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:December 31, 2009
  OR  [   ]

        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.  YesxNo 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 such shorter periods that the Registrant was required to submit and post such files). Yes o 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. Large accelerated filer o

        Accelerated filer o
 Non-accelerated filerx

        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 12, 2010
 Common Stock, no par value

        One Share
  As of February 12, 2010, 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 December 31, 2009  TABLE OF CONTENTS  PART I FINANCIAL INFORMATION Item No.

        Page
  1.

        Condensed Consolidated Financial Statements

        1Condensed Consolidated Balance Sheets at December 31, 2009 and September 30, 2009

        1Condensed Consolidated Statements of Operations for the three months ended December 31, 2009 and 2008

        2Condensed Consolidated Statements of Stockholders Equity for the three months ended December 31, 2009 and year ended September 30, 2009

        3Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2009 and 2008

        4Notes to Condensed Consolidated Financial Statements

        52.

        Management's Discussion and Analysis of Financial Condition and Results of Operations

        123.

        Quantitative and Qualitative Disclosures About Market Risk

        234T.

        Controls and Procedures

        23
  PART II OTHER INFORMATION  1.

        Legal Proceedings

        24
 2.

        Unregistered Sales of Equity Securities and Use of Proceeds

        24
 6.

        Exhibits

        25
    
 PART I - FINANCIAL INFORMATION  ITEM 1.Condensed Consolidated Financial Statements PIONEER FINANCIAL SERVICES, INC. Condensed Consolidated Balance Sheets As of December 31, 2009 and September 30, 2009 (unaudited) ASSETS  December 31,

        

        September 30,2009

        

        2009Cash and cash equivalents - non-restricted

        

        $

        6,707,312

        

        $

        3,311,478Cash and cash equivalents - restricted

        

        

        603,895

        

        

        114,058Investments - restricted

        

        

        7,803,640

        

        

        8,287,905Investments - non-restricted

        

        

        130,000

        

        

        130,000Net finance receivables

        

        

        319,064,673

        

        

        313,930,096Furniture and equipment, net

        

        

        338,194

        

        

        427,639Deferred income tax asset

        

        

        3,811,431

        

        

        4,294,966Prepaid and other assets

        

        

        5,288,466

        

        

        5,915,115Deferred acquisition costs

        

        

        3,068,325

        

        

        3,034,599Goodwill

        

        

        31,474,280

        

        

        31,474,280Intangibles - net

        

        

        13,482,200

        

        

        14,405,000Total assets

        

        $

        391,772,416

        

        $

        385,325,136LIABILITIES AND STOCKHOLDERS EQUITYRevolving credit line - banks

        

        $

        26,122,416

        

        $

        20,770,000Accounts payable

        

        

        524,286

        

        

        1,891,825Accrued expenses and other liabilities

        

        

        9,721,726

        

        

        7,682,887Amortizing term notes

        

        

        222,519,034

        

        

        221,187,023Investment notes

        

        

        33,193,963

        

        

        33,306,309Total liabilities

        

        

        292,081,425

        

        

        284,838,044Stockholder's equity:Common stock, no par value; 1 share issued andoutstanding

        

        

        86,394,200

        

        

        86,394,200Accumulated other comprehensive income

        

        

        86,920

        

        

        124,383Retained earnings

        

        

        13,209,871

        

        

        13,968,509Total stockholder's equity

        

        

        99,690,991

        

        

        100,487,092Total liabilities and stockholder's equity

        

        $

        391,772,416

        

        $

        385,325,136
   See Notes to Condensed Consolidated Financial Statements  1
 
 PIONEER FINANCIAL SERVICES, INC. Condensed Consolidated Statements of Operations For the three months ended December 31, 2009 and 2008 (unaudited)  Three Months EndedDecember 31,2009

        

        2008Interest income and fees

        

        $

        26,455,091

        

        $

        24,342,745Interest expense

        

        

        4,572,463

        

        

        4,276,368Net interest income before provision for credit losses

        

        

        21,882,628

        

        

        20,066,377Provision for credit losses

        

        

        5,610,651

        

        

        7,137,181Net interest income

        

        

        16,271,977

        

        

        12,929,196Noninterest income:Insurance premiums earned

        

        

        1,453,750

        

        

        1,143,954Total noninterest income

        

        

        1,453,750

        

        

        1,143,954Noninterest expense:Management and recordkeeping services fee

        

        

        9,247,223

        

        

        8,135,914Professional and regulatory fees

        

        

        351,269

        

        

        370,311Amortization of intangibles

        

        

        922,800

        

        

        1,058,700Other operating expenses

        

        

        949,010

        

        

        760,531Total noninterest expense

        

        

        11,470,302

        

        

        10,325,456Income before income taxes

        

        

        6,255,425

        

        

        3,747,694Provision for income taxes

        

        

        2,345,786

        

        

        1,495,855Net income

        

        $

        3,909,639

        

        $

        2,251,839Net income per share, basic and diluted

        

        $

        3,909,639

        

        $

        2,251,839
   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, 2009 and year ended September 30, 2009 (unaudited)  AccumulatedOtherComprehensiveTotal

        

        Common Stock

        

        Retained Earnings

        

        IncomeBalance, September 30, 2008

        

        $

        88,543,991

        

        $

        84,394,200

        

        $

        4,149,791

        

        $

        Net income

        

        

        13,336,552

        

        

        

        

        

        13,336,552

        

        

        Unrealized gain on investments,net of tax of $66,976

        

        

        124,383

        

        

        

        

        

        

        

        

        124,383Total comprehensive income

        

        

        13,460,935

        

        

        

        

        

        13,336,552

        

        

        124,383Capital contribution by parent

        

        

        2,000,000

        

        

        2,000,000

        

        

        

        

        

        Dividend paid to parent

        

        

        (3,517,834

        )

        

        

        

        

        (3,517,834

        )

        

        Balance, September 30, 2009

        

        $

        100,487,092

        

        $

        86,394,200

        

        $

        13,968,509

        

        $

        124,383Comprehensive income:Net income

        

        

        3,909,639

        

        

        

