Back to GetFilings.com
================================================================================
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 period ended: June 30, 2003
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 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. Yes [X] No[ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2003
----- -------------------------------
Common Stock, $100 par value 17,136 shares
PIONEER FINANCIAL SERVICES, INC.
FORM 10-Q
June 30, 2003
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item No. Page
1. CONSOLIDATED FINANCIAL STATEMENTS.........................................3
---------------------------------
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2003 AND SEPTEMBER 30, 2002......3
--------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS ENDED AND SIX MONTHS
ENDED MARCH 31, 2003 AND 2002.............................................4
-----------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE SIX MONTHS ENDED
MARCH 31, 2003 AND YEAR ENDED SEPTEMBER 30, 2002..........................5
------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31,
2003 AND 2002.............................................................6
-------------
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................7
----------------------------------------------------
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.............................................................8
-------------
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...............15
----------------------------------------------------------
PART II
OTHER INFORMATION
1. LEGAL PROCEEDINGS.......................................................15
-----------------
2. CHANGES IN SECURITIES AND USE OF PROCEEDS...............................15
-----------------------------------------
3. DEFAULTS UPON SENIOR SECURITIES.........................................15
-------------------------------
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................15
---------------------------------------------------
5. OTHER INFORMATION.......................................................15
-----------------
6. EXHIBITS AND REPORTS ON FORM 8-K........................................15
--------------------------------
PART I
ITEM 1: Consolidated Financial Statements
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, September 30,
2003 2002
--------------------- --------------------
(unaudited)
Cash $ 1,727,389 $ 1,150,863
Other investments 1,965,456 1,868,509
Finance receivables:
Direct receivables 143,536,831 139,663,612
Retail installment contracts 18,967,068 19,347,567
--------------------- -------------------
Finance receivables before allowance
for credit losses 162,503,899 159,011,179
Allowance for credit losses (9,020,868) (6,220,869)
--------------------- --------------------
Net finance receivables 153,483,031 152,790,310
Furniture and equipment, net 1,276,335 1,577,950
Deferred income taxes 3,252,876 2,331,000
Prepaid and other assets 377,793 278,154
--------------------- --------------------
Total assets $162,082,880 $159,996,786
===================== ====================
LIABILITIES AND STOCKHOLDER'S EQUITY
June 30, September 30,
2003 2002
--------------------- --------------------
(unaudited)
Revolving credit line - banks $ 11,185,000 $ 10,776,000
Revolving credit line - affiliate 1,966,485 1,941,831
Accounts payable 1,463,439 1,240,629
Accrued expenses and other liabilities 9,781,770 9,396,204
Amortizing and single pay term notes 97,041,410 97,925,405
Junior subordinated notes 20,824,175 21,396,438
--------------------- --------------------
Total liabilities 142,262,279 142,676,507
--------------------- --------------------
Stockholder's equity:
Common stock, $100 par value; authorized
20,000 shares; issued and outstanding
17,136 shares 1,713,600 1,713,600
Retained Earnings 18,107,001 15,606,679
--------------------- --------------------
Total stockholder's equity 19,820,601 17,320,279
--------------------- --------------------
Total liabilities and stockholder's equity $ 162,082,880 $ 159,996,786
===================== ====================
See notes to consolidated financial statements.
