WORLD ACCEPTANCE CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Information This report on Form 10-Q, including "Management’s Discussion and Analysis of Financial Condition and Results of Operations," contains various "forward-looking statements," within the meaning of The Private Securities Litigation Reform Act of 1995, that are based on management’s beliefs and assumptions, as well as information currently available to management. Statements other than those of historical fact, including those identified by words such as “anticipate,” “estimate,” “intend,” “plan,” “expect,” “believe,” “may,” “will,” “should,” "would," "could," "continue," "forecast," and any variation of the foregoing and similar expressions are forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Any such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the Company’s actual financial results, performance or financial condition may vary materially from those anticipated, estimated or expected. Therefore, you should not rely on any of these forward-looking statements. Among the key factors that could cause our actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements are the following: the ongoing impact of the COVID-19 pandemic and the mitigation efforts by governments and related effects on our financial condition, business operations and liquidity, our customers, our employees, and the overall economy; recently enacted, proposed or future legislation and the manner in which it is implemented; changes in the U.S. tax code; the nature and scope of regulatory authority, particularly discretionary authority, that may be exercised by regulators, including, but not limited to, the Securities and Exchange Commission (SEC), Department of Justice, U.S. Consumer Financial Protection Bureau, and individual state regulators having jurisdiction over the Company; the unpredictable nature of regulatory proceedings and litigation, employee misconduct or misconduct by third parties, uncertainties associated with management turnover and the effective succession of senior management; media and public characterization of consumer installment loans, labor unrest the impact of changes in accounting rules and regulations, or their interpretation or application, which could materially and adversely affect the Company’s reported consolidated financial statements or necessitate material delays or changes in the issuance of the Company’s audited consolidated financial statements; the Company's assessment of its internal control over financial reporting; changes in interest rates; the impact of inflation; risks relating to the acquisition or sale of assets or businesses or other strategic initiatives, including increased loan delinquencies or net charge-offs, the loss of key personnel, integration or migration issues, the failure to achieve anticipated synergies, increased costs of servicing, incomplete records, and retention of customers; risks inherent in making loans, including repayment risks and value of collateral; cybersecurity threats, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; our dependence on debt and the potential impact of limitations in the Company’s amended revolving credit facility or other impacts on the Company's ability to borrow money on favorable terms, or at all; the timing and amount of revenues that may be recognized by the Company; changes in current revenue and expense trends (including trends affecting delinquency and charge-offs); the impact of extreme weather events and natural disasters; changes in the Company’s markets and general changes in the economy (particularly in the markets served by the Company). These and other risks are discussed in more detail in Part I, Item 1A “Risk Factors” in the Company's most recent annual report on Form 10-K for the fiscal year ended March 31, 2022 filed with the SEC, and in the Company’s other reports filed with, or furnished to, the SEC from time to time. The Company does not undertake any obligation to update any forward-looking statements it may make. Results of Operations The following table sets forth certain information derived from the Company's consolidated statements of operations and balance sheets (unaudited), as well as operating data and ratios, for the periods indicated: 33 Table of Contents Three months ended December 31, Nine months ended December 31, 2022 2021 2022 2021 (Dollars in thousands) Gross loans receivable $ 1,553,985 $ 1,606,111 $ 1,553,985 $ 1,606,111 Average gross loans receivable (1) 1,562,199 1,493,234 1,585,306 1,319,026 Net loans receivable (2) 1,122,687 1,172,679 1,122,687 1,172,679 Average net loans receivable (3) 1,131,636 1,094,014 1,153,443 970,992 Expenses as a percentage of total revenue: Provision for credit losses 40.7 % 38.0 % 47.0 % 30.9 % General and administrative 45.4 % 50.0 % 46.2 % 53.5 % Interest expense 9.6 % 6.8 % 8.4 % 5.4 % Operating income as a % of total revenue (4) 14.0 % 12.0 % 6.8 % 15.6 % Loan volume (5) 787,775 976,118 2,476,631 2,531,815 Net charge-offs as percent of average net loans receivable on an annualized basis 25.1 % 13.8 % 23.6 % 12.0 % Return on average assets (trailing 12 months) 1.1 % 7.4 % 1.1 % 7.4 % Return on average equity (trailing 12 months) 3.8 % 20.1 % 3.8 % 20.1 % Branches opened or acquired (merged or closed), net (20) — (83) (3) Branches open (at period end) 1,084 1,202 1,084 1,202 _______________________________________________________ (1) Average gross loans receivable has been determined by averaging month-end gross loans receivable over the indicated period, excluding tax advances. (2) Net loans receivable is