        

        

        3,909,639

        

        

        Unrealized loss on investments,net of tax of $20,172

        

        

        (37,463

        )

        

        

        

        

        

        

        

        (37,463

        )Total comprehensive income

        

        

        3,872,177

        

        

        

        

        

        3,909,639

        

        

        (37,463

        )Dividend paid to parent

        

        

        (4,668,277

        )

        

        

        

        

        (4,668,277

        )

        

        Balance, December 31, 2009

        

        $

        99,690,991

        

        $

        86,394,200

        

        $

        13,209,871

        

        $

        86,920
   See Notes to Condensed Consolidated Financial Statements  3
 
 PIONEER FINANCIAL SERVICES, INC. Consolidated Statements of Cash Flows For the three months ended December 31, 2009 and 2008 (unaudited)  Three Months EndedDecember 31,2009

        

        2008Cash flows from operating activities:Net income

        

        $

        3,909,639

        

        $

        2,251,839Items not requiring (providing) cash:Provision for credit losses onfinance receivables

        

        

        5,610,651

        

        

        7,137,181Depreciation and amortization

        

        

        1,002,494

        

        

        1,234,910Deferred income taxes

        

        

        303,447

        

        

        (814,275

        )Interest accrued on investment notes

        

        

        430,377

        

        

        448,545Changes in:Accounts payable and accrued expenses

        

        

        909,027

        

        

        877,409Deferred fees - net

        

        

        805,598

        

        

        2,829,255Unearned premium reserves

        

        

        (35,774

        )

        

        (317,729

        )Prepaids and other assets

        

        

        592,920

        

        

        688,186Net cash provided by operating activities

        

        

        13,528,379

        

        

        14,335,321Cash flows from investing activities:Finance receivables purchased from affiliate

        

        

        (59,267,425

        )

        

        (69,009,320

        )Finance receivables purchased fromretail merchants

        

        

        (11,372,037

        )

        

        (10,270,869

        )Finance receivables repaid

        

        

        59,124,411

        

        

        45,460,838Capital expenditures

        

        

        (1,350

        )

        

        (3,105

        )Change in restricted cash

        

        

        (527,300

        )

        

        285,680Investments purchased - restricted

        

        

        (399,154

        )

        

        (1,068,394

        )Investments matured - restricted

        

        

        810,000

        

        

        701,000Net cash used in investing activities

        

        

        (11,632,855

        )

        

        (33,904,170

        )Cash flows from financing activities:Net change under lines of credit

        

        

        5,352,416

        

        

        8,523,586Proceeds from borrowings

        

        

        43,057,032

        

        

        30,000,000Repayment of borrowings

        

        

        (42,240,861

        )

        

        (22,831,162

        )Dividends paid to parent

        

        

        (4,668,277

        )

        

        (1,517,833

        )Net cash provided byfinancing activities

        

        

        1,500,310

        

        

        14,174,591Net increase (decrease) in cash and equivalents

        

        

        3,395,834

        

        

        (5,394,258

        )Cash and cash equivalentsBeginning of period

        

        

        3,311,478

        

        

        12,747,137Cash and cash equivalentsEnd of period

        

        $

        6,707,312

        

        $

        7,352,879Additional cash flow information:Interest paid

        

        $

        4,064,345

        

        $

        3,764,136Income taxes paid

        

        $

        202,265

        

        $

        1,839,156Noncash financing activities:Capital contribution from parent

        

        $

        

        

        $

        2,000,000
   See Notes to Condensed Consolidated Financial Statements  4
 
 PIONEER FINANCIAL SERVICES, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2009 and September 30, 2009 and for the three months ended December 31, 2009 and December 31, 2008 (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 a wholly owned first-tier subsidiary of MCFC. Nature of Operations and Concentration We are headquartered in Kansas City, Missouri.  We purchase finance receivables from the Military Banking Division (MBD) of MidCountry Bank, a federally chartered stock savings association and wholly owned subsidiary of MCFC (MCB). These receivables represent loans 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. 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.  We use estimates and employ 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. Information with respect to December 31, 2009 and 2008, 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, 2009 and 2008 are not necessarily indicative of results to be expected for the entire fiscal year.  The condensed consolidated balance sheet as of September 30, 2009 and statement of stockholders equity for the year ended September 30, 2009 have been derived from the audited consolidated balance sheet and statement of stockholders equity. All the information in these condensed financial statements should be considered in conjunction with the financial statements and the notes thereto included in our latest Annual
Report on Form 10-K.  5
 
   NOTE 2:  FINANCE RECEIVABLES Finance receivables at December 31, 2009 and September 30, 2009, consisted of the following:  December 31,

        

        September 30,2009

        

        2009Military receivables/loans

        

        $

        323,334,721

        

        $

        320,804,513Retail installment contracts

        

        

        47,108,244

        

        

        43,981,657Total finance receivables

        

        

        370,442,965

        

        

        364,786,170Net deferred loan fees and dealer discounts

        

        

        (19,041,294

        )

        

        (18,591,300

        )Unearned insurance premium reserves

        

        

        (7,067,441

        )

        

        (7,016,414

        )Insurance claims and policy reserves

        

        

        (648,302

        )

        

        (627,106

        )Finance receivables - net of unearned fees and premiums

        

        

        343,685,928

        

        

        338,551,351Allowance for credit losses

        

        

        (24,621,255

        )

        

        (24,621,255

        )Finance receivables - net of allowance

        

        $

        319,064,673

        

        $

        313,930,096
    The following table sets forth changes in the components of our allowance for credit losses on finance receivables as of the end of the period presented:  For the ThreeMonths EndedDecember 31,2009Balance as of September 30, 2009

        

        $

        24,621,255Charge-offs:Finance receivablescharged-off

        

        

        (6,384,895

        )Recoveries

        

        

        774,244Net charge-offs

        

        

        (5,610,651

        )Provision for credit losses

        

        

        5,610,651Balance as of December 31, 2009

        

        $

        24,621,255
    6
 
  NOTE 3:  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, 2009 and September 30, 2009 are as follows:  December 31, 2009

