ENOVA INTERNATIONAL, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
The following discussion of financial condition, results of operations, liquidity and capital resources and certain factors that may affect future results, including economic and industry-wide factors, ofEnova International, Inc. and its subsidiaries should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as with Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.
COMPANY OVERVIEW
We are a leading technology and analytics company focused on providing online financial services. In 2021, we extended approximately$3.1 billion in credit or financing to borrowers and for the nine months endedSeptember 30, 2022 , we extended approximately$3.3 billion in credit or financing to borrowers. As ofSeptember 30, 2022 , we offered or arranged loans or draws on lines of credit to consumers in 37 states inthe United States andBrazil . We also offered financing to small businesses in all 50 states andWashington D.C. inthe United States . We use our proprietary technology, analytics and customer service capabilities to quickly evaluate, underwrite and fund loans or provide financing, allowing us to offer consumers and small businesses credit or financing when and how they want it. Our customers include the large and growing number of consumers who and small businesses which have bank accounts but use alternative financial services because of their limited access to more traditional credit from banks, credit card companies and other lenders. We were an early entrant into online lending, launching our online business in 2004, and throughSeptember 30, 2022 , we have completed approximately 57.2 million customer transactions and collected more than 61 terabytes of currently accessible customer behavior data since launch, allowing us to better analyze and underwrite our specific customer base. We have significantly diversified our business over the past several years having expanded the markets we serve and the financing products we offer. These financing products include installment loans and receivables purchase agreements ("RPAs") and line of credit accounts. We believe our customers highly value our products and services as an important component of their personal or business finances because our products are convenient, quick and often less expensive than other available alternatives. We attribute the success of our business to our advanced and innovative technology systems, the proprietary analytical models we use to predict the performance of loans and finance receivables, our sophisticated customer acquisition programs, our dedication to customer service and our talented employees. We have developed proprietary underwriting systems based on data we have collected over our more than 18 years of experience. These systems employ advanced risk analytics, including machine learning and artificial intelligence, to decide whether to approve financing transactions, to structure the amount and terms of the financings we offer pursuant to jurisdiction-specific regulations and to provide customers with their funds quickly and efficiently. Our systems closely monitor collection and portfolio performance data that we use to continually refine machine learning-enabled analytical models and statistical measures used in making our credit, purchase, marketing and collection decisions. Approximately 90% of models used in our analytical environment are machine learning-enabled. Our flexible and scalable technology platform allows us to process and complete customers' transactions quickly and efficiently. In 2021, we processed approximately 2.2 million transactions, and we continue to grow our loans and finance receivable portfolios and increase the number of customers we serve through desktop, tablet and mobile platforms. Our highly customizable technology platform allows us to efficiently develop and deploy new products to adapt to evolving regulatory requirements and consumer preference, and to enter new markets quickly. In 2012, we launched a new product inthe United States designed to serve near-prime customers. InJune 2014 , we launched our business inBrazil , where we arrange financing for borrowers through a third-party lender. In addition, inJuly 2014 , we introduced a new line of credit product inthe United States to serve the needs of small businesses. InJune 2015 , we further expanded our product offering by acquiring certain assets of a company that provides financing and installment loans to small businesses by offering RPAs. InOctober 2020 , we acquired, through a merger,On Deck Capital Inc. ("OnDeck"), a small business lending company offering lending and funding solutions to small businesses primarily in theU.S. to expand our small business offerings. InMarch 2021 , we acquiredPangea Universal Holdings ("Pangea"), which provides mobile international money transfer services to customers in theU.S with a focus onLatin America andAsia . These new products have allowed us to further diversify our product offerings and customer base. We have been able to consistently acquire new customers and successfully generate repeat business from returning customers when they need financing. We believe our customers are loyal to us because they are satisfied with our products and services. We acquire new customers from a variety of sources, including visits to our own websites, mobile sites or applications, and through direct marketing, 22 -------------------------------------------------------------------------------- affiliate marketing, lead providers and relationships with other lenders. We believe that the online convenience of our products and our 24/7 availability to accept applications with quick approval decisions are important to our customers. Once a potential customer submits an application, we quickly provide a credit or purchase decision. If a loan or financing is approved, we or our lending partner typically fund the loan or financing the next business day or, in some cases, the same day. During the entire process, from application through payment, we provide access to our well-trained customer service team. All of our operations, from customer acquisition through collections, are structured to build customer satisfaction and loyalty, in the event that a customer has a need for our products in the future. We have developed a series of sophisticated proprietary scoring models to support our various products. We believe that these models are an integral component of our operations and allow us to complete a high volume of customer transactions while actively managing risk and the related credit quality of our loan and finance receivable portfolios. We believe our successful application of these technological innovations differentiates our capabilities relative to competing platforms as evidenced by our history of strong growth and stable credit quality. PRODUCTS AND SERVICES Our online financing products and services provide customers with a deposit of funds to their bank account in exchange for a commitment to repay the amount deposited plus fees, interest and/or revenue on the receivables purchased. We originate, arrange, guarantee or purchase installment loans, line of credit accounts and receivables purchase agreements ("RPAs") to consumers and small businesses. We have one reportable segment that includes all of our online financial services.
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Installment loans. Our installment loans are either written directly by us, purchased as part of our Bank Programs as discussed below, or are those that we arrange and guarantee as part of our CSO program as discussed below. We offer, or arrange through our CSO program, unsecured consumer installment loan products in 37 states inthe United States and small business installment loans in 47 states and inWashington D.C. Internationally, we also offer or arrange unsecured consumer installment loan products inBrazil . Terms for our installment loan products range between two and 60 months. Loans may be repaid early at any time with no additional prepayment charges.
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Line of credit accounts. We directly offer, or purchase a participation interest in receivables through our Bank Programs, new consumer line of credit accounts in 31 states (and continue to service existing line of credit accounts in two additional states) inthe United States and business line of credit accounts in 47 states and inWashington D.C. inthe United States , which allow customers to draw on their unsecured line of credit in increments of their choosing up to their credit limit. Customers may pay off their account balance in full at any time or make required minimum payments in accordance with the terms of the line of credit account. As long as the customer's account is in good standing and has credit available, customers may continue to borrow on their line of credit.
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Receivables purchase agreements. Under RPAs, small businesses receive funds in exchange for a portion of the business's future receivables at an agreed upon discount. In contrast, lending is a commitment to repay principal and interest and/or fees. A small business customer who enters into an RPA commits to delivering a percentage of its receivables through ACH or wire debits or by splitting credit card receipts until all purchased receivables are delivered. We offer RPAs in all 50 states and inWashington D.C. inthe United States .
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CSO programs. We currently operate a credit services organization or credit
access business ("CSO") program in Texas . Through our CSO program, we provide
services related to third-party lenders' installment consumer loan products by
acting as a credit services organization or credit access business on behalf of
consumers in accordance with applicable state laws. Services offered under our
CSO program include credit-related services such as arranging loans with
independent third-party lenders and assisting in the preparation of loan
applications and loan documents ("CSO loans"). When a consumer executes an
agreement with us under our CSO program, we agree, for a fee payable to us by
the consumer, to provide certain services, one of which is to guarantee the
consumer's obligation to repay the loan received by the consumer from the
third-party lender if the consumer fails to do so. For CSO loans, each lender is
responsible for providing the criteria by which the consumer's application is
underwritten and, if approved, determining the amount of the consumer loan. We,
in turn, are responsible for assessing whether or not we will guarantee such
loan. The guarantee represents an obligation to purchase the loan, which has
terms of up to six months, if it goes into default.
