when a customer declares bankruptcy. See our annual report Item 7: Management Discussion and Analysis of Financial Condition and Results of Operations  Nonearning Assets. The following table presents net charge-offs on direct loans and net charge-offs as a percentage of military loans as of the end of the periods presented:  Three Months EndedDecember 31,2008
        
        
        
        2007(dollars in thousands)Military loans:Military receivables charged-off
        
        $
        6,149
        
        
        
        $
        6,416Less recoveries
        
        
        572
        
        
        
        
        545Net charge-offs
        
        $
        5,577
        
        
        
        $
        5,871Average military receivables
        
        $
        309,661
        
        
        
        $
        269,106Percentage of net charge-offs to averagemilitary receivables (1)
        
        
        7.21
        %
        
        
        
        8.73
        %
  (1)
        Averages are computed using month-end balances.
  20    Retail Installment Contracts.Under some of our arrangements with retail merchant, 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 specific reserve account, as specified in the agreement. Upon the retail merchants request, and no more often than annually, we will pay the retail merchant the amount by which its specific reserve account exceeds 15% of the aggregate outstanding balance on all retail installment contracts purchased from them, less losses we have sustained, or reasonably could sustain, due to debtor defaults, collection expenses,
delinquencies and breaches of our agreement with the retail merchant. Our allowance for credit losses is charged only to the extent that the loss on a retail installment contract exceeds the originating retail merchants specific reserve account at the time of the loss. The following table 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 EndedDecember 31,2008
        
        
        
        2007(dollars in thousands)Retail installment contracts:Contracts charged-off
        
        $
        324
        
        
        
        $
        193Less recoveries
        
        
        73
        
        
        
        
        25Net charge-offs
        
        $
        251
        
        
        
        $
        168Average retail installment contactreceivables (1)
        
        $
        25,243
        
        
        
        $
        18,960Percentage of net charge-offs toretail installment contract receivables
        
        
        3.98
        %
        
        
        
        3.54
        %
  (1)
        Averages are computed using month-end balances.
   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 EndedDecember 31,2008
        
        
        
        2007(dollars in thousands)Average total finance receivables (1)
        
        $
        334,903
        
        
        
        $
        288,066Provision for credit losses
        
        $
        7,137
        
        
        
        $
        7,258Net charge-offs
        
        $
        5,828
        
        
        
        $
        6,039Net charge-offs as a percentage ofaverage total finance receivables
        
        
        6.96
        %
        
        
        
        8.39
        %Allowance for credit losses
        
        $
        24,291
        
        
        
        $
        22,858Allowance as a percentage of averagetotal finance receivables
        
        
        7.25
        %
        
        
        
        7.93
        %
  (1)
        Averages are computed using month-end balances.
   21     We maintain an allowance for credit losses, which represents managements best estimate of probable 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 loan losses and recoveries of previous losses. The provision for finance receivable losses is charged to earnings to bring the total allowance to a level considered necessary by management. As the portfolio of finance receivables consists of a large number of relatively small, homogenous accounts, the finance receivables are evaluated for impairment as a group. 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
 
        Demographics of the current finance receivable portfolio
 The following table sets forth changes in the components of our allowance for credit losses on finance receivables as of the end of the periods presented:  Three Months EndedDecember 31,2008
        
        
        
        2007(dollars in thousands)Balance, beginning of period
        
        $
        22,982
        
        
        
        $
        21,639Charge-offs:Finance receivables charged-off
        
        
        (6,473
        )
        
        
        
        (6,609
        )Recoveries
        
        
        645
        
        
        
        
        570Net charge-offs
        
        
        (5,828
        )
        
        
        
        (6,039
        )Provision for credit losses
        
        
        7,137
        
        
        
        
        7,258Balance, end of period
        
        $
        24,291
        
        
        
        $
        22,858
   22    Loan Acquisition / Origination  Asset growth is the most important factor in determining our future revenues. We are dependent upon MBD and retail merchants to increase their originations for our future growth. Loans purchased increased for the first three months of fiscal 2009 to $122.7 million from $96.0 million for the first three months of fiscal year 2008, an increase of $26.7 million or 27.8%. See Results of Operations  Three Months Ended December 31, 2008 Compared to Three Months ended December 31, 2007  Finance Receivables. The following table sets forth our overall purchases of military loans and retail installment contracts as of the end of the periods presented:  Three Months EndedDecember 31,2008
        
        
        
        2007(dollars in thousands)Total loans acquired/originated:Gross balance
        
        $
        122,698
        
        
        
        $
        96,019Number of finance receivable notes
        
        
        39,139
        
        
        
        
        29,163Average note amount
        
        $
        3,135
        
        
        
        $
        3,292Military loans:Gross balance
        
        $
        112,020
        
        
        
        $
        91,626Number of finance receivable notes
        
        
        35,130
        
        
        
        
        27,599Average note amount
        
        $
        3,189
        
        
        
        $
        3,320Retail installment contracts:Gross balance
        
        $
        10,678
        
        
        
        $
        4,393Number of finance receivable notes
        
        
        4,009
        
        
        