3
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------------------- ------------------------------------------
2003 2002 2003 2002
------------------ -------------------- ------------------ -------------------
Revenue
Finance income $12,194,349 $11,529,786 $37,377,783 $33,779,168
Insurance premiums
and commissions 1,321,872 1,169,406 4,017,528 3,445,872
Other income, fees
and commissions 312,441 523,656 1,247,008 1,327,243
------------------ -------------------- ------------------ -------------------
Total revenue 13,828,662 13,222,848 42,642,319 38,552,283
Provision for credit losses 3,007,663 2,885,701 9,430,573 7,610,574
Interest expense 2,296,585 2,376,509 7,129,507 7,195,256
------------------ -------------------- ------------------ -------------------
Net Revenue 8,524,414 7,960,638 26,082,239 23,746,453
Operating Expenses
Employment costs 4,577,550 4,392,845 13,991,480 12,757,688
Facilities 1,173,569 1,421,321 3,700,598 4,364,119
Marketing 510,041 343,255 1,331,576 1,151,540
Professional fees 343,571 387,459 1,575,142 1,244,808
Other 240,922 216,973 906,266 822,167
------------------ -------------------- ------------------ -------------------
Total operating expenses 6,845,653 6,761,853 21,505,062 20,340,322
------------------ -------------------- ------------------ -------------------
Income before income taxes 1,678,761 1,198,785 4,577,177 3,406,131
Provision for income taxes 574,696 431,563 1,657,708 1,232,738
------------------ -------------------- ------------------ -------------------
Net Income $1,104,065 $ 767,222 $ 2,919,469 $ 2,173,393
================== ==================== ================== ===================
Net income per share, basic and
diluted $ 64.43 $ 44.77 $ 170.37 $ 126.83
================== ==================== ================== ===================
See notes to consolidated financial statements.
4
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Nine Months Ended Year Ended
June 30, September 30,
2003 2002
------------------------- -------------------------
(unaudited)
Retained earnings, beginning of period $15,606,679 $13,147,497
Net income 2,919,469 2,864,104
Dividends paid ($24.46 and $23.63 per share) (419,147) (404,922)
------------------------- -------------------------
Retained earnings, end of period $18,107,001 $15,606,679
========================= =========================
See notes to consolidated financial statements.
5
PIONEER FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended June 30,
2003 2002
------------------------ ------------------------
Cash Flows From Operating Activities:
Net income $ 2,919,469 $ 2,093,184
Items not requiring (providing) cash:
Provision for credit losses on
finance receivables 9,430,573 7,610,573
Depreciation and amortization 555,449 663,323
Compounded interest added to
junior subordinated debt 945,952 896,477
Deferred income taxes (921,876) (564,325)
Loss on disposal/donation of
equipment 25,062 9,690
Changes in:
Accounts payable and accrued
expenses (147,413) 931,660
Other (99,639) 186,718
------------------------ ------------------------
Net cash provided by operating
activities 12,707,577 11,827,300
------------------------ ------------------------
Cash Flows From Investing Activities:
Loans originated (87,847,338) (91,140,670)
Loans purchased (11,807,793) (11,720,226)
Loans repaid 89,378,621 81,181,196
Capital expenditures (270,902) (332,406)
Securities purchased (317,827) (427,612)
Securities matured 212,884 289,123
------------------------ ------------------------
Net cash used in investing activities (10,652,355) (22,150,595)
------------------------ ------------------------
Cash Flows From Financing Activities:
Net borrowing under lines of credit 433,654 1,078,346
Proceeds from borrowings 32,367,594 40,015,868
Repayment of borrowings (33,860,797) (29,883,840)
Dividends paid (419,147) (199,977)
------------------------ ------------------------
Net cash (used in) or provided by
financing activities (1,478,696) 11,010,397
------------------------ ------------------------
Net Increase in Cash 576,526 687,102
Cash, Beginning of period 1,150,863 2,428,899
------------------------ ------------------------
Cash, End of period $ 1,727,389 $ 3,116,001
======================== ========================
Additional Cash Flow Information:
Interest paid $ 7,230,547 $ 7,260,469
Income taxes paid $ 2,718,506 $ 1,817,331
See notes to consolidated financial statements.
6
PIONEER FINANCIAL SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and September 30, 2002
(Unaudited)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pioneer Financial Services, Inc., a Missouri corporation (the "Company"), is a
specialized financial services company which originates and services consumer
loans and provides other products and financial services exclusively to active
duty or retired career military personnel or Department of Defense employees.
The Company's revenues are primarily earned from the making of direct loans and
the purchase of retail installment contracts. The Company also earns revenues
from commissions from the sale of credit-related insurance placed with
non-related insurance companies and from reinsurance premiums on credit accident
and health insurance. Additionally, the Company sells non-loan related products
and services, including roadside assistance programs and discount healthcare
cards.