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Bank program. We operate programs with certain banks to provide marketing services and loan servicing for near-prime unsecured consumer installment loans and, beginning inJanuary 2021 , line of credit accounts. Under the programs, we receive marketing and servicing fees while the bank receives an origination fee. The bank has the ability to sell and we have the option, but not the requirement, to purchase the loans the bank originates and, in the case of line of credit accounts, a participation interest in the receivables from draws on those accounts. We do not guarantee the performance of the loans and line of credit accounts originated by the bank. As part of the OnDeck business both prior and subsequent to Enova's acquisition, OnDeck operates a program with a separate bank to provide marketing services and loan servicing for small business installment loans and line of credit accounts. Under the OnDeck program, we receive marketing fees while the bank receives origination fees and certain program fees. The bank has the ability to sell and we have the option, but not the requirement, to purchase the installment loans 23 --------------------------------------------------------------------------------
the bank creates and, in the case of line of credit accounts, extensions under such line of credit accounts. We do not guarantee the performance of loans or lines of credit issued by the bank.
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Money transfer business. Through the acquisition of Pangea, we operate a money transfer platform that allows customers to send money fromthe United States toMexico , other Latin American countries andAsia . The customer pays us inU.S. dollars, and we then make local currency available to the intended recipient of the transfer in one of many termination countries. Our revenue model includes a fee per transfer and an exchange rate spread. Our customers can access our proprietary platform via the website, Android app, or iOS (Apple) app.
OUR MARKETS
We currently offer our services in the following countries:
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United States . We began our online business inthe United States inMay 2004 . As ofSeptember 30, 2022 , we provided services in all 50 states andWashington D.C. We market our financing products under the names CashNetUSA at www.cashnetusa.com, NetCredit at www.netcredit.com, OnDeck at www.ondeck.com,Headway Capital at www.headwaycapital.com, The Business Backer at www.businessbacker.com, and Pangea at www.pangeamoneytransfer.com.
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Our internet websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Quarterly Report on Form 10-Q.
RECENT REGULATORY DEVELOPMENTS
We received a Civil Investigative Demand ("CID") from the CFPB concerning
certain loan processing issues. We cooperated fully with the CFPB and provided
all requested data and information in response to the CID. We anticipate being
able to expeditiously complete the investigation as several of the issues were
selfdisclosed and we have provided restitution to customers who may have been
negatively impacted. We received a second CID in April 2022 requesting
additional information. We have provided all requested information in response
to the CID.
On October 6, 2017 , the CFPB issued its final rule entitled "Payday, Vehicle
Title, and Certain High-Cost Installment Loans" (the "Small Dollar Rule"), which
covers certain consumer loans that we offer. The Small Dollar Rule requires that
lenders who make short-term loans and longer-term loans with balloon payments
reasonably determine consumers' ability to repay the loans according to their
terms before issuing the loans. The Small Dollar Rule also introduces new
limitations on repayment processes for those lenders as well as lenders of other
longer-term loans with an annual percentage rate greater than 36 percent that
include an ACH authorization or similar payment provision. If a consumer has two
consecutive failed payment attempts, the lender must obtain the consumer's new
and specific authorization to make further withdrawals from the consumer's bank
account. For loans covered by the Small Dollar Rule, lenders must provide
certain notices to consumers before attempting a first payment withdrawal or an
unusual withdrawal and after two consecutive failed withdrawal attempts. On June
7, 2019 , the CFPB issued a final rule to set the compliance date for the
mandatory underwriting provisions of the Small Dollar Rule to November 19, 2020 .
On July 7, 2020 , the CFPB issued a final rule rescinding the ability to repay
("ATR") provisions of the Small Dollar Rule along with related provisions, such
as the establishment of registered information systems for checking ATR and
reporting loan activity. The payment provisions of the Small Dollar Rule remain
in place, but remain stayed indefinitely by the United States Court of Appeals
for the Fifth Circuit , which is hearing an appeal from the plaintiff on a
constitutional challenge to the Small Dollar Rule. On October 14, 2021 , the
Fifth Circuit ruled that the Small Dollar Rule will not take effect until 286
days after the Fifth Circuit rules on the appeal. On October 19, 2022 , a
three-judge panel of the Fifth Circuit U.S. Circuit Court of Appeals ruled that
the funding structure of the CFPB is unconstitutional and vacated the Small
Dollar Rule. The CFPB may appeal the decision. If the Small Dollar Rule does
become effective in its current proposed form, we will need to make certain
changes to our payment processes and customer notifications in our U.S. consumer
lending business.
New Mexico HB 132
On February 15, 2022 , the New Mexico Legislature passed HB 132. The bill imposes
a 36% rate cap on loans up to $10,000 . Additionally, HB 132 provides for the
application of a predominant economic interest test for bank service
arrangements whereby a broker or servicer with a predominant economic interest
in a loan is considered to be the "true lender" for purposes of applying the 36%
rate cap. The New Mexico Governor signed the bill into law on March 1, 2022 . The
law will take effect on January 1, 2023 .
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RESULTS OF OPERATIONS Highlights
Our financial results for the three-month period ended
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Consolidated total revenue increased$136.0 million , or 42.5%, to$456.2 million in the current quarter compared to$320.2 million for the three months endedSeptember 30, 2021 , or the prior year quarter.
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Consolidated net sales were
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Consolidated operating profit increases
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Consolidated net income was$51.7 million in the current quarter compared to$51.5 million in the prior year quarter. Consolidated diluted income per share was$1.57 in the current quarter compared to$1.36 in the prior year quarter. 25 --------------------------------------------------------------------------------
Insight
The following tables reflect our results of operations for the periods indicated, both in dollars and as a percentage of total revenue (in thousands of dollars, except per share data):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue
Loans and finance receivables revenue $ 449,817 $ 316,042 $ 1,233,910 $ 833,412
Other 6,383 4,118 16,011 10,912
Total Revenue 456,200 320,160 1,249,921 844,324
Change in Fair Value (162,005 ) (73,778 ) (422,465 ) (100,443 )
Net Revenue 294,195 246,382 827,456 743,881
Operating Expenses
Marketing 101,278 79,726 286,000 163,548
Operations and technology 45,953 37,966 128,945 108,628
General and administrative 37,182 33,557 105,400 116,321
Depreciation and amortization 11,270 8,914 28,368 23,001
Total Operating Expenses 195,683 160,163 548,713 411,498
Income from Operations 98,512 86,219 278,743 332,383
Interest expense, net (30,924 ) (18,163 ) (78,357 ) (57,493 )
Foreign currency transaction gain (loss) 363 (109 ) 70 (383 )
Equity method investment (loss) income (129 ) 529 6,522 2,558
Other nonoperating expenses (230 ) - (1,321 ) (1,128 )
Income before Income Taxes 67,592 68,476 205,657 275,937
Provision for income taxes 15,884 16,667 49,105 67,607
Net income before noncontrolling
interest 51,708 51,809 156,552 208,330
Less: Net income attributable to
noncontrolling interest - 261 - 685
Net income attributable to Enova
International, Inc. $ 51,708 $
$51,548,156,552
Earnings per common share – diluted
4.64 $ 5.48
Revenue
Loans and finance receivables revenue 98.6 % 98.7 % 98.7 % 98.7 % Other 1.4 1.3 1.3 1.3 Total Revenue 100.0 100.0 100.0 100.0 Change in Fair Value (35.5 ) (23.0 ) (33.8 ) (11.9 ) Net Revenue 64.5 77.0 66.2 88.1 Operating Expenses Marketing 22.2 24.9 22.9 19.4 Operations and technology 10.1 11.9 10.3 12.8 General and administrative 8.1 10.5 8.4 13.8 Depreciation and amortization 2.5 2.8 2.3 2.7 Total Operating Expenses 42.9 50.1 43.9 48.7 Income from Operations 21.6 26.9 22.3 39.4 Interest expense, net (6.8 ) (5.7 ) (6.3 ) (6.8 ) Foreign currency transaction loss 0.1 - - - Equity method investment income - 0.2 0.5 0.3 Other nonoperating expenses (0.1 ) - (0.1 ) (0.2 ) Income before Income Taxes 14.8 21.4 16.4 32.7 Provision for income taxes 3.5 5.2 3.9 8.0 Net income before noncontrolling interest 11.3 16.2 12.5 24.7 Less: Net income attributable to noncontrolling interest - 0.1 - 0.1 Net income attributable to Enova International, Inc. 11.3 % 16.1 % 12.5 % 24.6 %
Valuation of loans and financial receivables
The COVID-19 pandemic severely impacted global economic conditions, resulting in
substantial volatility in the financial markets, increased unemployment, and
operational challenges resulting from measures that governments have imposed to
control its spread. We actively worked with our customers to understand their
financial situations, waive late fees, offer a variety of repayment options to
increase flexibility and reduce or defer payments for impacted customers. We
took measures to adjust our underwriting procedures, which reduced exposure to
more heavily impacted consumers and businesses. Certain of these measures eased
since the height of the pandemic, with improvement of economic conditions and
our outlook.