defined as gross loans receivable less unearned interest and deferred fees. (3) Average net loans receivable has been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period, excluding tax advances. (4) Operating income is computed as total revenue less provision for credit losses and general and administrative expenses. (5) Loan volume includes all loan balances originated by the Company. It does not include loans purchased through acquisitions. Comparison of three months ended December 31, 2022 versus three months ended December 31, 2021 Gross loans outstanding increased to $1.55 billion as of December 31, 2022, a 3.2% decrease from the $1.61 billion of gross loans outstanding as of December 31, 2021. During the three months ended December 31, 2022 our unique borrowers decreased by 4.9% compared to an increase of 7.7% during the three months ended December 31, 2021. Net income for the three months ended December 31, 2022 decreased to net income of $5.8 million, a 21.4% decrease from a net income of $7.3 million for the same period of the prior year. Operating income, which is revenue less provision for credit losses and general and administrative expenses, increased by $2.6 million, or 14.3%, compared to the same period of the prior fiscal year. Revenues for the three months ended December 31, 2022 decreased by $2.1 million, or 1.4%, to $146.5 million from $148.6 million for the same period of the prior year. The decrease was primarily due to a 4.8% decrease in average gross earning loans (total gross loans less gross loans 60 days or more contractually past due and tax advances). 34 Table of Contents Interest and fee income for the three months ended December 31, 2022 decreased by $1.9 million, or 1.5%, from the same period of the prior year due to a decrease in loans outstanding. The decrease was primarily due to a 4.8% decrease in average gross earning loans (total gross loans less gross loans 60 days or more contractually past due and tax advances). Insurance and other income for the three months ended December 31, 2022 decreased by $0.1 million, or 0.6%, from the same period of the prior year. Insurance income increased by approximately $2.8 million, or 19.5%, during the three months ended December 31, 2022 when compared to the three months ended December 31, 2021. Insurance income increased due to a shift to larger loans over the twelve months ending December 31, 2022. The sale of insurance products are limited to large loans in several of our states. The large loan portfolio increased from 49.5% of the overall portfolio as of December 31, 2021 to 56.4% as of December 31, 2022. Other income decreased by $2.9 million. Other income decreased due to a decrease in sales of our motor club product as a result of lower originations during the quarter. The provision for credit losses increased $3.1 million, or 5.6%, to $59.6 million from $56.5 million when comparing the third quarter of fiscal 2023 to the third quarter of fiscal 2022. The table below itemizes the key components of the CECL allowance and provision impact during the quarter. CECL Allowance and Provision (Dollars in millions) FY 2023 FY 2022 Difference Reconciliation Beginning Allowance - September 30 $155.9 $114.7 $41.2 Change due to Growth $(4.3) $17.4 $(21.7) $(21.7) Change due to Expected Loss Rate on Performing Loans $(7.5) $(10.9) $3.4 $3.4 Change due to 90 day past due $0.4 $12.2 $(11.8) $(11.8) Ending Allowance - December 31 $144.5 $133.4 $11.1 $(30.1) Net Charge-offs $71.0 $37.8 $33.2 $33.2 Provision $59.6 $56.5 $3.1 $3.1 Note: The change in allowance for the quarter plus net charge-offs for the quarter equals the provision for the quarter (see above reconciliation). The provision benefited from a decrease in the portfolio and changes in expected loss rates on our performing loans. The three most important factors impacting the expected loss rates on performing loans are recent actual loss performance, changes in Customer Tenure mix, and a seasonality factor. The table below includes the seasonality factor for each quarter end. Quarter End Seasonality Factor March 31 0.943738 June 30 1.080301 September 30 1.047518 December 31 0.938281 Expected loss rates by Customer Tenure bucket also increased due to actual loss rates increasing as credit normalizes. Actual loss rates increased at substantially lower rates in the third quarter compared to the first and second quarter. This was offset by a decreasing seasonality factor and by a shift in portfolio mix to more tenured customers. Net charge-offs for the quarter increased 33.2 million, from $37.8 million in the third quarter of fiscal 2022 to $71.0 million in the third quarter of fiscal 2023. Net charge-offs as a percentage of average net loan receivables on an annualized basis increased from 13.8% in the third quarter of fiscal 2022 to 25.1% in the third quarter of fiscal 2023. Net charge-offs during the period include $11.4 million in proceeds related to the sale of charge-offs, for which $8.4 million relates to bulk sales of charge-offs from prior periods and $3 million relates to recurring sales of charge-offs during the three months ended December 31, 2022. The Company's allowance for credit losses as a percentage of net loans was 12.9% at December 31, 2022 compared to 11.4% at December 31, 2021. Accounts that were 61 days or more past due on a recency basis were 7.4% of the portfolio at December 31, 2022 and 6.4% of the portfolio at December 31, 2021. Accounts that were 61 days or more past due on a contractual basis were 9.3% of the portfolio at December 31, 2022 compared to 7.8% of the portfolio at December 