The accompanying consolidated financial statements include the accounts of
Pioneer Financial Services, Inc. (a wholly-owned subsidiary of Pioneer Financial
Industries, Inc.) and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated from the
accompanying consolidated financial statements. Certain information and note
disclosures normally included in the Company's annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the Company's annual consolidated financial
statements filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Information with respect to June 30, 2003 and 2002, and the periods then ended,
have not been audited by the Company's 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 of the Company. The results of operations for the three months and
nine months ended June 30, 2003 and 2002 are not necessarily indicative of
results to be expected for the entire fiscal year. The condensed consolidated
balance sheet as of September 30, 2002 has been derived from the Company's
audited consolidated balance sheet.
NOTE 2: NET INCOME PER SHARE
Net income per share is computed based upon the weighted-average common shares
outstanding of 17,136 during each period. There are no potentially dilutive
securities issued and outstanding.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion set forth below, as well as other portions of this Quarterly
Report, contains forward-looking statements within the meaning of federal
securities law. Words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," "continue," "predict," or other similar words, identify
forward-looking statements. Forward-looking statements 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 registration statement on Form S-1, as amended (No. 333-103293). 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.
7
Overview
We originate and service consumer loans and provide other financial
products and services on a worldwide basis, exclusively to active duty or
retired career military personnel or Department of Defense employees. We make
direct loans to our customers through our network of retail sales offices and
over the Internet. We also purchase retail installment sales contracts from
retail merchants who sell consumer goods to active duty or retired career
military personnel or Department of Defense employees. We refer to these
consumer loans and retail installment contracts as finance receivables.
Our finance receivables are generally unsecured with fixed interest
rates and typically have a maturity of less than 48 months. During the first
nine months of fiscal 2003, the size of our average finance receivable at
origination was approximately $3,129. A large portion of our customers are
unable to obtain traditional financing from banks, credit unions or savings and
loan associations due to factors such as their age, likelihood of relocation and
lack of credit history.
Further improvement of our profitability is dependent in large part
upon the growth in our outstanding finance receivables, the maintenance of loan
quality, acceptable levels of borrowing costs and operating expenses and the
ongoing introduction of innovative new products and services to our customer
base. Since September 30, 1998, finance receivables have increased at a 15.2%
annual compounded rate from $90.3 million to $159.0 million at September 30,
2002. The increase reflects the higher volume of loans generated through our
existing retail offices and through the Internet and the addition of new retail
offices to our network. To support our growth, we continuously seek to introduce
new products and services to our customer base. In addition to new insurance and
savings products we introduced to selected markets in the third and fourth
quarters of fiscal 2002, we sell discount health care cards, roadside assistance
program and offer an array of free services to our customers.
Finance Receivables
Our finance receivables are comprised of direct loans and retail installment
contracts. The following table sets forth certain information about the
components of our finance receivables as of the ends of the periods presented:
As of, and For the Nine As of, and For the Years
Months Ended, Ended
June 30, September 30,
-------------------------------------------------------------------
2003 2002 2002 2001
-------------------------------------------------------------------
(dollars in thousands)
Total Finance Receivables:
Finance receivables balance $162,504 $152,597 $159,011 $137,314
Average note balance 2,067 1,901 1,946 1,753
Total finance income 37,378 33,779 45,884 38,965
Total number of notes 78,624 80,290 81,726 78,316
Direct Loans:
Notes receivable balance $143,537 $133,381 $139,663 $117,098
Percent of finance receivables 88.33% 87.41% 87.83% 85.28%
Average note balance 2,071 1,918 1,959 1,767
Number of notes 69,292 69,528 71,302 66,264
Retail Installment Contracts:
Notes receivable balance $18,967 $19,216 $19,348 $20,216
Percent of finance receivables 11.67% 12.59% 12.17% 14.72%
Average note balance 2,032 1,786 1,856 1,677
Number of notes 9,332 10,762 10,424 12,052
8
Net Interest Margin
The principal component of our profitability is our net interest
margin, which is the difference between the interest we earn on finance
receivables and the interest we pay on borrowed funds. In some states, statutes
regulate the interest rates that we may charge our customers while in other
states competitive market conditions establish the interest rates we may charge.