        
        1,564Average note amount
        
        $
        2,663
        
        
        
        $
        2,809
   Liquidity and Capital Resources  A relatively high ratio of borrowings to invested capital is customary in the consumer finance industry. Our principal use of cash is to purchase military loans and retail installment contracts. We use borrowings to fund the difference if any, between the cash used to purchase military loans and retail installment contracts and operations and the cash generated from loan repayments and operations. This amount is generally cash used in investing activities. Cash used in investing activities in the first three months of fiscal year 2009 was approximately $33.9 million, which was funded from $14.3 million from operating activities and $14.2 million from financing activities. Cash used in investing activities in the first three months of fiscal 2008 was approximately $19.1 million which was funded from $11.6 million of cash from operating activities and $11.7 million from financing activities.
The increase of $14.8 million when comparing cash used in investing activities in first quarter fiscal 2009 from first quarter fiscal 2008 resulted primarily from a 18.3% increase in aggregate finance receivables. We have not sold any investment notes since December 31, 2006. Financing activities primarily consist of borrowing and repayments relating to our Senior Lending Agreement (SLA). Currently, we anticipate that our cash inflow from operations and borrowings under our SLA will be adequate to meet our cash outflows to fund anticipated growth in finance receivables, operating expenses, repayment of indebtedness, and planned capital expenditures. With ongoing strains in the financial markets, we see liquidity, capital and earnings challenges for some banks in our credit group which may reduce their ability to participate in the credit or may cause a decrease in their willingness to lend at the current levels. Senior Indebtedness-Bank Debt.As of December 31, 2008, we had $238.8 million of senior debt outstanding compared to $222.1 million at September 30, 2008, an increase of $16.7 million or 7.5%. Our SLA is an uncommitted facility which provides common terms and conditions pursuant to which individual banks that are a party to this agreement may choose to make loans to us in the future. Any bank may elect not to participate in any future fundings at any time without penalty. As of December 31, 2008, we could request up to $24.1 million in additional funds and remain in compliance with the terms of our SLA. No bank, however, has any contractual obligation to lend us these additional funds. As of December 31, 2008, we were in compliance with all loan covenants.  23    Senior Indebtedness Table.As of December 31, 2008 and September 30, 2008, the total borrowings and availability under our SLA and our revolving line of credit from our parent company consisted of the following amounts for the end of the periods presented:  As of
        
        
        
        AsofDecember 31,
        
        
        
        September30,2008
        
        
        
        2008(dollars in thousands)Revolving credit line:Total facility
        
        $
        40,000
        
        
        
        $
        40,000Balance at end of year
        
        $
        32,110
        
        
        
        $
        23,586Maximum available credit (1)
        
        $
        7,890
        
        
        
        $
        16,414Term notes (2):Total facility
        
        $
        256,702
        
        
        
        $
        260,892Balance at end of year
        
        $
        206,679
        
        
        
        $
        198,466Maximum available credit (1)
        
        $
        50,023
        
        
        
        $
        62,426Total revolving and term notes(2):Total facility
        
        $
        296,702
        
        
        
        $
        300,892Balance at end of year
        
        $
        238,789
        
        
        
        $
        222,052Maximum available credit (1)
        
        $
        57,913
        
        
        
        $
        78,840Credit facility available (3)
        
        $
        23,530
        
        
        
        $
        20,110Percent utilization of the total facility
        
        
        80.48
        %
        
        
        
        73.80
        %
  (1)
        Maximum available credit assuming proceeds in excess of the amounts shown below under Credit Facility Available are used to increase qualifying finance receivables and all terms of the senior lending agreement are met, including maintaining a Senior Indebtedness to Net Receivable Ratio of not more than 80.0%
 (2)
        Includes 48-month amortizing term note.
 (3)
        Credit available based on the existing asset borrowing base and maintaining a Senior Indebtedness to Net Notes Receivable Ratio of not more than 80%.
   24     Outstanding Investment Notes.Prior to December 31, 2006, we funded certain capital and financial needs through the sale of investment notes. These notes have varying fixed interest rates and are subordinate to all senior indebtedness. We can redeem these notes at any time upon 30 days written notice. As of December 31, 2008, we had outstanding $33.6 million of these notes at a weighted average interest rate of 9.45%. As part of the Transaction, we recorded certain liabilities at market value. The table below is a reconciliation of these adjustments as of December 31, 2008.  Amortizing Term Notes
        
        
        
        Investment NotesNotional value
        
        
        
        $
        206,678,944
        
        
        
        $
        33,615,602Purchase adjustment (1)
        
        
        
        
        (21,497
        )
        
        
        
        668,247Recorded value
        
        
        
        $
        206,657,447
        
        
        