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From a loan valuation perspective, at the onset of the COVID-19 pandemic, we
deemed it appropriate to increase the discount rates used in our
internally-developed valuation models, thereby lowering loan fair values, to
capture the increase in potential volatility in expected cash flows due to the
unprecedented nature of the pandemic and governmental response. These rates
remained consistent for the remainder of 2020. Over the course of 2021, we noted
a tightening of credit spreads in observable pricing in the market; as such, we
reduced the discount rates used in our valuations. As of December 31, 2021 , our
discount rates had generally returned to the levels utilized immediately prior
to the pandemic. As of March 31, 2022 , June 30, 2022 and September 30, 2022 , we
increased our discount rates based primarily on movements in the market during
each period. We believe the adjustments to our discount rates to be responsive
to changes in the market and representative of what a market participant would
use.
After seeing increases in delinquency and charge-offs early in the pandemic, we
experienced significant improvements to these metrics over the remainder of 2020
and into 2021. The U.S. government provided multiple rounds of stimulus
assistance to taxpayers and businesses. Positive COVID-19 test counts in the
U.S. generally decreased across the first half of 2021 although have spiked at
numerous times in the past year as different variants escalate and abate. In
2022, views in the marketplace on the economy and its near-term prospects remain
mixed with concerns on employment, inflation, and other macroeconomic trends. In
certain situations, management concluded that the probability of future
charge-offs was higher than what we had experienced in the past and, therefore,
increased anticipated charge-offs in our fair value models. We continue to
utilize this approach and have adjusted charge-off expectations where
appropriate. As of September 30, 2022 , we deemed the resulting fair value to be
an appropriate market-based exit price that considers current market conditions.
NON-GAAP FINANCIAL MEASURES
In addition to the financial information prepared in conformity with generally
accepted accounting principles ("GAAP"), we provide historical non-GAAP
financial information. We believe that presentation of non-GAAP financial
information is meaningful and useful in understanding the activities and
business metrics of our operations. We believe that these non-GAAP financial
measures reflect an additional way of viewing aspects of our business that, when
viewed with our GAAP results, provide a more complete understanding of factors
and trends affecting our business. Readers should consider the information in
addition to, but not instead of or superior to, our consolidated financial
statements prepared in accordance with GAAP. This non-GAAP financial information
may be determined or calculated differently by other companies, limiting the
usefulness of those measures for comparative purposes.
Adjusted earnings measures
In addition to reporting financial results in accordance with GAAP, we have
provided adjusted earnings and adjusted earnings per share, or, collectively,
the Adjusted Earnings Measures, which are non-GAAP measures. We believe that the
presentation of these measures provides investors with greater transparency and
facilitates comparison of operating results across a broad spectrum of companies
with varying capital structures, compensation strategies, derivative instruments
and amortization methods, which provides a more complete understanding of our
financial performance, competitive position and prospects for the future. We
also believe that investors regularly rely on non-GAAP financial measures, such
as the Adjusted Earnings Measures, to assess operating performance and that such
measures may highlight trends in our business that may not otherwise be apparent
when relying on financial measures calculated in accordance with GAAP. In
addition, we believe that the adjustments shown below are useful to investors in
order to allow them to compare our financial results during the periods shown
without the effect of each of these income or expense items.
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The following table provides reconciliations of net earnings and diluted earnings per share calculated in accordance with GAAP to adjusted earnings measures (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income $ 51,708 $ 51,548 $ 156,552 $ 207,645
Adjustments:
Transaction-related costs(a) - - - 1,424
Lease termination and cease-use gain(b) - (113 ) - (113 )
Equity method investment loss (income)(c) 129 - (6,194 ) -
Other nonoperating expenses(d) 230 - 1,321 1,128
Intangible asset amortization 2,014 2,013 6,041 4,848
Stock-based compensation expense 5,457 5,018 15,957 16,072
Foreign currency transaction (gain) loss (363 ) 102 (70 ) 373
Cumulative tax effect of adjustments (1,871 ) (1,581 ) (3,174 ) (5,843 )
Adjusted earnings $ 57,304 $ 56,987 $ 170,433 $ 225,534
Diluted earnings per share $ 1.57 $ 1.36 $ 4.64 $ 5.48
Adjustments:
Transaction-related costs - - - 0.04
Lease termination and cease-use gain - - - -
Equity method investment income - - (0.18 ) -
Other nonoperating expenses 0.01 - 0.04 0.03
Intangible asset amortization 0.06 0.05 0.18 0.13
Stock-based compensation expense 0.17 0.13 0.47 0.42
Foreign currency transaction (gain) loss (0.01 ) - - 0.01
Cumulative tax effect of adjustments (0.06 ) (0.04 ) (0.10 ) (0.16 )
Adjusted earnings per share $ 1.74 $ 1.50 $ 5.05 $ 5.95
(a) In the first quarter of 2021, we incurred expenses totaling $1.4 million
($1.1 million net of tax) related to acquisitions and a divestiture of a
subsidiary.
(b) In the third quarter of 2021, we recorded a gain of $0.1 million ($0.1
million net of tax) related to the exit of leased office space.
(c) In the second quarter of 2022, we recorded equity method investment income
of $6.3 million ($3.6 million net of tax) that was comprised primarily of an
$11.0 million gain generated on Linear's sale of its operating company,
partially offset by a $4.4 million loss on the sale of OnDeck Canada.
(d) In the third quarter of 2022, second quarter of 2022 and second quarter of
2021, we recorded other nonoperating expenses of $0.2 million ($0.2 million net
of tax), $1.1 million ($0.8 million net of tax) and $0.8 million ($0.6 million
net of tax), respectively, related to incomplete transactions. In the first
quarter of 2021, we recorded other nonoperating expenses of $0.4 million ($0.3
million net of tax) related to the repurchase of securitization notes.