Differences also exist in the interest rates we earn on the various components
of our finance receivable portfolio.
Unlike our interest income, our interest expense is sensitive to
general market interest rate fluctuations. These general market fluctuations
directly impact our interest expense. Our general inability to increase the
interest rates earned on new and existing finance receivables restricts our
ability to react to increases in our interest expense. Accordingly, increases in
market interest rates generally will narrow our interest rate spread and lower
our profitability, while decreases in market interest rates generally will widen
our interest rate spread and increase our profitability.
The following table presents important data relating to our net
interest margin as of, and for the three months ended, June 30, 2003 and 2002
and as of, and for nine months ended, June 30, 2003 and 2002.
As of, and For the Three As of, and For the Nine
Months Ended, Months Ended,
June 30, June 30,
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
(dollars in thousands)
Finance receivables balance $162,504 $152,597 $162,504 $152,597
Average finance receivables (1) $162,222 $150,051 $164,518 $147,223
Average interest bearing
liabilities $132,042 $124,516 $131,700 $124,711
Total finance income $ 12,194 $ 11,530 $ 37,378 $ 33,779
Total interest expense $ 2,297 $ 2,377 $ 7,130 $ 7,195
- ---------------------
(1) Averages are computed using month-end balances.
Results of Operations
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Our aggregate finance receivables decreased .8% during third quarter
of fiscal 2003 to $162.5 million on June 30, 2003 from $163.9 million on March
31, 2003. This decline is due primarily to military deployments to the
Middle-East conflict, which affected some of our retail sales offices. While we
experienced lower loan originations in April and May of 2003 as compared to the
same periods in 2002, our June 2003 results provided for a 24% increase in
demand from May 2003. Although loan originations increased in June 2003, we
cannot predict what will occur in future quarters.
Total revenues during the third quarter of fiscal 2003 increased to
$13.8 million from $13.2 million in the third quarter of fiscal 2002, an
increase of $.6 million or 4.6%.
Finance income during the third quarter of fiscal 2003 increased to
$12.2 million from $11.5 million in the third quarter of fiscal 2002, an
increase of $.7 million or 5.8%. This increase is attributable to the 8.1%
increase in our average finance receivable portfolio for the three months ended
June 30, 2003 compared to the three months ended June 30, 2002.
Insurance premium and commission revenues in the third quarter of
fiscal 2003 increased to $1.3 million from $1.2 million in the third quarter of
fiscal 2002, an increase of $.1 million or 13.0%. This increase results
primarily from increased sales of credit insurance products.
9
The provision for credit losses in the third quarter of fiscal 2003
increased to $3.0 million from $2.9 million in the third quarter of fiscal 2002,
an increase of $.1 million or 4.2%. Net charge-offs of finance receivables in
the third quarter of fiscal 2003 decreased to $2.2 million from $2.3 million in
the third quarter of fiscal 2002, a decrease of $.1 million or 3.5%. Net
charge-offs as a percentage of average finance receivables balance in the third
quarter of fiscal 2003 was 5.4% compared to 6.1% in the third quarter of fiscal
2002. Our allowance for credit losses at June 30, 2003 increased to $9.0 million
from $8.2 million at March 31, 2003, an increase of $.8 million, or 9.7%. The
increase in the provision and allowance for credit losses reflects, among other
things, the 8.1% increase in our average finance receivables portfolio for the
three months ended June 30, 2003 compared to the three months ended June 30,
2002, as well as our concern regarding uncertainty surrounding the Middle-East
hostilities.
Interest expense in the third quarter of fiscal 2003 decreased to $2.3
million from $2.4 million in the third quarter of fiscal 2002, a decrease of $.1
million or 3.4%. While our average interest bearing liabilities for the three
months ended June 30, 2003 increased by $7.5 million or 6.0% compared to the
three months ended June 30, 2002, this increase was offset by a decrease in
interest rates. The weighted average interest rate declined to 7.3% in the third
quarter of fiscal 2003 from 7.7% in the third quarter of fiscal 2002.