        $
        34,283,849
  (1) Relates to the fair value adjustment recorded as part of the Transaction.  ITEM 3.Quantitative and Qualitative Disclosures About Market Risk. Our profitability and financial performance are sensitive to changes in the U.S. Treasury yields and the spread between the effective rate of interest we receive on customer loans and the interest rates we pay on our borrowings. Our finance income is generally not sensitive to fluctuations in market interest rates. The primary exposure that we face is changes in interest rates on our borrowings. A substantial and sustained increase in market interest rates could adversely affect our growth and profitability. The overall objective of our interest rate risk management strategy is to mitigate the effects of changing interest rates on our interest expense through the utilization of short-term variable rate debt and medium and long term fixed rate debt. We have not entered into any derivative instruments to manage our interest rate risk. For more information about this item see our annual report;
Item 7, Liquidity and Capital Resources-Interest Rate Risk Management. The following shows the estimated impact on earnings of changes in interest rates on variable rate debt:  Decrease/increase:
        
        -2%
        
        
        
        -1%
        
        
        
        0%
        
        
        
        +1%
        
        
        
        +2%Revolving credit line
        
        $
        (374,100
        )
        
        
        $
        (187,050
        )
        
        
        $
        
        
        
        
        $
        187,050
        
        
        
        $
        374,100Amortizing term notes
        
        
        (2,511,302
        )
        
        
        
        (1,693,289
        )
        
        
        
        (875,275
        )
        
        
        
        (57,261
        )
        
        
        
        760,753Investment note
        
        
        (50,451
        )
        
        
        
        (24,579
        )
        
        
        
        1,294
        
        
        
        
        27,166
        
        
        
        
        53,038Total impact on interest expense
        
        $
        (2,935,853
        )
        
        
        $
        (1,904,918
        )
        
        
        $
        (873,981
        )
        
        
        $
        156,955
        
        
        
        $
        1,187,891
   ITEM 4.Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under 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 as of the end of the period covered by this report (evaluation date), and that such information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. 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 the design and operation of our
disclosure controls and procedures as of December 31, 2008.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date the evaluation was completed.  25    PART II - OTHER INFORMATION ITEM 1.Legal Proceedings The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not have a material adverse effect on the financial position or results of operations of the Company.  26    ITEM 6.Exhibits  Exhibit No.
        Description
 3.1
        Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of our Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission on February 18, 2003 (Commission No. 333-103293) (the Initial Registration Statement).
 3.2
        Certificate of Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.2 of the Initial Registration Statement).
 3.3
        Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.3 of the Initial Registration Statement).
 4.1
        Amended and Restated Indenture dated as of December 15, 2004 (Incorporated by reference to Exhibit 4.1 of the Post Effective Amendment No. 2 to the Registration Statement filed with the Securities and Exchange Commission dated December 17, 2004 (Commission No. 333-103293) (Post Effective Amendment No.2)).
 4.2
        Form of investment note certificate (Incorporated by reference to Exhibit 4.2 of the Post Effective Amendment No. 2).
 4.3
        Form of junior subordinated debenture prior to November 1, 2002 (Incorporated by reference to Exhibit 4.3 of the Initial Registration Statement).
 4.9
        Amended and Restated Senior Lending Agreement dated May 31, 2007 among the Company and various banks named therein. (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated May 31, 2007 and filed with the Securities and Exchange Commission on June 6, 2007).
 4.11
        Form of Rate Supplement (Incorporated by reference to Exhibit 4.11 of the Post Effective Amendment No. 2).
 4.12
        Form of IRA Application (Incorporated by reference to Exhibit 4.12 of the Post Effective Amendment No. 2).
 4.13
        Form of Offer to Purchase (Incorporated by reference to Exhibit 4.13 of the Post Effective Amendment No. 2).
 4.14
        Form of IRA Application (Incorporated by reference to Exhibit 4.14 of the Post Effective Amendment No. 3 to the Registration Statement filed with the Securities and Exchange Commission dated January 6, 2006 (Commission No. 333-103293)).
 10.1
        Trademark Licensing Agreement dated October 10, 2000 between the Company and Pioneer Licensing Services, Inc. (Incorporated by reference to Exhibit 10.6 of the Initial Registration Statement).
 10.2
        Loan Sale and Master Servicing Agreement dated as of June 1, 2007 between the Company and MBD (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated May 31, 2007 and filed with the Securities and Exchange Commission on June 6, 2007).
 10.3
        Employment Agreement dated January 30, 2007 between the Company and Thomas H. Holcom, Jr. (Incorporated by reference to Exhibit 10.3 of the Companys annual report on Form 10-K for the period ended September 30, 2008).
 10.4
        Employment Agreement dated February 1, 2007 between the Company and Laura V. Stack. (Incorporated by reference to Exhibit 10.4 of the Companys annual report on Form 10-K for the period ended September 30, 2008).
 21
        Subsidiaries (Incorporated by reference to Exhibit 21 of the Annual Report on form 10K for the year ended September 30, 2008).
 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.
  27    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.  PIONEER FINANCIAL SERVICES, INC.  Name
        
        Title
        
        Date/s/ Thomas H. Holcom, Jr.
        
        Chief Executive Officer
        
        February 13, 2009Thomas H. Holcom, Jr.
        
        and Sole Director(Principal Executive Officer)/s/ Laura V. Stack
        
        Chief Financial Officer,
        
        February 13, 2009Laura V. Stack
        
        Treasurer and Asst. Secretary(Principal Financial Officerand Principal Accounting Officer)
    28