Adjusted EBITDA
The table below shows Adjusted EBITDA, which is a non-GAAP measure that we
define as earnings excluding depreciation, amortization, interest, foreign
currency transaction gains or losses, taxes and stock-based compensation
expense. We believe Adjusted EBITDA is used by investors to analyze operating
performance and evaluate our ability to incur and service debt and our capacity
for making capital expenditures. Adjusted EBITDA is also useful to investors to
help assess our estimated enterprise value. In addition, we believe that the
adjustments for transaction-related costs, lease termination and cease-use loss
(gain), equity method investment income and other nonoperating expenses shown
below are useful to investors in order to allow them to compare our financial
results during the
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periods indicated without the effect of income or expense items. The calculation of Adjusted EBITDA, as presented below, may differ from the calculation of similarly titled measures provided by other companies (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income $ 51,708 $ 51,548 $ 156,552 $ 207,645
Depreciation and amortization
expenses(e) 11,270 8,912 28,368 22,990
Interest expense, net(e) 30,924 17,966 78,357 57,013
Foreign currency transaction (gain)
loss(e) (363 ) 102 (70 ) 373
Provision for income taxes 15,884 16,667 49,105 67,607
Stock-based compensation expense 5,457 5,018 15,957 16,072
Adjustment:
Transaction-related costs(a) - - - 1,424
Lease termination and cease-use gain(b) - (113 ) - (113 )
Equity method investment loss
(income)(c) 129 (529 ) (6,522 ) (2,558 )
Other nonoperating expenses(d) 230 - 1,321 1,128
Adjusted EBITDA $ 115,239 $ 99,571 $
323,068
Adjusted EBITDA margin calculated as follows: Total Revenue$ 456,200 $ 320,160 $ 1,249,921 $ 844,324 Adjusted EBITDA 115,239 99,571 323,068 371,581 Adjusted EBITDA as a percentage of total revenue 25.3 % 31.1 % 25.8 % 44.0 % (a) In the first quarter of 2021, we incurred expenses totaling$1.4 million related to acquisitions and a divestiture of a subsidiary. (b) In the third quarter of 2021, we recorded a gain of$0.1 million related to the exit of leased office space. (c) In the second quarter of 2022, we recorded equity method investment income of$6.3 million that was comprised primarily of an$11.0 million gain generated on Linear's sale of its operating company, partially offset by a$4.4 million loss on the sale of OnDeck Canada. (d) In the third quarter of 2022, second quarter of 2022 and second quarter of 2021, we recorded other nonoperating expenses of$0.2 million ,$1.1 million and$0.8 million , respectively, related to incomplete transactions. In the first quarter of 2021, we recorded other nonoperating expenses of$0.4 million related to the repurchase of securitization notes. (e) Excludes amounts attributable to noncontrolling interests.
Combined measures of loans and financial claims
In addition to reporting loans and finance receivables balance information in accordance with GAAP (see Note 3 in the Notes to Consolidated Financial Statements included in this report), we have provided metrics on a combined basis. The Combined Loans and Finance Receivables Measures are non-GAAP measures that include both loans and RPAs we own or have purchased and loans we guarantee, which are either GAAP items or disclosures required by GAAP. See "-Loan and Finance Receivable Balances" and "-Credit Performance of Loans and Finance Receivables" below for reconciliations between Company owned and purchased loans and finance receivables, gross, change in fair value and charge-offs (net of recoveries) calculated in accordance with GAAP to the Combined Loans and Finance Receivables Measures. We believe these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential receivable losses and the opportunity for revenue performance of the loans and finance receivable portfolio on an aggregate basis. We also believe that the comparison of the aggregate amounts from period to period is more meaningful than comparing only the amounts reflected on our consolidated balance sheet since both revenue and cost of revenue are impacted by the aggregate amount of receivables we own and those we guarantee as reflected in our consolidated financial statements.
THREE MONTHS ENDED
Revenue and Net Revenue Revenue increased$136.0 million , or 42.5%, to$456.2 million for the current quarter as compared to$320.2 million for the prior year quarter. The increase was driven by a 71.7% increase in revenue from our small business portfolio and a 28.6% increase in revenue from our consumer portfolio as higher levels of originations in 2021 and into 2022 have led to higher loan balances for both portfolios. Net revenue for the current quarter was$294.2 million compared to$246.4 million for the prior year quarter. Our consolidated net revenue margin was 64.5% for the current quarter compared to 77.0% for the prior year quarter. The net revenue margin in the prior year quarter was elevated due primarily to lower delinquency rates and lower than expected charge-offs as a result of portfolio seasoning 29 --------------------------------------------------------------------------------
and lower origins. With creations increasing in the second half of 2021 and across
The following table sets forth the components of revenue and net revenue,
separated by product for the current quarter and the prior year quarter (in
thousands):
Three Months Ended September 30,
2022 2021 $ Change % Change
Revenue by product:
Consumer loans and finance receivables
revenue $ 277,096 $ 215,432 $ 61,664 28.6 %
Small business loans and finance
receivables revenue 172,721 100,610 72,111 71.7
Total loans and finance receivables
revenue 449,817 316,042 133,775 42.3
Other 6,383 4,118 2,265 55.0
Total revenue 456,200 320,160 136,040 42.5
Change in fair value (162,005 ) (73,778 ) (88,227 ) 119.6
Net revenue $ 294,195 $ 246,382 $ 47,813 19.4 %
Revenue by product (% to total):
Consumer loans and finance receivables
revenue 60.7 % 67.3 %
Small business loans and finance
receivables revenue 37.9
31.4
Total loans and finance receivables revenue 98.6 98.7 Other 1.4 1.3 Total revenue 100.0 100.0 Change in fair value (35.5 ) (23.0 ) Net revenue 64.5 % 77.0 %
Loan and financing balances receivable
The fair value of our loan and finance receivable portfolio in our consolidated financial statements was$2,765.1 million and$1,635.3 million as ofSeptember 30, 2022 and 2021, respectively. The outstanding principal balance of our loan and finance receivables portfolio was$2,552.6 million and$1,586.4 million as ofSeptember 30, 2022 and 2021, respectively. The fair value of the combined loan and finance receivables portfolio includes$16.1 million and$16.9 million with an outstanding principal balance of$11.8 million and$11.4 million of consumer loan balances that are guaranteed by us but not owned by us, which are not included in our consolidated financial statements as ofSeptember 30, 2022 and 2021, respectively. Our small business portfolio of loans and finance receivables increased to 61.4% of our combined loan and finance receivable portfolio at fair value as ofSeptember 30, 2022 , compared to 55.2% as ofSeptember 30, 2021 due primarily to more accelerated growth in the small business portfolio. The consumer portfolio balance decreased to 38.6% of our combined loan and finance receivable portfolio balance at fair value as ofSeptember 30, 2022 , compared to 44.8% as ofSeptember 30, 2021 . See "-Non-GAAP Disclosure-Combined Loans and Finance Receivables Measures" above for additional information related to combined loans and finance receivables.
The following tables summarize the outstanding balances of loans and financial receivables as of
As of September 30, 2022 As of September 30, 2021
Guaranteed Guaranteed
Company by the Company by the
Owned(a) Company(a) Combined Owned(a) Company(a) Combined(b)
Consumer loans and finance
receivables
Principal $ 972,320 $ 11,843 $ 984,163 $ 709,781 $ 11,354 $ 721,135
Fair value 1,056,205 16,144 1,072,349 723,553 16,921 740,474
Fair value as a % of principal 108.6 % 136.3 % 109.0 % 101.9 % 149.0 % 102.7 %
Small business loans and finance
receivables
Principal $ 1,580,289 $ - $ 1,580,289 $ 876,668 $ - $ 876,668
Fair value 1,708,918 - 1,708,918 911,729 - 911,729
Fair value as a % of principal 108.1 % - % 108.1 % 104.0 % - % 104.0 %
Total loans and finance
receivables
Principal $ 2,552,609 $ 11,843 $ 2,564,452 $ 1,586,449 $ 11,354 $ 1,597,803
Fair value 2,765,123 16,144 2,781,267 1,635,282 16,921 1,652,203
Fair value as a % of principal 108.3 % 136.3 % 108.5 % 103.1 % 149.0 % 103.4 %
(a) GAAP measure. The loans and finance receivables balances guaranteed by us
relate to loans originated by third-party lenders through the CSO programs that
we have not yet purchased and, therefore, are not included in our consolidated
financial statements.