Operating expenses in the third quarter of fiscal 2003 remained
constant at $6.8 million. However, during this quarter we experienced a decline
of $.2 million in facilities costs due to a change in our data services provider
for our facilities throughout the United States. This was somewhat offset by an
increase in our marketing costs due to new promotional initiatives to build
brand recognition within our marketplace and to support our customer financial
educational efforts which were developed in the past year along with a slight
increase in employee costs.
We generated income before income taxes of $1.7 million and net income
of $1.1 million during the third quarter of fiscal 2003 compared to income
before income taxes of $1.2 million and net income of $.8 million during the
third quarter of fiscal 2002.
Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002
Our aggregate finance receivables grew 2.2% during the first nine
months of fiscal 2003 to $162.5 million on June 30, 2003 from $159.0 on
September 30, 2002. This growth is due primarily to an increase in finance
receivables originated via the Internet, which grew by more than $7.5 million or
16.0%. The Internet is a lower-cost method of loan origination and loan proceeds
distribution, and we plan to increase this distribution channel in the future.
Total revenues in the first nine months of fiscal 2003 increased to
$42.6 million compared to $38.6 million in the first nine months of fiscal 2002,
an increase of $4.0 million or 10.6%.
Finance income in the first nine months of fiscal 2003 increased to
$37.4 million from $33.8 million in first nine months of fiscal 2002 an increase
of $3.6 million or 10.7%. This increase is attributable to the 11.7% increase in
our average finance receivable portfolio for the nine months ended June 30, 2003
compared to the nine months ended June 30, 2002.
Insurance premium and commission revenues in the first nine months of
fiscal 2003 increased to $4.0 million from $3.4 million in the first nine months
of fiscal 2002, an increase of $.6 million or 16.6%. This is due to the growth
in our finance receivables as well as the introduction of enhanced theft
coverage for a credit insurance product in June 2002.
The provision for credit losses in the first nine months of fiscal
2003 increased to $9.4 million from $7.6 million in the first nine months of
fiscal 2002, an increase of $1.8 million or 23.9%. Net charge-offs of finance
receivables in the first nine months of fiscal 2003 increased to $6.6 million
from $6.4 million in the first nine months of fiscal 2002, an increase of $.2
million or 3.4%. Net charge-offs were 5.4% of the average finance receivable
balance for the nine months ended June 30, 2003 compared to 5.8% for the nine
months ended June 30, 2002. We increased our allowance for credit losses during
the nine months ended June 30, 2003 by $2.8 million compared to $1.2 million for
the nine months ended June 30, 2002. These increases are attributable, in part,
to an 11.7% growth in our average finance receivable portfolio for the nine
months ended June 30, 2003 compared to nine months ended June 30, 2002, and
uncertainty regarding the Middle-East hostilities.
Interest expense for the nine months ended June 30, 2003 decreased to
$7.1 million from $7.2 million for the nine months ended June 30, 2002, a
decrease of $.1 million or .9%. Our average interest bearing liabilities for the
same period increased by $7.0 million or 5.6%. However, this increase was offset
by decreased interest rates.
10
The weighted average interest rate on our debt declined to 7.2% for the nine
months ended June 30, 2003 from 7.7% for the nine months ended June 30, 2002.
Operating expenses for the first nine months of fiscal 2003 increased
to $21.5 million from $20.3 million for the first nine months of fiscal 2002, an
increase of $1.2 million or 5.7%. This increase is due primarily to increases in
employment costs. Employment costs increased by $1.2 million as we expanded the
software development team that is developing a comprehensive enterprise-wide
software application and continued efforts to build infrastructure, primarily in
our Internet distribution facility, audit and compliance, collections and
product development teams. In addition, we experienced savings in our facilities
costs due to our new data service provider, which was partially offset by an
increase in marketing costs.
We generated income before income taxes of $4.6 million and net income
of $2.9 million for the first nine months of fiscal 2003 compared to income
before income taxes of $3.4 million and net income of $2.2 million for the first
nine months of fiscal 2002.