        

        September 30, 2009Gross

        

        

        

        

        

        Net

        

        Gross

        

        

        

        

        

        NetCarrying

        

        Accumulated

        

        

        

        Carrying

        

        Carrying

        

        Accumulated

        

        

        

        CarryingAmount

        

        Amortization

        

        

        

        Value

        

        Amount

        

        Amortization

        

        

        

        ValueCustomer relationships

        

        $

        11,000,000

        

        $

        (5,332,736

        )

        

        

        $

        5,667,264

        

        $

        11,000,000

        

        $

        (4,910,000

        )

        

        

        $

        6,090,000Agent relationships

        

        

        700,000

        

        

        (293,342

        )

        

        

        

        406,658

        

        

        700,000

        

        

        (268,000

        )

        

        

        

        432,000Vendor relationships

        

        

        1,700,000

        

        

        (708,952

        )

        

        

        

        991,048

        

        

        1,700,000

        

        

        (647,000

        )

        

        

        

        1,053,000Trade name

        

        

        7,000,000

        

        

        (2,289,177

        )

        

        

        

        4,710,823

        

        

        7,000,000

        

        

        (2,083,000

        )

        

        

        

        4,917,000Technology

        

        

        4,000,000

        

        

        (2,293,593

        )

        

        

        

        1,706,407

        

        

        4,000,000

        

        

        (2,087,000

        )

        

        

        

        1,913,000Valuation of business acquired unearned premium

        

        

        1,600,000

        

        

        (1,600,000

        )

        

        

        

        

        

        

        1,600,000

        

        

        (1,600,000

        )

        

        

        

        Total amortizable intangibles

        

        $

        26,000,000

        

        $

        (12,517,800

        )

        

        

        $

        13,482,200

        

        $

        26,000,000

        

        $

        (11,595,000

        )

        

        

        $

        14,405,000Goodwill

        

        $

        31,474,280

        

        $

        

        

        

        

        $

        31,474,280

        

        $

        31,474,280

        

        $

        

        

        

        

        $

        31,474,280
   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, 2009, and determined that there was no impairment as the estimated fair value substantially exceeded the carrying value.  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, 2009.  NOTE 4: NET INCOME PER SHARE Net income per share is computed based upon the weighted-average common shares outstanding of one share for the three months ended December 31, 2009.  There are no potentially dilutive securities issued and outstanding.  NOTE 5: RELATED PARTY TRANSACTIONS  In June 2009, we entered into an amended and restated Loan Sale and Master Services Agreement (LSMS Agreement) with MBD.  Under the LSMS Agreement, we buy certain military loans that MBD originates and receive management and recordkeeping services from MBD.  During the first quarter of fiscal 2010, the total loans we purchased from MBD pursuant to the LSMS Agreement were $59.3 million. Total fees paid to MBD pursuant to the LSMS Agreement were $10.0 million for the first quarter of fiscal 2010.  7
 
  NOTE 6:  DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS 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, currency and 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.  The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:  Cash and Cash Equivalents Carrying value approximates fair value due to their liquid nature. Investment Securities Fair value for investment securities are based on quoted market prices. Finance Receivables The fair values of finance receivables is estimated by discounting future cash flows using current rates at which similar finance receivables would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount of finance receivables approximate fair value due to their stated interest rates approximating a market rate for instruments with similar remaining maturities and credit profiles. Revolving Line of Credit The carrying amounts of a revolving line of credit approximate their fair value due to the variable interest rates. Amortizing Term Notes The fair value of the amortizing term notes with fixed interest rates are estimated using the discounted cash flow analysis based on the Companys current incremental borrowing rates for similar types of borrowing arrangements. Investment Notes The fair value of investment notes and other junior subordinated debentures is estimated by discounting future cash flows using current rates at which similar investment notes and other junior subordinated debentures would be offered to lenders for the same remaining maturities. The carrying amounts of borrowings approximate their fair value.  As of December 31, 2009

        

        As of September 30, 2009Carrying

        

        

        

        CarryingAmount

        

        Fair Value

        

        Amount

        

        Fair ValueFinancial assets:Cash and cash equivalents - non-restricted

        

        $

        6,707,312

        

        $

        6,707,312

        

        $

        3,311,478

        

        $

        3,311,478Cash and cash equivalents - restricted

        

        

        603,895

        

        

        603,895

        

        

        114,058

        

        

        114,058Investment securities - restricted

        

        

        7,803,640

        

        

        7,803,640

        

        

        8,287,905

        

        

        8,287,905Investment securities - non-restricted

        

        

        130,000

        

        

        130,000

        

        

        130,000

        

        

        130,000Finance receivables

        

        $

        319,064,673

        

        $

        319,140,820

        

        $

        313,930,096

        

        $

        313,711,224Financial liabilities:Revolving credit line

        

        $

        26,122,416

        

        $

        26,122,416

        

        $

        20,770,000

        

        $

        20,770,000Amortizing term notes

        

        

        222,519,034

        

        

        224,667,039

        

        

        221,187,023

        

        

        219,281,642Investment notes

        

        $

        33,193,963

        

        $

        33,093,766

        

        $

        33,306,309

        

        $

        33,248,428
   8
 
  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.
  The table below represents the Companys financial instruments measured at fair value as of December 31, 2009, aggregated by level in the fair value hierarchy within those measurements fall.  Input Levels for Fair Value MeasurementsDescription

        

        Level 1

        

        Level 2

        

        Level 3

        

        TotalAssets:Investments - restricted

        

        $

        7,803,640

        

        $

        

        

        $

        

        

        $

        7,803,640Money market funds - restricted*

        

        

        332,073

        

        

        

        

        

        

        

        

        332,073Money market funds - non-restricted*

        

        

        2,813,748

        

        

        

        

        

        

        

        

        2,813,748Total

        

        $

        10,949,461

        

        $

        

        

        $

        

        