30
--------------------------------------------------------------------------------
To
Average amount outstanding per loan and financing receivable
The average amount outstanding per loan and finance receivable is calculated as the total combined loans and finance receivables, gross balance at the end of the period divided by the total number of combined loans and finance receivables outstanding at the end of the period. The following table shows the average amount outstanding per loan and finance receivable by product atSeptember 30, 2022 and 2021: As of September 30, 2022 2021 Average amount outstanding per loan and finance receivable(a) Consumer loans and finance receivables(b)$ 2,156 $
1,812
Small business loans and finance receivables 37,670
33,581
Total loans and finance receivables(b)$ 4,980 $ 3,633 (a) The disclosure regarding the average amount per loan and finance receivable is statistical data that is not included in our consolidated financial statements. (b) Includes loans guaranteed by us, which represent loans originated by third-party lenders through the CSO programs that we have not yet purchased and, therefore, are not included in our consolidated financial statements.
The average outstanding amount per loan and financial receivable rose to
Average amount of loans and financing receivable
The average loan and finance receivable origination amount is calculated as the
total amount of combined loans and finance receivables originated, renewed and
purchased for the period divided by the total number of combined loans and
finance receivables originated, renewed and purchased for the period. The
following table shows the average loan and finance receivable origination amount
by product for the current quarter compared to the prior year quarter:
Three Months Ended
September 30,
2022 2021
Average amount at origin of loans and financial receivables(a) Consumer loans and financial receivables(b)(c)
$ 717 $ 664 Small business loans and finance receivables(c) 17,849
15,610
Total loans and finance receivables(b)$ 2,014 $ 1,372 (a) The disclosure regarding the average loan origination amount is statistical data that is not included in our consolidated financial statements. (b) Includes loans guaranteed by us, which represent loans originated by third-party lenders through the CSO programs that we have not yet purchased and, therefore, are not included in our consolidated financial statements. (c) For line of credit accounts the average represents the average amount of each incremental draw. The average loan and finance receivable origination amount increased to$2,014 from$1,372 during the current quarter compared to the prior year quarter, due primarily to an increase in the mix of higher dollar amount loans and finance receivables to small businesses.
Credit performance of financial loans and receivables
We monitor the performance of our loans and finance receivables. Internal
factors such as portfolio composition (e.g., interest rate, loan term, geography
information, customer mix, credit quality) and performance (e.g., delinquency,
loss trends, prepayment rates) are reviewed on a regular basis at various levels
(e.g., product, vintage). We also weigh the impact of relevant, internal
business decisions on the portfolio. External factors such as macroeconomic
trends, financial market liquidity expectations, competitive landscape and
legal/regulatory requirements are also reviewed on a regular basis.
31
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The payment status of a customer, including the degree of any delinquency, is a
significant factor in determining estimated charge-offs in the cash flow models
that we use to determine fair value. The following table shows payment status on
outstanding principal, interest and fees as of the end of each of the last five
quarters (in thousands):
2021 2022
Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter
Ending combined loans and finance
receivables, including principal
and accrued fees/interest
outstanding:
Company owned $ 1,650,771 $ 1,944,263 $ 2,169,140 $ 2,377,514 $ 2,630,537
Guaranteed by the Company(a) 13,239 13,750 11,858 13,997 14,330
Ending combined loan and finance
receivables balance(b) $ 1,664,010 $ 1,958,013 $ 2,180,998 $ 2,391,511 $ 2,644,867
> 30 days delinquent 90,782 103,213 113,798 121,459 147,688
> 30 days delinquency rate 5.5 % 5.3 % 5.2 % 5.1 % 5.6 %
(a) Represents loans originated by third-party lenders through the CSO programs
that we have not yet purchased, which are not included in our consolidated
balance sheets.
(b) Non-GAAP measure.
Consumer loans and financial receivables
The following table includes financial information for our consumer loans and
finance receivables. Delinquency metrics include principal, interest and fees,
and only amounts that are past due (in thousands):
2021 2022
Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter
Consumer loans and finance
receivables:
Consumer combined loan and finance
receivable principal balance:
Company owned $ 709,781 $ 867,751 $ 888,657 $ 936,601 $ 972,320
Guaranteed by the Company(a) 11,354 11,790 10,027 11,873 11,843
Total combined loan and finance
receivable principal balance(b) $ 721,135 $ 879,541 $ 898,684 $ 948,474 $ 984,163
Consumer combined loan and finance
receivable fair value balance:
Company owned $ 723,553 $ 890,144 $ 934,351 $ 989,128 $ 1,056,205
Guaranteed by the Company(a) 16,921 18,813 14,433 17,860 16,144
Ending combined loan and finance
receivable fair value balance(b) $ 740,474 $ 908,957 $ 948,784 $ 1,006,988 $ 1,072,349
Fair value as a % of
principal(b)(c) 102.7 % 103.3 % 105.6 % 106.2 % 109.0 %
Consumer combined loan and finance
receivable balance, including
principal and accrued fees/interest
outstanding:
Company owned $ 768,964 $ 927,673 $ 951,560 $ 1,004,847 $ 1,039,792
Guaranteed by the Company(a) 13,239 13,750 11,858 13,997 14,330
Ending combined loan and finance
receivable balance(b) $ 782,203 $ 941,423 $ 963,418 $ 1,018,844 $ 1,054,122
Average consumer combined loan and
finance receivable balance,
including principal and accrued
fees/interest outstanding:
Company owned(d) $ 702,818 $ 836,147 $ 953,108 $ 966,816 $ 1,027,100
Guaranteed by the Company(a)(d) 11,366 13,212 12,960 12,591 14,421
Average combined loan and finance
receivable balance(b)(d) $ 714,184 $ 849,359 $
966 068
Revenue$ 215,432 $ 243,570 $ 248,547 $ 253,043 $ 277,096 Change in fair value (97,061 ) (104,715 ) (116,767 ) (133,078 ) (135,646 ) Net revenue 118,371 138,855 131,780 119,965 141,450 Net revenue margin 54.9 % 57.0 %
53.0% 47.4% 51.0%
Delinquencies:
> 30 days delinquent$ 45,804 $ 59,312 $ 70,480 $ 72,300 $ 77,258 > 30 days delinquent as a % of combined loan and finance receivable balance(b)(c) 5.9 % 6.3 % 7.3 % 7.1 % 7.3 % Charge-offs: Charge-offs (net of recoveries)$ 57,836 $ 112,582 $ 137,224 $ 134,524 $ 167,762 Charge-offs (net of recoveries) as a % of average combined loan and finance receivable balance(b)(d) 8.1 % 13.3 % 14.2 % 13.7 % 16.1 % (a) Represents loans originated by third-party lenders through the CSO programs that we have not yet purchased, which are not included in our consolidated balance sheets. (b) Non-GAAP measure. (c) Determined using period-end balances. (d) The average combined loan and finance receivable balance is the average of the month-end balances during the period. 32 -------------------------------------------------------------------------------- The ending balance, including principal and accrued fees/interest outstanding, of combined consumer loans and finance receivables atSeptember 30, 2022 increased 34.8% to$1,054.1 million compared to$782.2 million atSeptember 30, 2021 , due primarily to the acceleration in originations beginning approximately mid-2021, following the strategic reduction in originations at the onset of the COVID-19 pandemic to mitigate risks associated with the pandemic. The percentage of loans greater than 30 days delinquent increased to 7.3% atSeptember 30, 2022 , compared to 5.9% atSeptember 30, 2021 . The increase was driven primarily by growth in originations in the current year, particularly to new customers, which typically default at a higher percentage than returning customers. Charge-offs (net of recoveries) as a percentage of average combined loan balance increased to 16.1% for the current quarter, compared to 8.1% for the prior year quarter, driven primarily by growth in originations, particularly to new customers, which typically default at a higher percentage than returning customers. In the prior year quarter, this charge-off rate was lower due primarily to our having a more seasoned and lower risk portfolio remaining as originations since the onset of the COVID-19 pandemic had been significantly lower and the majority of higher risk loans to new customers originated in prior quarters had been charged off. The charge-off rate in the current quarter is more consistent with rates experienced prior to the COVID-19 pandemic. The ratio of fair value as a percentage of principal on consumer loans and finance receivables was 109.0% atSeptember 30, 2022 , compared to 102.7% atSeptember 30, 2021 and 106.2% atJune 30, 2022 . The increase fromJune 30, 2022 was primarily driven by an improvement in early-stage delinquencies. Refer also to "Results of Operations-COVID-19" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion on loan valuation.