31, 2021. G&A expenses for the three months ended December 31, 2022 decreased by $7.8 million, or 10.5%, from the corresponding period of the previous year. As a percentage of revenues, G&A expenses decreased from 50.0% during the three months ended December 31, 2021 to 45.4% during the three months ended December 31, 2022. G&A expenses per average open branch 35 Table of Contents decreased by 1.6% when comparing the two three-month periods. The change in G&A expense is explained in greater detail below. Personnel expense totaled $40.7 million for the three months ended December 31, 2022, a $3.7 million, or 8.3%, decrease over the three months ended December 31, 2021. Benefit expense decreased approximately $0.1 million, or 1.7%, when comparing the quarterly periods ended December 31, 2022 and 2021. Incentive expense decreased $6.9 million, or 62.8%. This was offset by a $2.2 million, or 7.5%, increase in salary expense when comparing the two quarterly periods ended December 31, 2022 and 2021. The decrease in incentives expense is mostly due to a $3.1 million decrease in share based compensation related to forfeiture of shares during the third quarter of fiscal 2023. Additionally, o n July 1, 2022, we increased base wages for our Financial Service Representatives to a minimum of approximately $15 an hour and eliminated the monthly bonus for the same position. The increase in salary expense is mostly due to the increased based wages for our Financial Service Representatives as mentioned above and our headcount as of December 31, 2022, increased 0.8% compared to December 30, 2021. Occupancy and equipment expense totaled $12.9 million for the three months ended December 31, 2022, a $0.3 million, or 2.5%, increase over the three months ended December 31, 2021. Occupancy and equipment expense is generally a function of the number of branches the Company has open throughout the period. The current year includes $0.4 million in expense related to the merger of branches during the quarter. For the three months ended December 31, 2022, the average open branches decreased 9.1% compared to the three months ended December 31, 2021. Advertising expense decreased $5.5 million, or 80.7%, in the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022 due to decreased spending on new customer acquisition programs. Amortization of intangible assets totaled $1.1 million for the three months ended December 31, 2022, a $161.2 thousand, or 12.6%, decrease over the three months ended December 31, 2021. Other expense totaled $10.4 million for the three months ended December 31, 2022, a $1.3 million, or 13.8%, increase over the three months ended December 31, 2021. Interest expense for the three months ended December 31, 2022 increased by $3.9 million, or 38.4%, from the corresponding three months of the previous year. The increase in interest expense was due to a 14.6% increase in the average debt outstanding, from $640.8 million to $734.3 million, and a 21.4% increase in the effective interest rate from 6.3% to 7.6%. The Company’s senior debt-to-equity ratio increased from 1.8:1 at December 31, 2021 to 2.0:1 at December 31, 2022. Other key return ratios for the three months ended December 31, 2022 included a 1.1% return on average assets and a return on average equity of 3.8% (both on a trailing 12-month basis), as compared to a 7.4% return on average assets and a return on average equity of 20.1% (both on a trailing 12-month basis) for the three months ended December 31, 2021. The Company’s effective income tax rate increased to 9.7% for the three months ended December 31, 2022 compared to 5.1% for the corresponding period of the previous year. The increase is primarily due to the permanent benefit related to non-qualified stock option exercises and vesting of restricted stock as discrete items in the prior year quarter. This was partially offset by the effects of pretax book earnings relative to the effects of various permanent items including a decrease in the disallowed executive compensation under Section 162(m) and the recognition of additional Federal Historic Tax Credits when compared to the prior year quarter. Comparison of nine months ended December 31, 2022 versus nine months ended December 31, 2021 Gross loans outstanding increased to $1.55 billion as of December 31, 2022, a 3.2% decrease from the $1.61 billion of gross loans outstanding as of December 31, 2021. During the nine months ended December 31, 2022 our number of unique borrowers in the portfolio decreased by 13.7% compared to an increase of 4.4% during the nine months ended December 31, 2021. Net income (loss) for the nine months ended December 31, 2022 decreased to a net loss of $4.4 million, a 112.4% decrease from a net income of $35.5 million reported for the same period of the prior year. Operating income (revenue less provision for credit losses and general and administrative expenses) decreased by $33.9 million, or 52.4%. Revenues increased by $39.3 million, or 9.4%, to $455.3 million during the nine months ended December 31, 2022 from $416.1 million for the same period of the prior year. The increase was primarily due to an increase in average net loans outstanding. 