        $

        10,949,461
  ______________ *Money market funds are included within "cash and cash equivalents-restricted" and "cash and cash equivalents non-restricted" as presented above, respectively.  During fiscal 2010 and 2009, we did not recognize any material realized gains or losses on investments. None of the investments with unrealized losses were determined to be other than temporarily impaired and none of those investments have unrealized losses for more than one year.  We record our restricted investments at fair market value.  The following table represents our restricted investments as of December 31, 2009 and September 30, 2009:  As of December 31, 2009

        

        As of September 30, 2009Gross

        

        Gross

        

        

        

        

        

        

        

        Gross

        

        GrossUnrealized

        

        Unrealized

        

        

        

        Market

        

        

        

        Unrealized

        

        Unrealized

        

        

        

        MarketBook Value

        

        Gains(1)

        

        (Losses)(1)

        

        

        

        Value

        

        Book Value

        

        Gains

        

        (Losses)

        

        

        

        ValueRestricted Investments:Certificates of Deposit

        

        $

        200,000

        

        $

        3,757

        

        $

        

        

        

        

        $

        203,757

        

        $

        300,000

        

        $

        6,571

        

        $

        

        

        

        

        $

        306,571Government Bonds

        

        

        7,167,150

        

        

        666,085

        

        

        (537,984

        )

        

        

        

        7,295,251

        

        

        7,494,097

        

        

        404,777

        

        

        (223,422

        )

        

        

        

        7,675,452Corporate Bonds

        

        

        302,768

        

        

        1,864

        

        

        

        

        

        

        

        304,632

        

        

        302,449

        

        

        3,433

        

        

        

        

        

        

        

        305,882$

        7,669,918

        

        $

        671,706

        

        $

        (537,984

        )

        

        

        $

        7,803,640

        

        $

        8,096,546

        

        $

        414,781

        

        $

        (223,422

        )

        

        

        $

        8,287,905
  ________________ (1)

        The net unrealized gain on investments of $133,722 net of tax of $46,803 represents the accumulated other comprehensive income of $86,920
   9
 
  NOTE 7:  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 initial term of the SSLA ends on March 31, 2010 and is automatically extended annually unless any lender gives written notice of its objection by March 1 of each calendar year.  Our assets secure the loans extended under the SSLA for the benefit of the lenders and other holders of the notes issued pursuant to the SSLA or the SLA (the Senior Debt).  The facility is an uncommitted facility that provides common terms and conditions pursuant to which the individual lenders that are a party to the SSLA may choose to make loans to us in the future.  Any
lender may elect not to participate in future fundings at any time without penalty.  As of December 31, 2009, we could request up to $12.7 million in additional funds and remain in compliance with the terms of the SSLA.  No lender, however, has any contractual obligation to lend us these additional funds. If a lender were to elect not to participate in future fundings, any existing borrowings from that lender under the revolving credit line would be payable in accordance with the underlying note.  All amortizing notes outstanding at that time would continue to be serviced under the original term of the note. Interest on the amortizing notes is fixed at 270 basis points over the 90-day moving average of like-term treasury notes when issued. The interest rate may not be less than 6.25%.  All amortizing notes have terms not to exceed 48 months, payable in equal monthly principal and interest payments. Interest on amortizing notes is payable monthly.  In addition, we are paying our lenders a quarterly uncommitted availability fee in an amount equal to ten basis points multiplied by the average, aggregate outstanding principal amount of all amortizing notes held by the lenders. Substantially all of our assets secure this debt under the SSLA.  The SSLA also limits, among other things, our ability to (1) incur additional debt from the lenders beyond that allowed by specific financial ratios and tests, (2) borrow or incur other additional debt except as permitted in the SSLA, (3) pledge assets, (4) pay dividends, (5) consummate certain asset sales and dispositions, (6) merge, consolidate or enter into a business combination with any other person, (7) pay 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 that require that we, among other things, maintain specific financial ratios and satisfy certain financial tests.  In part, these covenants require us to: (1) maintain an allowance for credit losses equal to or greater than the allowance for credit losses shown on our audited financial statements as of the end of our most recent fiscal year and at no time less than 5.25% of our consolidated net receivables unless otherwise required by generally accepted accounting principles (GAAP), (2) limit our senior indebtedness as of the end of each quarter to not greater than four times our tangible net worth, (3) maintain a positive net income in each fiscal year, (4) limit our senior indebtedness as of the end of each quarter to not greater than 80% of our consolidated net 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, 2009.  Any part of the 50% of positive net income not distributed by us as a dividend for any fiscal year within 120 days after the last day of such fiscal year must be added to our consolidated total required capital and may not be distributed as a dividend or otherwise.  No part of the consolidated total required may be distributed as a dividend.  As of December 31, 2009, we were in compliance with all loan covenants. 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. As of December 31, 2009, the lenders have indicated a willingness to participate in fundings up to an aggregate of $261.3 million during the next 12 months, including $248.6 million which is currently outstanding.  Included in this amount are borrowings of $45.4 million from withdrawing banks (the withdrawing banks), which had previously participated in the SLA.  10
 
  Maturities The following table represents outstanding obligations of our current SSLA lenders and banks that are not participating in our current SSLA listed within as withdrawing banks as of December 31, 2009:  Amortizing Notes

        

        Amortizing NotesSSLA Lenders

        

        Withdrawing Banks

        

        Total2010

        

        $

        48,079,472

        

        $

        17,692,703

        

        $

        65,772,1752011

        

        

        58,166,841

        

        

        16,021,950

        

        

        74,188,7912012

        

        

        46,235,007

        

        

        10,051,875

        

        

        56,286,8822013

        

        

        22,856,113

        

        

        1,612,135

        

        

        24,468,2482014

        

        

        1,802,938

        

        

        

        

        

        1,802,9382015 and beyond

        

        

        

        

        

        

        

        

        Total

        

        $

        177,140,371

        

        $

        45,378,663

        