Small Business Loans and Financial Claims
The following table includes financial information for our small business loans
and finance receivables. Delinquency metrics include principal, interest, and
fees, and only amounts that are past due (in thousands):
2021 2022
Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter
Small business loans and finance
receivables:
Total loan and finance receivable
principal balance $ 876,668 $ 1,010,675 $ 1,210,389 $ 1,364,055 $ 1,580,289
Ending loan and finance receivable
fair value balance 911,729 1,074,546
1,297,533 1,471,723 1,708,918 Fair value as % of principal(a) 104.0% 106.3% 107.2% 107.9% 108.1%
Ending loan and finance receivable balance, including principal and accrued fees/interest outstanding$ 881,807 $ 1,016,590 $ 1,217,580 $ 1,372,667 $ 1,590,745 Average loan and finance receivable balance(b)$ 837,606 $ 956,110 $ 1,122,609 $ 1,288,384 $ 1,488,029 Revenue$ 100,610 $ 115,063 $ 132,594 $ 149,909 $ 172,721 Change in fair value 24,515 22,804 1,138 (8,764 ) (24,662 ) Net revenue 125,125 137,867 133,732 141,145 148,059 Net revenue margin 124.4 % 119.8 %
100.9% 94.2% 85.7%
Delinquencies:
> 30 days delinquent$ 44,978 $ 43,901 $ 43,318 $ 49,159 $ 70,430 > 30 days delinquent as a % of loan balance(a) 5.1 % 4.3 % 3.6 % 3.6 % 4.4 %
Dump :
Charge-offs (net of recoveries)$ 7,060 $ 7,677 $ 20,860 $ 27,867 $ 43,778 Charge-offs (net of recoveries) as a % of average loan and finance receivable balance(b) 0.8 % 0.8 % 1.9 % 2.2 % 2.9 %
(a) Determined from end of period balances. (b) The average balance of loans and financial receivables corresponds to the average of month-end balances during the period.
The ending balance, including principal and accrued fees/interest outstanding, of small business loans and finance receivables atSeptember 30, 2022 increased 80.4% to$1,590.7 million compared to$881.8 million atSeptember 30, 2021 , due primarily to the continued impact of strong originations. The percentage of loans greater than 30 days delinquent was 4.4% atSeptember 30, 2022 , compared to 5.1% atSeptember 30, 2021 . Delinquency has improved in all of our small business portfolios, as we have actively worked with our customers to understand their 33 --------------------------------------------------------------------------------
financial situations, offering a variety of repayment options to increase flexibility, and reducing or deferring payments for affected customers.
Charge-offs (net of recoveries) as a percentage of average loan balance increased to 2.9% for the current quarter, compared to 0.8% in the prior year quarter, due primarily to growth in originations, particularly to new customers, which typically default at a higher percentage than returning customers. In the prior year quarter, this charge-off rate was lower due primarily to our having a more seasoned portfolio remaining as originations since the onset of the COVID-19 pandemic had been significantly lower and the majority of higher risk loans to new customers originated in prior quarters had been charged off. The ratio of fair value as a percentage of principal on small business loans and finance receivables was 108.1% atSeptember 30, 2022 , compared to 104.0% atSeptember 30, 2021 and 107.9% atJune 30, 2022 . The increase fromJune 30, 2022 was nominal as credit metrics remained fairly consistent.
Total operating expenses
Total expenses increased
Marketing expense increased to$101.3 million in the current quarter compared to$79.7 million in the prior year quarter due primarily to our efforts to capture increasing market demand for loan products in the current quarter. Certain marketing costs, such as commissions paid to third-party lead providers, are variable and increase as originations increase.
Operating and technology expenses increased to
General and administrative expense increased to$37.2 million in the current quarter compared to$33.6 million in the prior year quarter, due primarily to higher personnel costs. Depreciation and amortization expense increased$2.4 million or 26.4% compared to the prior year quarter driven primarily by$3.6 million in impairment charges recorded in the current quarter on internal-use software that was retired.
Non-operating items
Interest expense, net increased$12.8 million , or 70.3%, to$30.9 million in the current quarter compared to$18.1 million in the prior year quarter. The increase was due primarily to an increase in the average amount of debt outstanding, which increased$867.6 million to$1,933.0 million during the current quarter from$1,065.4 million during the prior year quarter, partially offset by a decrease in the weighted average interest rate on our outstanding debt to 6.46% during the current quarter from 6.65% during the prior year quarter.
Provision for income taxes
The effective tax rate of 23.5% in the current quarter was lower than the 24.3% rate recorded in the prior year quarter due primarily to the revaluation of the deferred tax liability related to reductions in in state apportionment in separate company filing states, partially offset by higher nondeductible executive compensation. As ofSeptember 30, 2022 , the balance of unrecognized tax benefits was$73.0 million which is included in "Accounts payable and accrued expenses" on the consolidated balance sheet,$11.1 million of which, if recognized, would favorably affect the effective tax rate in the period of recognition. We had$35.3 million and$44.1 million of unrecognized tax benefits as ofSeptember 30, 2021 andDecember 31, 2021 , respectively. We believe that we have adequately accounted for any material tax uncertainties in our existing reserves for all open tax years. OurU.S. tax returns are subject to examination by federal and state taxing authorities. The statute of limitations related to our consolidated Federal income tax returns is closed for all tax years up to and including 2017. However, the 2014 tax year is still open to the extent of the net operating loss that was carried back from the 2019 tax return. The years open to examination by state, local and foreign government authorities vary by jurisdiction, but the statute of limitation is generally three years from the date the tax return is filed. For jurisdictions that have generated net operating losses, carryovers may be subject to the statute of limitations applicable for the year those carryovers are utilized. In these cases, the period for which the losses may be adjusted will extend to conform with the statute of limitations for the year in which the losses are utilized. In most circumstances, this is expected to increase the length of time that the applicable taxing authority may examine the carryovers by one year or longer, in limited cases. 34 --------------------------------------------------------------------------------
Net revenue
Net income increased$0.2 million , or 0.3%, to$51.7 million during the current quarter compared to$51.5 million during the prior year quarter. The increase was due primarily to higher net revenue resulting from growth in the size of the business, which was mostly offset by higher associated costs, particularly marketing and interest.