Delinquency Experience
Our customers are required to make monthly payments of interest and
principal. We analyze our delinquencies on a recency delinquency basis. 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 60 days after the last full
payment. We rarely grant extensions or deferments, or allow account revision,
rewriting, renewal or rescheduling in order to bring otherwise delinquent
accounts current.
The following sets forth our delinquency experience for accounts for
which payments are 60 days or more past due and allowance for credit losses for
our finance receivables:
As of As of
June 30, September 30, September 30,
2003 2002 2001
------------------------------------------------------
(dollars in thousands)
Finance receivables balances $162,504 $159,011 $137,314
Finance receivables balances 60 days or more past due $ 5,291 $ 5,580 $ 6,369
Finance receivables balances 60 days or more past due
as a percent of finance receivables 3.26% 3.51% 4.64%
In September of 2001, we experienced an increase in delinquencies due
to the issues surrounding the September 11th tragedy. In an effort to be
sensitive to the activities of the military, we limited collection efforts
during the remainder of the month of September. As a result, we ended that year
with a delinquency amount in excess of our historical rates.
Credit Loss Experience and Provision for Credit Losses
Our provisions for credit losses are charged to income in amounts
sufficient to maintain our allowance for credit losses at a level considered
adequate to cover the probable losses inherent in our existing finance
receivable portfolio. Historical credit loss experience, delinquency of finance
receivables, the value of underlying collateral, current economic conditions,
current military activities and management's judgment are factors used in
assessing the overall adequacy of the allowance and corresponding provision for
credit losses. Our allowance for credit losses is developed primarily for our
direct finance receivable portfolio as our retail installment contracts are
generally covered by dealer reserves.
Our charge-off policy is based on an account-by-account review of
delinquent receivables on a recency basis. Finance receivables are charged-off
when management deems them to be uncollectable through our normal collection
procedures or they become 270 days past due. The 270-day limit is required by
our senior lending agreement. Approximately one-third of our charge-offs occur
before an account is 180 days delinquent. Our primary source of charge-offs is
when a customer leaves the military prior to repaying the finance receivable. We
generally structure our loans so that the entire amount is repaid prior to a
customer's estimated separation from the
11
military, and the number of our customers who depart the military early has
remained relatively constant over time. We, however, cannot predict when or
whether a customer may depart from the military early. Accordingly, we cannot
implement any policy or procedure to ensure that we are repaid in full prior to
our customer leaving the military. Our second greatest source of loss is when a
customer declares bankruptcy.
The following table(s) present information about our credit loss
experience and allowance for credit losses.
As of, and For the Three As of, and For the Nine
Months Ended, Months Ended,
June 30, June 30,
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
(dollars in thousands)
Direct loans:
Loans charged-off $ 2,471 $ 2,488 $ 7,462 $ 6,970
Less recoveries 256 238 760 632
----------------- ---------------- --------------- ----------------
Net charge-offs $ 2,215 $ 2,250 $ 6,702 $ 6,338
================= ================ =============== ================
Average monthly balance of direct loans
outstanding (1) $143,135 $130,614 $145,392 $127,679
Percentage of net charge-offs to average
monthly balance outstanding (2) 6.19% 6.89% 6.15% 6.62%
- -------------------
(1) Averages are computed using month-end balances.
(2) June 30, 2003 and 2002 are annualized for comparison purpose.
As of, and For the Three As of, and For the Nine
Months Ended, Months Ended,
June 30, June 30,
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
(dollars in thousands)
Retail installment contracts:
Loans charged-off $ 14 $ 59 $ 71 $ 143
Less recoveries 21 23 142 70
----------------- ---------------- --------------- ----------------
Net charge-offs $ (7) $ 36 $ (71) $ 73
================= ================ =============== ================
Average monthly balance of retail
contracts outstanding (1) $19,088 $19,436 $19,126 $19,544
Percentage of net charge-offs to average
monthly balance outstanding (2) -0.15% 0.74% -0.49% 0.50%
- --------------------
(1) Averages are computed using month-end balances.
(2) June 30, 2003 and 2002 are annualized for comparison purpose.