        $

        222,519,034
   Investment Notes  We also have borrowings through the issuance of investment notes (with accrued interest) with an outstanding notional balance of $33.2 million, which includes a $0.6 million purchase adjustment at December 31, 2009 and $33.3 million, which includes a $0.6 million purchase adjustment at September 30, 2009.  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 1 to 10 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 $35,324 and $32,900, with a weighted interest rate of 9.52% and 9.45% at December 31, 2009 and 2008, respectively. On January 21, 2010, the Securities and Exchange Commission (SEC) declared effective our registration statement on Form S-1 (Amendment No. 1) registering $25 million of investment notes.  We filed our final prospectus and prospectus supplement containing certain pricing information on January 21, 2010.  We began offering these investment notes on January 22, 2010.  NOTE 8: SUBSEQUENT EVENTS We have evaluated subsequent events through the time of filing these financial statements on February 12, 2010, and determined that there have been no events which management feels can materially affect our financial position.  11
 
   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, 2009 (annual report) under Part I 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 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 exclusively to active-duty or career retired 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 the Military Banking Division (MBD) of MidCountry Bank, a federally chartered stock savings association and wholly owned subsidiary of MCFC (MCB), 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.  On June 12, 2009, we entered into an Amended and Restated Non-Recourse Loan Sale and Master Services Agreement (LSMS Agreement) with MBD that outlines the terms of
the sale and servicing of these loans.  We also purchase retail installment contracts from retail merchants that sell consumer goods to active-duty or career retired U.S. military personnel or U.S. Department of Defense employees.  We plan to hold these military loans and retail installment contracts until repaid. 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 2010, the average size of a loan when purchased was approximately $3,312.  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.  12
 
  Lending and Servicing Operations Primary Supplier of Loans We have retained MBD as our primary supplier of loans.  Under the LSMS Agreement, MBD uses our underwriting criteria (which was developed from our past customer credit repayment experience and is periodically revalidated based on current portfolio performance).  These criteria primarily require the following: 

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

        All potential borrowers must complete standardized credit applications either in person at one of 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 MCFC acquiring us in June 2007 (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, which may materially adversely affect our business operations, cash flow, results of operations, financial condition and profitability. Loan Purchasing  Generally.Prior to the Transaction,we had over 20 years of experience underwriting, originating, monitoring and servicing consumer loans to the military market and have developed a deep understanding of the military and the military lifestyle. Through this extensive knowledge of our customer base, we developed a proprietary credit scoring model that focuses on the unique characteristics of the military market, as well as traditional credit scoring variables that are currently utilized by MBD when originating loans in this market.   Prior to the Transaction, we had incorporated these proprietary underwriting guidelines and scoring model into our loan origination system to facilitate auto-decisioning and risk-based pricing on our loans.  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. For the loans we purchase, MBD uses our proprietary underwriting guidelines and scoring model when it originates loans.  Under these guidelines, in evaluating the creditworthiness of potential customers, MBD primarily examines the individuals debt to income ratio, discretionary income, military rank, time served in the military and prior credit experience. Loans are limited to amounts that the customer could reasonably be expected to repay from 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 cannot predict when or whether a customer may unexpectedly leave the military or when or whether other events could occur which result in not being repaid prior to a customers departure from the military. A risk in all consumer lending and retail sales financing transactions is the customers unwillingness or inability to repay obligations. An unwillingness to repay is usually evidenced by a consumers historical credit repayment record. An inability to repay occurs after initial credit evaluation and funding and usually results from lower income due to early separation from the military or reduction in rank, major medical expenses, or divorce.  Occasionally, these types of events are so economically severe that the customer files for protection under the bankruptcy laws.  Standard underwriting guidelines are used at the time the customer applies for a loan to help minimize the risk of unwillingness or inability to repay.  These guidelines were developed from past customer credit repayment experience and are periodically revalidated based on current portfolio performance.  MBD uses
these guidelines to predict the relative likelihood of credit applicants repaying their obligation to us.  We purchase loans made to consumers who fit our underwriting guidelines.  The amount and interest rate of the military loan or retail sales finance transaction purchased are set by MBD or the retail merchant based upon our underwriting guidelines considering the estimated credit risk assumed.  13
 
 As a customer service, we consider purchasing a new loan from MBD that includes a refinanced portion if the existing borrower has demonstrated a positive payment history with us and where the transaction creates an economic benefit to the customer after fully underwriting the new loan request to ensure proper debt ratio, credit history and payment performance. We will not purchase refinancings made to cure delinquency or for the sole purpose of creating fee income.  Generally, we purchase refinancing of existing loans when a portion of the new loan proceeds is used to repay the balance of the existing loan and the remaining portion is advanced to the customer.  Approximately 28.9% of the amount of military loans we purchased in the first quarter of fiscal 2010 was refinanced from outstanding loans compared to 26.0% during the first quarter of fiscal 2009. 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 Agreement, we transferred the right to use our underwriting model and system to MBD.  However, we retained ownership of this model and the lending system.  MBD originates these loans directly through its loan production offices and over the internet. Retail Installment Contracts.We purchase retail installment contracts that meet our quality standards and return on investment objectives from approximately 227 active retail merchant locations.  Retail installment contracts are finance receivable notes generated during the purchase of consumer goods by active-duty or career retired U.S. military personnel or U.S. Department of Defense employees.  These customers have demonstrated an apparent need to finance a retail purchase and a willingness to use credit.  We generally acquire these contracts without recourse to the originating merchant.  However, reserve agreements with many retail merchants allow us to withhold funds from the merchant's proceeds to create reserves to be used in the event a customer defaults and the loan is deemed uncollectible.  Retail installment contracts generally have maximum terms of 48 months. Management and Recordkeeping Services We have retained MBD to provide management and recordkeeping services.  MBD services our finance receivables in the same manner as we did prior to the Transaction. For these management and recordkeeping 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 insufficient funds (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 is paid in monthly installments. This fee is 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 income earned on the military loans purchased from MBD, loans previously originated by us and retail installment contracts purchased from retail merchants. We also earn revenues from credit reinsurance premiums. For purposes of the following discussion, revenues means the sum of our finance income and reinsurance premiums.  14
 
  Finance Receivables Our finance receivables are comprised of 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,

        

        

        

        September 30,2009

        

        

        

        2009(dollars in thousands, except average note balance)Finance receivables:Total finance receivables balance

        

        $

        370,443

        

        

        