NINE MONTHS ENDED
Revenue and Net Revenue Revenue increased$405.6 million , or 48.0%, to$1,249.9 million for the nine-month period endedSeptember 30, 2022 , or current nine-month period, as compared to$844.3 million for the nine-month period endedSeptember 30, 2021 , or prior year nine-month period. The increase was driven by a 73.9% increase in revenue from our small business portfolio and a 36.2% increase in revenue from our consumer portfolio as higher levels of originations in 2021 and into 2022 have led to higher loan balances for both portfolios. Net revenue for the current nine-month period was$827.4 million compared to$743.9 million for the prior year nine-month period. Our consolidated net revenue margin was 66.2% for the current nine-month period compared to 88.1% for the prior year nine-month period. The net revenue margin in the prior year nine-month period was elevated due primarily to lower delinquency rates and lower than expected charge-offs as a result of portfolio seasoning and lower originations. With originations having increased across the second half of 2021 and throughSeptember 30, 2022 , the net revenue margin in the current nine-month period was in a more normalized range.
The following table shows the components of revenue and net revenue, separated by product for the current nine-month period and the prior year nine-month period (in thousands):
Nine Months Ended September 30,
2022 2021 $ Change % Change
Revenue by product:
Consumer loans and finance receivables
revenue $ 778,686 $ 571,681 $ 207,005 36.2 %
Small business loans and finance
receivables revenue 455,224 261,731 193,493 73.9
Total loans and finance receivables
revenue 1,233,910 833,412 400,498 48.1
Other 16,011 10,912 5,099 46.7
Total revenue 1,249,921 844,324 405,597 48.0
Change in fair value (422,465 ) (100,443 ) (322,022 ) 320.6
Net revenue $ 827,456 $ 743,881 $ 83,575 11.2 %
Revenue by product (% to total):
Consumer loans and finance receivables
revenue 62.3 % 67.7 %
Small business loans and finance
receivables revenue 36.4
31.0
Total loans and finance receivables
revenue 98.7 98.7
Other 1.3 1.3
Total revenue 100.0 100.0
Change in fair value (33.8 ) (11.9 )
Net revenue 66.2 % 88.1 %
Average Loan Origination
The average loan and finance receivable origination amount is calculated as the
total amount of combined loans and finance receivables originated, renewed and
purchased for the period divided by the total number of combined loans and
finance receivables originated, renewed and purchased for the period. The
following table shows the average loan and finance receivable origination amount
by product for the current nine-month period compared to the prior year
nine-month period:
Nine Months Ended
September 30,
2022 2021
Average amount at origin of loans and financial receivables(a) Consumer loans and financial receivables(b)(c)
$ 677 $
602
Small business loans and finance receivables(c) 16,983
15,236
Total loans and finance receivables(b)$ 1,773 $ 1,358 35
-------------------------------------------------------------------------------- (a) The disclosure regarding the average loan origination amount is statistical data that is not included in our consolidated financial statements. (b) Includes loans guaranteed by us, which represent loans originated by third-party lenders through the CSO programs that we have not yet purchased and, therefore, are not included in our consolidated financial statements. (c) Represents the average amount of each incremental draw on line of credit accounts. The average loan origination amount increased to$1,773 from$1,358 during the current nine-month period compared to the prior year nine-month period, due primarily to the gradual easing of restrictions on loan amounts as risks from the COVID-19 pandemic abated as well as an increase in the mix of higher dollar amount loans and finance receivables to small businesses.
Total expenses
Total expenses increased
Marketing expense increased to$286.0 million in the current nine-month period compared to$163.6 million in the prior year nine-month period. The increase was due primarily to our efforts to capture increasing market demand for loan products in the current nine-month period. The prior year nine-month period was abnormally low due to our strategic actions to mitigate risks associated with the COVID-19 pandemic. Certain marketing costs, such as commissions paid to third-party lead providers, are variable and increase as originations increase.
Operating and technology expenses increased to
General and administrative expense decreased$10.9 million , or 9.4%, to$105.4 million in the current nine-month period compared to$116.3 million in the prior year nine-month period, due primarily to synergies achieved following theOctober 2020 acquisition of OnDeck. Depreciation and amortization expense increased$5.4 million or 23.3% compared to the prior year nine-month period driven primarily by$3.6 million in impairment charges recorded in the current nine-month period on internal-use software that was retired as well as additional internal-use software placed into service and fixed assets and intangible assets acquired with Pangea.
Non-operating items
Interest expense, net increased$20.8 million , or 36.3%, to$78.3 million in the current nine-month period compared to$57.5 million in the prior year nine-month period. The increase was due primarily to an increase of$756.2 million in the average amount of debt outstanding to$1,755.5 million during the current nine-month period from$999.3 million during the prior year nine-month period, partially offset by a decrease in the weighted average interest rate on our outstanding debt to 6.07% during the current nine-month period from 7.65% during the prior year nine-month period. Equity method investment income increased$4.0 million , or 155.0%, to$6.5 million in the current nine-month period compared to$2.5 million in the prior year nine-month period. In the current nine-month period, Linear sold its operating company, resulting in a gain of$11.0 million , which was partially offset by a$4.4 million loss on the sale of OnDeck Canada.
Provision for income taxes
The effective tax rate of 23.9% in the current nine-month period was lower than the effective tax rate of 24.5% in the prior year nine-month period due primarily to the revaluation of the deferred tax liability related to reductions in state apportionment in separate company filing states.
Net revenue
Net income decreased$51.0 million , or 24.6%, to$156.6 million during the current nine-month period compared to$207.6 million during the prior year nine-month period. The decrease was due primarily to higher costs attributable to growth in the size of the business coupled with a lower but more normalized net revenue margin in the current nine-month period.