12
As of, and For the Three As of, and For the Nine
Months Ended, Months Ended,
June 30, June 30,
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
(dollars in thousands)
Average total finance receivables (1) $162,222 $150,051 $164,518 $147,223
Provision for credit losses $ 3,008 $ 2,886 $ 9,431 $ 7,611
Net charge-offs $ 2,208 $ 2,286 $ 6,631 $ 6,411
Net charge-offs as a percentage of
average finance receivables (2) 5.44% 6.09% 5.37% 5.81%
Allowance for credit losses $ 9,021 $ 5,621 $ 9,021 $ 5,621
Allowance as a percentage of average
finance receivables 5.56% 3.75% 5.48% 3.82%
- ---------------------------
(1) Averages are computed using month-end balances.
(2) June 30, 2003 and 2002 are annualized for comparison purpose.
The following table sets forth changes in the components of our
allowance for credit losses:
As of, and For the Three As of, and For the Nine
Months Ended, Months Ended,
June 30, June 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
(dollars in thousands)
Balance beginning of period $ 8,221 $ 5,021 $ 6,221 $ 4,421
Additions:
Provision for credit losses 3,008 2,886 9,431 7,611
Recoveries 277 261 902 702
Deductions:
Charge-offs (2,485) (2,547) (7,533) (7,113)
----------------- ---------------- --------------- ----------------
Balance end of period $ 9,021 $ 5,621 $ 9,021 $ 5,621
================= ================ =============== ================
Loan Origination
Our loan origination is the most important factor in determining our
future revenues. Our loan origination for the first nine months of fiscal 2003
decreased to $138.9 million from $141.6 million for the first nine months of
fiscal 2002, a decrease of $2.7 million or 2.0%. Our loan origination for the
three months ended June 30, 2003 decreased to $42.9 million from $49.8 million
loan origination for the three months ended June 30, 2002, a decrease of $6.9
million or 13.9%. This decline is due primarily to military deployments to the
Middle-East conflict, which has somewhat affected demand for our loans. We
experienced some increase in demand in June 2003, however we cannot predict what
will occur in future quarters.
13
As of, and For the Three As of, and For the Nine
Months Ended, Months Ended,
June 30, June 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
(dollars in thousands, except for average note amounts)
Total Loan Origination:
Gross Balance $42,932 $49,846 $138,944 $141,598
Number of Notes 12,855 17,566 44,408 50,421
Average note amount $ 3,340 $ 2,838 $ 3,129 $ 2,808
Direct Loans:
Gross Balance $39,103 $45,810 $127,136 $129,878
Number of Notes 11,758 16,325 40,923 46,798
Average note amount $ 3,326 $ 2,806 $ 3,107 $ 2,775
Retail Installment Contracts:
Gross Balance $ 3,829 $ 4,036 $ 11,808 $ 11,720
Number of Notes 1,097 1,241 3,485 3,623
Average note amount $ 3,490 $ 3,252 $ 3,388 $ 3,235
Liquidity and Capital Resources
A relatively high ratio of borrowings to invested capital is customary
in consumer finance activities due to the quality and term of the assets
employed. Our principal use of cash is to make new loans and purchase retail
installment contracts. We use our borrowings to fund the difference between the
cash used to make new loans and purchase retail installment contracts, and the
cash generated from loan repayments. This amount is generally our cash used in
investing activities. Cash used in investing activities in the first nine months
of fiscal 2003 was approximately $10.5 million, compared to $22.2 million in the
first nine months of fiscal 2002. This decrease reflects the decline in our loan
originations.
Investing activities in the first nine months of fiscal 2003 were
primarily funded by $13.6 million from operating activities. Financing
activities consist of borrowings under our senior lending agreement, an
unsecured revolving credit line from our parent and sales of our junior
subordinated debentures.
Senior Indebtedness
Our senior lending agreement 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 June 30, 2003, we could request up to $12.6 million in additional funds and
remain in compliance with the terms of our senior lending agreement. No bank,
however, has any contractual obligation to lend us these additional funds. The
Company is in compliance with all loan covenants at June 30, 2003.