        $

        364,786Average note balance

        

        $

        2,441

        

        

        

        $

        2,465Total number of notes

        

        

        151,779

        

        

        

        

        148,015Military loans:Total military receivables

        

        $

        323,335

        

        

        

        $

        320,805Percent of total finance receivables

        

        

        87.28

        %

        

        

        

        87.94

        %Average note balance

        

        $

        2,526

        

        

        

        $

        2,534Number of notes

        

        

        128,026

        

        

        

        

        126,613Retail installment contracts:Total retail installment contract receivables

        

        $

        47,108

        

        

        

        $

        43,982Percent of total finance receivables

        

        

        12.72

        %

        

        

        

        12.06

        %Average note balance

        

        $

        1,983

        

        

        

        $

        2,055Number of notes

        

        

        23,753

        

        

        

        

        21,402
   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.  15
 
 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 31,2009

        

        

        

        2008(dollars in thousands)Total finance receivables balance

        

        $

        370,443

        

        

        

        $

        346,957Average total finance receivables (1)

        

        $

        368,238

        

        

        

        $

        334,903Average interest bearing liabilities (1)

        

        $

        279,023

        

        

        

        $

        260,712Total interest income and fees

        

        $

        26,455

        

        

        

        $

        24,343Total interest expense

        

        $

        4,572

        

        

        

        $

        4,276
  _____________________________ (1)  Averages are computed using month-end balances.   16
 
  Results of Operations and Financial Condition  Three Months Ended December 31, 2009 Compared to Three Months Ended December 31, 2008  Total Finance Receivables.Our aggregate finance receivables increased 6.8% to $370.4 million on December 31, 2009 from $347.0 million on December 31, 2008.  Our loan acquisitions decreased to $105 million during the first quarter of 2010 compared to $123 million during the first quarter of fiscal 2009.  We reduced our loan acquisitions during this quarter in an effort to conserve funding resources.  See further discussion in the section entitled Loan Acquisition. Interest Income and Fees.Interest income and fees represented 94.8% of our total revenue for the first quarter of fiscal 2010 compared to 95.5% for the first quarter of fiscal year 2009. Interest income and fees increased to $26.5 million from $24.3 million for the first quarter of fiscal 2009, an increase of $2.1 million or 8.7%.  This increase was primarily due to an increase in aggregate average finance receivables of 9.9%. Interest Expense.Interest expense in the first quarter of 2010 increased to $4.6 million from $4.3 million in the first quarter of fiscal 2009, an increase of $0.3 million or 6.9%.  In January 2009, we started paying our lenders a minimum interest rate per annum of 5.00% for our revolving facility and 6.25% per annum for our amortizing notes.  In addition, we are paying our lenders a quarterly uncommitted availability fee in an amount equal to ten basis points multiplied by the average, aggregate outstanding principal amount of all amortizing notes held by the lenders.  For the first quarter ending December 31, 2009, we paid our lenders $0.2 million in uncommitted availability fees. Provision for Credit Losses.The provision for credit losses in the first quarter of fiscal 2010 decreased to $5.6 million from $7.1 million in the first quarter of fiscal 2009, a decrease of $1.5 million or 21.1%. The decrease is primarily due to positive trends in net charge-offs. During the first quarter of 2010, we saw a decline in our net charge-offs to 6.09% compared to 6.96% during the first quarter of 2009.  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 decreased to 3.23% in first quarter fiscal 2010 from 3.32% in first quarter fiscal 2009.  See further discussion in the section entitled Allowance for Credit Losses. Noninterest Income.  Noninterest income consists of revenue from credit reinsurance premiums, which was $1.5 million in the first quarter of fiscal 2010 compared to $1.1 million in the first quarter fiscal 2009. Noninterest Expense.  Noninterest expenses in the first quarter of fiscal 2010 increased to $11.4 million from $10.3 million in the first quarter of fiscal 2009, an increase of $1.1 million or 11.09%.  The increase was primarily due to the increase in our management and recordkeeping services fees for the quarter.  Management and recordkeeping services fees in the first quarter fiscal 2010 increased by $1.1 million or 13.7% from the first quarter of the fiscal 2009 due to an increase in our aggregate finance receivables for which this fee is based.  The ratio of noninterest expense to average receivables was 3.11% in the first quarter of fiscal 2010 compared to 3.18% in the first quarter of fiscal 2009.  17
 
   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.  As of

        

        

        

        As of

        

        

        

        As ofDecember 31,

        

        

        

        September 30,

        

        

        

        December 31,2009

        

        

        

        2009

        

        

        

        2008(dollars in thousands)Total finance receivables

        

        $

        370,443

        

        

        

        $

        364,786

        

        

        

        $

        346,957Total finance receivables balances 60

        

        $

        11,960

        

        

        

        $

        10,837

        

        

        

        $

        11,509days or more past dueTotal finance receivables balances 60

        

        

        3.23

        %

        

        

        

        2.97

        %

        

        

        

        3.32

        %days or more past due as a percentof total finance receivables
   Credit Loss Experience and Provision for Credit Losses  General.The allowance for credit losses is maintained at an amount that management considers sufficient to cover estimated future losses. We utilize a statistical model based on potential credit risk trends incorporating both historical and prospective factors to estimate losses.  These results and management's judgment are used to estimate future losses and in establishing the current provision and allowance for credit losses. These estimates are influenced by factors outside our control, such as economic conditions, current or future military deployments and completion of military service prior to repayment of loan. There is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term.  See our annual report Item 1A. Risk Factors  If a customer leaves the military prior to repaying the
military loan, there is an increased risk that loan will not be repaid. Military Loans.Our charge-off policy is to charge off finance receivables at 180 days past due or earlier if management deems it appropriate.  Charge-offs occur primarily 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.  18
 
 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 EndedDecember 31,2009

        

        

        

        2008(dollars in thousands)Military loans:Military receivables charged-off

        

        $

        6,200

        

        

        

        $

        6,149Less recoveries

        

        

        709

        

        

        

        

        572Net charge-offs

        

        $

        5,491

        

        

        

        $

        5,577Average military receivables

        