CASH AND CAPITAL RESOURCES
36 --------------------------------------------------------------------------------
Capital funding strategy
Since the start of the COVID-19 pandemic, we have taken various actions to maintain a stable and flexible balance sheet that ensures liquidity and funding available to meet our business obligations. As ofSeptember 30, 2022 , we had cash, cash equivalents, and restricted cash of$172.1 million , of which$84.4 million was restricted, compared to$225.9 million , of which$60.4 million was restricted, as ofDecember 31, 2021 . During the three months endedMarch 31, 2022 , we increased the borrowing capacity on four of our loan securitization facilities without having to increase any of the respective borrowing rates. InJune 2022 , we entered into a new$420.0 million loan securitization facility and increased the aggregate principal on our existing secured revolving credit agreement while extending its term. As ofSeptember 30, 2022 , we had funding capacity of$579.9 million . Based on numerous stressed-case modeling scenarios, we believe we have sufficient liquidity to run our operations for the foreseeable future. Further, we have no recourse debt obligations due untilSeptember 2024 . Historically, we have generated significant cash flow through normal operating activities for funding both long-term and short-term needs. Our near-term liquidity is managed to ensure that adequate resources are available to fund our seasonal working capital growth, which is driven by demand for our loan and financing products. OnMay 30, 2014 , we issued and sold$500.0 million in aggregate principal amount of 9.75% senior notes due 2021 (the "2021 Senior Notes"). OnSeptember 1, 2017 , we issued and sold$250.0 million in aggregate principal amount of 8.50% Senior Notes due 2024 (the "2024 Senior Notes") and used the net proceeds, in part, to retire$155.0 million in 2021 Senior Notes. OnJanuary 21, 2018 , we redeemed an additional$50.0 million in principal amount of the outstanding 2021 Senior Notes. OnSeptember 19, 2018 , we issued and sold$375.0 million in aggregate principal amount of 8.50% Senior Notes due 2025 (the "2025 Senior Notes") and used the net proceeds, in part, to retire the remaining$295.0 million in principal amount of the outstanding 2021 Senior Notes. OnJune 30, 2017 , we entered into a secured revolving credit agreement (as amended, the "Credit Agreement"). OnApril 13, 2018 ,October 5, 2018 ,July 1, 2019 andMay 10, 2021 , we and certain of our operating subsidiaries entered into amendments to our Credit Agreement. OnJune 23, 2022 , we entered into an additional amendment to our Credit Agreement that, among other things, increased the borrowing capacity to$440.0 million , with a$20.0 million letter of credit sublimit and$10.0 million swingline loan sublimit. The Credit Agreement bears interest, at our option, at the base rate plus 0.75% or the Secured Overnight Financing Rate plus 3.50%. In addition to customary fees for a credit facility of this size and type, the Credit Agreement provides for payment of a commitment fee calculated with respect to the unused portion of the commitment, and ranges from 0.15% per annum to 0.50% per annum depending on usage. The Credit Agreement contains certain prepayment penalties if it is terminated on or before the first and second anniversary dates, subject to certain exceptions. The Credit Agreement matures onJune 30, 2026 . As ofOctober 26, 2022 , our available borrowings under the Credit Agreement were$130.3 million . Since 2016, we have entered into several loan securitization facilities and offered asset-backed notes to fund our growth, primarily in our near-prime consumer installment loan and small business loan businesses. OnOctober 21, 2022 , we entered into a receivables funding agreement that provides additional funding capacity of$125.0 million . As ofOctober 26, 2022 , we had funding capacity of$506.2 million . We expect that our operating needs, including satisfying our obligations under our debt agreements and funding our working capital growth, will be satisfied by a combination of cash flows from operations, borrowings under the Credit Agreement, or any refinancing, replacement thereof or increase in borrowings thereunder, and securitization or sale of loans and finance receivables under our consumer and small business loan securitization facilities. As ofSeptember 30, 2022 , we were in compliance with all financial ratios, covenants and other requirements set forth in our debt agreements. Unexpected changes in our financial condition or other unforeseen factors may result in our inability to obtain third-party financing or could increase our borrowing costs in the future. To the extent we experience short-term or long-term funding disruptions, we have the ability to adjust our volume of lending and financing to consumers and small businesses that would reduce cash outflow requirements while increasing cash inflows through repayments. Additional alternatives may include the securitization or sale of assets, increased borrowings under the Credit Agreement, or any refinancing or replacement thereof, and reductions in capital spending, which could be expected to generate additional liquidity.
Capital
Our Total stockholders' equity increased by$53.2 million to$1,146.2 million atSeptember 30, 2022 from$1,093.1 million atDecember 31, 2021 . The increase of stockholders' equity was driven primarily by net income for the nine months endedSeptember 30, 2022 and, to a lesser extent, stock-based compensation expense, partially offset by repurchases of our outstanding common stock. Our book value per share outstanding increased to$36.24 atSeptember 30, 2022 from$32.01 atDecember 31, 2021 , which was primarily driven by the decrease in shares outstanding as a result of share repurchases, which is discussed in more detail below. OnNovember 5, 2020 , we announced the Board of Directors had authorized a share repurchase program for up to$50.0 million of our outstanding common stock throughDecember 31, 2021 (the "2020 Authorization"). OnNovember 4, 2021 , we announced the Board of Directors authorized a new share repurchase program totaling$150.0 million throughDecember 31, 2022 (the "2021 Authorization"). The 2021 Authorization replaced the 2020 Authorization. OnFebruary 9, 2022 , we announced the Board of Directors authorized a new share repurchase program totaling$100.0 million throughJune 30, 2023 (the "2022 Authorization"). The 2022 Authorization replaced the 2021 Authorization. Repurchases under our share repurchase programs are made in accordance with applicable securities laws from 37 -------------------------------------------------------------------------------- time to time in the open market, through privately negotiated transactions or otherwise. Our share repurchase programs do not obligate us to purchase any shares of our common stock. Similar to our previous share repurchase programs, the 2022 Authorization may be terminated, increased or decreased by the Board of Directors in its discretion at any time. During the nine months endedSeptember 30, 2022 , we had$118.8 million in repurchases of common stock under our share repurchase programs. Cash Our cash and cash equivalents are held primarily for working capital purposes and are used to fund a portion of our lending activities. We do not enter into investments for trading or speculative purposes. Our policy is to invest cash in excess of our immediate working capital requirements in short-term investments, deposit accounts or other arrangements designed to preserve the principal balance and maintain adequate liquidity. Our excess cash may be invested primarily in overnight sweep accounts, money market instruments or similar arrangements that provide competitive returns consistent with our polices and market conditions. Our restricted cash represents funds held in accounts as reserves on certain debt facilities and as collateral for issuing bank partner transactions. We have no ability to draw on such funds as long as they remain restricted under the applicable arrangements but have the ability to use these funds to finance loan originations, subject to meeting borrowing base requirements. Our policy is to invest restricted cash held in debt facility related accounts, to the extent permitted by such debt facility, in investments designed to preserve the principal balance and provide liquidity. Accordingly, such cash is invested primarily in money market instruments that offer daily purchase and redemption and provide competitive returns consistent with our policies and market conditions.
Current borrowing facilities
The following table summarizes our debt facilities as ofSeptember 30, 2022 (dollars in thousands). Weighted average interest Borrowing Principal Maturity date rate(a) capacity outstanding Funding Debt: 2018-1 Securitization Facility March 2027 (b) 6.54% 200,000 (h) 175,000 2018-2 Securitization Facility July 2025 (c) 6.74% 225,000 (i) 189,327 2019-A Securitization Notes June 2026 7.62% 276 276
ODR 2021-1 Securitization facility
62,000
RAOD securitization facility
300,000 Total funding debt 4.71%$ 1,582,118 $ 1,132,445 Corporate Debt: 8.50% Senior Notes Due 2024 September 2024 8.50% 250,000 250,000 8.50% Senior Notes Due 2025 September 2025 8.50% 375,000 375,000 Revolving line of credit June 2026 6.51% 440,000 (l) 309,000 Total corporate debt 7.84%$ 1,065,000 $ 934,000 (a) The weighted average interest rate is determined based on the rates and principal balances onSeptember 30, 2022 . It does not include the impact of the amortization of deferred loan origination costs or debt discounts. (b) The period during which new borrowings may be made under this facility expires inMarch 2025 . (c) The period during which new borrowings may be made under this facility expires inJuly 2023 . (d) The period during which new borrowings may be made under this facility expires inNovember 2023 . (e) The period during which new borrowings may be made under this facility expires inJune 2024 . (f) The period during which new borrowings may be made under this facility expires inDecember 2022 . (g) The period during which new borrowings may be made under this facility expires inApril 2024 . (h) During the current nine-month period, we amended this facility to increase the maximum borrowing capacity from$150.0 million to$200.0 million . (i) During the current nine-month period, we amended this facility to increase the maximum borrowing capacity from$150.0 million to$225.0 million . (j) During the current nine-month period, we amended this facility to increase the maximum borrowing capacity from$150.0 million to$200.0 million . (k) During the current nine-month period, we amended this facility to increase the maximum borrowing capacity from$177.6 million to$236.8 million . (l) During the current nine-month period, we amended the Revolving line of credit to increase the borrowing capacity from$310.0 million to$440.0 million . Additionally, we had an outstanding letter of credit under the Revolving line of credit of$0.8 million as ofSeptember 30, 2022 . 38 --------------------------------------------------------------------------------
Our ability to fully utilize the available capacity of our credit facilities may also be affected by provisions that limit concentration risk and eligibility.
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