14
As of June 30, 2003 and 2002 and September 30, 2002 and 2001, the
total borrowings and availability under our senior lending agreement and our
revolving line of credit from our parent company consisted of:
As of June 30, As of September 31,
------------------------------ --------------------------
2003 2002 2002 2001
---------- ---------- ---------- ----------
Revolving Credit Line (1):
Total facility $ 31,000 $ 27,000 $ 27,000 $ 23,000
Balance at end of period $ 13,151 $ 13,388 $ 12,718 $ 12,310
Maximum available credit $ 17,849 $ 13,612 $ 14,282 $ 10,690
Term Notes (2):
Total facility $141,269 $126,789 $ 125,470 $123,432
Balance at end of period $ 97,041 $ 94,826 $ 97,925 $ 83,847
Maximum available credit $ 44,228 $ 31,963 $ 27,545 $ 39,585
Total Revolving and Term
Notes (1)(2):
Total facility $172,269 $153,789 $ 152,470 $146,432
Balance at end of period $110,192 $108,214 $ 110,643 $ 96,157
Maximum available credit(3) $ 62,077 $ 45,575 $ 41,827 $ 50,275
Credit facility available (4) $ 12,594 $ 9,366 $ 11,589 $ 10,157
Percent utilization of the
total facility 63.97% 70.37% 72.57% 65.67%
- ----------------------
(1) Includes revolving credit line from our parent.
(2) Includes amortizing notes and single payment term notes.
(3) 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%.
(4) Credit facility available based on the existing asset borrowing base
and maintaining a Senior Indebtedness to Net Receivable Ratio of not
more than 80%.
Recent Developments
On May 13, 2003, the SEC declared effective our registration statement
registering up to $25,000,000 of our junior subordinated debentures. We intend
to sell these debentures in principal amounts ranging from $1,000 to $250,000 at
rates set at the time the debenture is issued to residents of Missouri, Kansas
and Illinois on a continuous basis until May 2005. The sale of these debentures
will provide us with additional liquidity and capital resources. Issuing
debentures increases the amount we can borrow under our senior lending
agreement. To finance the growth of our finance receivables portfolio, we intend
to borrow additional funds under our senior lending agreement from time to time
as we sell additional debentures.
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.
15
ITEM 4. Controls and Procedures
Our management, under the supervision and with the participation of
our principal executive officer and principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this Quarterly Report on Form
10-Q. Based on this evaluation, our principal executive officer and principal
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On May 13, 2003, the Securities and Exchange Commission declared our
registration statement on Form S-1, as amended (File No. 333-103293), 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 junior subordinated debentures, with a maximum aggregate offering price of
$25,000,000 on a continuous basis with an expected termination in May 2005. We
commenced the offering of these junior subordinated debentures on May 20, 2003.
We are currently offering the debentures through our officers and employees
directly without an underwriter or agent. As of June 30, 2003, we had sold 12
debentures in an approximate aggregate principal amount of $220,000. From July 1, 2003,
through August 8, 2003, we sold an additional 24 debentures in an approximate aggregate
principal amount of $580,000. As of August 8, 2003, the aggregate proceeds
received from the sale of debentures was $800,000. Costs incurred in connection
with the preparation of the initial registration statement on Form S-1 were
approximately $315,000. Subsequent to approval of the registration statement by
the Securities and Exchange Commission on May 13, 2003, our expenses incurred in
connection with the issuance and distribution of the junior subordinated
debentures through June 30, 2003, were approximately $35,000. From July 1, 2003,
through August 8, 2003, we incurred additional expenses of approximately
$20,000. Net proceeds from the offering through August 8, 2003, were
$430,000.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Rule 15d-15(e)
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 15d-15(e)
(b) Reports on Form 8-K
None.
16
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.
August 13, 2003 /s/ William D. Sullivan
- ------------------ --------------------------------------------
Date William D. Sullivan
Chief Executive Officer
(Principal Executive Officer)
August 13, 2003 /s/ Randall J. Opliger
- ------------------ --------------------------------------------
Date Randall J. Opliger
Chief Financial Officer
(Principal Financial Officer)
17