        $

        321,962

        

        

        

        $

        309,661Percentage of net charge-offs to average

        

        

        6.82

        %

        

        

        

        7.21

        %military receivables (1)
  _______________________________ (1) Averages are computed using month-end balances.  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, as specified in the agreement with such retail merchant.  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 charged off 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 EndedDecember 31,2009

        

        

        

        2008(dollars in thousands)Retail installment contracts:Contracts charged-off

        

        $

        184

        

        

        

        $

        324Less recoveries

        

        

        65

        

        

        

        

        73Net charge-offs

        

        $

        119

        

        

        

        $

        251Average retail installment contact

        

        $

        46,276

        

        

        

        $

        25,243receivables (1)Percentage of net charge-offs to

        

        

        1.02

        %

        

        

        

        3.98

        %retail installment contract receivables
  _______________________________ (1) Averages are computed using month-end balances.    19
 
 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 31,2009

        

        

        

        2008(dollars in thousands)Average total finance receivables (1)

        

        $

        368,238

        

        

        

        $

        334,903Provision for credit losses

        

        $

        5,611

        

        

        

        $

        7,137Net charge-offs

        

        $

        5,611

        

        

        

        $

        5,828Net charge-offs as a percentage of

        

        

        6.09

        %

        

        

        

        6.96

        %average total finance receivablesAllowance for credit losses

        

        $

        24,621

        

        

        

        $

        24,291Allowance as a percentage of average

        

        

        6.69

        %

        

        

        

        7.25

        %total finance receivables
  _______________________________ (1)  Averages are computed using month-end balances.   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 losses and recoveries of previous credit losses.  The provision for credit 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; and
 

        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 31,2009

        

        

        

        2008(dollars in thousands)Balance, beginning of period

        

        $

        24,621

        

        

        

        $

        22,982Charge-offs:Finance receivablescharged-off

        

        

        (6,385

        )

        

        

        

        (6,473

        )Recoveries

        

        

        774

        

        

        

        

        645Net charge-offs

        

        

        (5,611

        )

        

        

        

        (5,828

        )Provision for credit losses

        

        

        5,611

        

        

        

        

        7,137Balance, end of period

        

        $

        24,621

        

        

        

        $

        24,291
   20
 
  Loan Acquisition Asset growth is the most important factor in determining our future revenues.  In connection with purchasing the loans, we pay MBD a fee in the amount of $32.00 for each military consumer loan originated by MBD and purchased by us. This fee is adjusted annually on the basis of the annual increase or decrease in MBDs deferred acquisition cost analysis.  Our loan acquisitions decreased to $105 million during the first quarter of 2010 compared to $123 million during the first quarter of fiscal 2009.  We reduced our loan acquisitions during this quarter in an effort to conserve funding resources. 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 31,2009

        

        

        

        2008(dollars in thousands)Total loans acquired:Gross balance

        

        $

        105,221

        

        

        

        $

        122,698Number of finance receivable notes

        

        

        32,733

        

        

        

        

        39,139Average note amount

        

        $

        3,215

        

        

        

        $

        3,135Military loans:Gross balance

        

        $

        93,388

        

        

        

        $

        112,020Number of finance receivable notes

        

        

        28,193

        

        

        

        

        35,130Average note amount

        

        $

        3,312

        

        

        

        $

        3,189Retail installment contracts:Gross balance

        

        $

        11,833

        

        

        

        $

        10,678Number of finance receivable notes

        

        

        4,540

        

        

        

        

        4,009Average note amount

        

        $

        2,606

        

        

        

        $

        2,663
   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 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 2010 was approximately $11.6 million, which was funded from $13.5 million in operating activities and $1.5 million in financing activities.  Cash used in investing activities in the first three months of fiscal 2009 was approximately $33.9 million, which was funded from $14.3 million of cash in operating activities and $14.2 million in financing activities.  The decrease of $22.3
million, when comparing cash used in investing activities in the first three months of fiscal 2010 from first three months of fiscal year 2009, is primarily the result of a 38.9% increase in repayment of finance receivables.  Financing activities primarily consist of borrowing and repayments of debt incurred under our Secured Senior Lending Agreement dated June 12, 2009 (the SSLA).  With ongoing strains in the financial markets, we see liquidity, capital and earnings challenges for some lenders in our credit group that may reduce their ability to participate in our credit facility or may cause a decrease in their willingness to lend at the current levels. During the first quarter, two of our existing SSLA banks were combined.  This could result in less funding, however, the impact is not yet known.  In addition, we have borrowings as of December 31, 2009 of $45.4 million from withdrawing banks who previously participated in the SLA; this capacity needs to be replaced to fund finance receivables. In an effort to conserve our funding resources, we have reduced our loan acquisitions while we continue to pursue alternative
funding sources.  On January 21, 2010, the Securities and Exchange Commission (SEC) declared effective our registration statement on Form S-1 (Amendment No. 1) registering $25 million of investment notes.  We filed our final prospectus and prospectus supplement containing certain pricing information on January 21, 2010.  We began offering these investment notes on January 22, 2010.  21
 
 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 (the SLA).  The Company filed a Form 8-K on June 18, 2009 providing a brief description of the material terms of the SSLA. As of December 31, 2009 we had $248.6 million of senior debt outstanding compared to $242.0 million at September 30, 2009, an increase of $6.6 million or 2.7%.  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.  As of December 31, 2009 we could request up to $12.7 million in additional funds and remain in compliance with the terms of the SSLA.  No lender, however, has any contractual obligation to lend us these additional funds.  As of December 31, 2009 we were in compliance with all loan covenants. As of December 31, 2009, the lenders have indicated a willingness to participate in fundings up to an aggregate of $261.3 million during the next 12 months, including $248.6 million which is currently outstanding.  Included in this amount are borrowings of $45.4 million from other withdrawing banks who had previously participated in the SLA. Senior Indebtedness Table.As of December 31, 2009 and September 30, 2009, the total borrowings and availability under the SSLA and our revolving line of credit from MCFC consisted of the following amounts for the end of the periods presented:  As of

        

        

        

        As ofDecember 31,

        

        

        

        September 30,2009

        

        

        

        2009(dollars in thousands)Revolving credit line:Total facility

        

        $

        32,500

        

        

        

        $

        32,500Balance at end of period

        

        $

        26,122

        

        

        

        $

        20,770Maximum available credit (1)

        

        $

        6,378

        

        

        

        $

        11,730Term notes (2):Total facility

        

        $

        228,834

        

        

        

        $

        236,888Balance at end of period

        

        $

        222,519

        

        

        

        $

        221,187Maximum available credit (1):

        

        $

        6,315

        

        

        

        $

        16,098Total revolving and term notes (2):Total facility

        

        $

        261,334

        

        

        

        $

        269,388Balance at end of period

        

        $

        248,641

        

        

        

        $

        241,957Maximum available credit (1)

        

        $

        12,693

        

        

        

        $

        27,828Credit facility available (3)

        

        $

        12,693

        

        

        

        $

        27,828Percent utilization of the total facility

        

        

        95.14

        %

        

        

        

        89.82

        %
  _____________________________ (1)   Maximum available credit assumes that 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 consolidated net receivable ratio of not more than 80%. (2)

        Includes 48-month amortizing term note.
 (3)   Credit available is based on the existing asset borrowing base and maintaining a senior indebtedness to consolidated net notes receivable ratio of not more than 80%.   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 December 31, 2009, we had outstanding $33.2 million of these notes (with accrued interest), which includes a $0.6 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 9.52%.  See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.  22
 
  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 income from finance receivables is generally not sensitive to fluctuations in market interest rates.  The primary exposure that we face is a change 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 under Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. The following shows the estimated impact on earnings of changes in interest rates on variable rate debt as of December 31, 2009:  (Decrease)/increase:

        

        

        -2%

        

        

        -1%

        

        

        0%

        

        

        +1%

        

        

        +2%Revolving credit line *

        

        $

        

        

        $

        

        

        $

        

        

        $

        261,224

        

        $

        522,448Amortizing term notes *

        

        

        

        

        

        

        

        

        (223,655

        )

        

        636,557

        

        

        1,496,768Investment note

        

        

        (57,849

        )

        

        (29,211

        )

        

        (573

        )

        

        28,065

        

        

        56,704Total impact on interest expense

        

        $

        (57,849

        )

        $

        (29,211

        )

        $

        (224,228

        )

        $

        925,846

        

        $

        2,075,920
  ___________________________ *The revolving credit line and amortizing term notes have a minimum interest rate of 5.0% and 6.25% respectively.  ITEM 4T.Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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 as of the end of the period covered by this quarterly 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, 2009.   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.  23
 
  PART II - OTHER INFORMATION ITEM 1.Legal Proceedings The Company is subject to legal proceedings and claims that arise in the ordinary course of business.  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. ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds. On January 21, 2010, the Securities and Exchange Commission declared our registration statement on Form S-1, as amended (File No. 333-164109) effective.  Pursuant to this registration statement and the accompanying prospectus, we registered and are offering up to $25,000,000 in aggregate principal amount of our investment notes, with a maximum aggregate offering price of $25,000,000, on a continuous basis with an expected termination in January 21, 2012 (Offering).  We commenced the offering of these investment notes on January 22, 2010.  As of February 12, 2010, we had sold 8 investment notes, with an aggregate offering price of $518,505. As described in our prospectus, we are offering the investment notes through our officers and employees directly without an underwriter or agent. As of December 31, 2009, we had not offered or sold any investment notes under this
Offering.  We anticipate the net proceeds of the Offering to be $24.4 million.  We estimate the total expenses of the Offering to be $0.6 million.  24
 
  ITEM 6.Exhibits Exhibit No.

        Description
 3.1

        Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K dated December 24, 2009).
 3.2

        Certificate of Amendment to Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated December 24, 2009).
 3.3

        Amended and Restated By-Laws of the Company (Incorporated by reference to Exhibit 3.3 of the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on February 18, 2003 (the Initial Registration Statement)).
 4.1

        Second Amended and Restated Indenture dated as of December 29, 2009. (Incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 31, 2009 (the "2009 Registration Statement")).
 4.2

        Form of investment note certificate (Incorporated by reference to Exhibit 4.2 of the 2009 Registration Statement).
 4.3

        Secured Senior Lending Agreement dated as of June 12, 2009 among the Company, certain of the Companys subsidiaries, the listed lenders and UMB Bank, N.A., as Agent (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated June 18, 2009).
 4.4

        Negative Pledge Agreement dated as of June 12, 2009, between MidCountry Financial Corp. and UMB Bank, N.A., as agent (Incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated June 18, 2009).
 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).
 10.3

        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 year ended September 30, 2008).
 10.5

        Amended and Restated Non-Recourse Loan Sale and Master Services Agreement dated as of June 12, 2009 among MidCountry Bank through its Pioneer Military Lending Division, Pioneer Funding, listed other affiliated entities of the Company and UMB Bank, N.A. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated June 18, 2009).
 10.6

        Unlimited Continuing Guaranty, dated as of June 12, 2009, from MidCountry Financial Corp. in favor of UMB Bank, N.A., as Agent (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated June 18, 2009).
 21

        Subsidiaries of the Company. (Incorporated by reference to Exhibit 21 of the Companys annual report on Form 10-K for the year ended September 30, 2009).
 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.
  25
 
  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 duly authorized.  Name

        

        Title

        Date/s/ Thomas H. Holcom

        

        Chief Executive Officer,

        February 12, 2010Thomas H. Holcom

        

        President and Director
(Principal Executive Officer)/s/ Laura V. Stack

        

        Chief Financial Officer,

        February 12, 2010Laura V. Stack

        

        Treasurer, Asst. Secretary and
Director (Principal Financial Officer and Principal Accounting Officer)/s/ Joe B. Freeman

        

        Chief Operating Officer and

        February 12, 2010Joe B. Freeman

        

        Director/s/ Robert F. Hatcher

        

        Director

        February 12, 2010Robert F. Hatcher
    26