36 Table of Contents Interest and fee income for the nine months ended December 31, 2022 increased by $31.4 million, or 8.8%, from the same period of the prior year. Interest and fee income was impacted by a shift to larger, lower interest rate loans. Average net loans outstanding increased by 18.8% for the nine months ended December 31, 2022 compared to the nine-month period ended December 31, 2021. Insurance and other income for the nine months ended December 31, 2022 increased by $7.8 million, or 12.9%, from the same period of the prior year. Insurance income increased by approximately $10.5 million, or 25.7%, during the nine months ended December 31, 2022 when compared to the nine months ended December 31, 2021. Insurance income benefited from the shift to larger loans mentioned above. Other income decreased by $2.6 million due to a decreases in the sale of our motor club product and tax preparation business revenue, offset by a $3.7 million bargain purchase gain during the nine months ended December 31, 2022. G&A expenses for the nine months ended December 31, 2022 decreased by $12.1 million, or 5.4%, from the corresponding period of the previous year. As a percentage of revenues, G&A expenses decreased from 53.5% during the first nine months of fiscal 2022 to 46.2% during the first nine months of fiscal 2023. G&A expenses per average open branch increased by 1.1% when comparing the two nine-month periods. The change in G&A expense is explained in greater detail below. Personnel expense totaled $131.2 million for the nine months ended December 31, 2022, a $5.2 million, or 3.8%, decrease over the nine months ended December 31, 2021. Salary expense increased approximately $7.1 million, or 8.2%, when comparing the two nine month periods ended December 31, 2022 and 2021. Our headcount as of December 31, 2022, increased 0.8% compared to December 31, 2021. Benefit expense decreased approximately $1.2 million, or 4.7%, when comparing the nine month periods ended December 31, 2022 and 2021. Incentive expense decreased $12.6 million, or 36.8% mostly due to a decrease in share based compensation related to forfeiture of shares and a reduction in branch level bonuses. Occupancy and equipment expense totaled $39.7 million for the nine months ended December 31, 2022, a $0.5 million, or 1.3%, increase over the nine months ended December 31, 2021. Occupancy and equipment expense is generally a function of the number of branches the Company has open throughout the period. For the nine months ended December 31, 2022, the average occupancy and equipment expense per branch increased to $35.2 thousand, up from $32.5 thousand for the nine months ended December 31, 2021. The prior year includes $0.4 million more in write down of signage as a result of rebranding our offices when comparing the two nine-month periods. The current year includes $1.5 million in expense related to the merger of branches during the nine months ended December 31, 2022. Advertising expense totaled $4.5 million for the nine months ended December 31, 2022, a $11.4 million, or 71.4%, decrease over the nine months ended December 31, 2021. The decrease is due to decreased spending on new customer acquisition programs during the period. Amortization of intangible assets totaled $3.4 million for the nine months ended December 31, 2022, a $383.4 thousand, or 10.3%, decrease over the nine months ended December 31, 2021. Other expense totaled $31.7 million for the nine months ended December 31, 2022, a $4.3 million, or 15.8%, increase over the nine months ended December 31, 2021. Interest expense for the nine months ended December 31, 2022 increased by $15.9 million, or 71.0%, from the corresponding nine months of the previous year. The increase in interest expense was due to a 41.0% increase in the average debt outstanding, from $530.0 million to $747.4 million, offset by a 23.1% increase in the effective interest rate from 5.5% to 6.8%. Other key return ratios for the first nine months of fiscal 2023 included a 1.1% return on average assets and a return on average equity of 3.8% (both on a trailing 12-month basis), as compared to a 7.4% return on average assets and a return on average equity of 20.1% (both on a trailing 12-month basis) for the first nine months of fiscal 2022. The Company’s effective income tax rate increased to 41.1% for the nine months ended December 31, 2022 compared to 16.1% for the corresponding period of the previous year. The increase is primarily due to the permanent benefit related to non-qualified stock option exercises and vesting of restricted stock as discrete items in the prior year. This was partially offset by the effects of pretax book earnings relative to the effects of various permanent items including a decrease in the disallowed executive compensation under Section 162(m) and the recognition of additional Federal Historic Tax Credits when compared to the prior year. 37 Table of Contents Regulatory Matters CFPB Rulemaking Initiatives On October 5, 2017, the CFPB issued a final rule (the "Rule") imposing limitations on (i) short-term consumer loans, (ii) longer-term consumer installment loans with balloon payments, and (iii) higher-rate consumer installment loans repayable by a payment authorization. The Rule originally required lenders originating short-term loans and longer-term balloon payment loans to evaluate whether each consumer has the ability to repay the loan along with current obligations and expenses (“ability to repay requirements”), however the ability to repay requirements were rescinded in July 2020. The Rule also curtails repeated unsuccessful attempts to debit consumers’ accounts for short-term loans, balloon payment loans, and installment loans that involve a payment authorization and an annual percentage rate over 36% (“payment requirements”). However, on October 19, 2022, a three-judge panel of the Fifth Circuit Court of Appeals held in Cmty. Fin.l Servs. Ass’n of Am., Ltd. v. Consumer Fin. Prot. Bureau , that the CFPB’s funding structure violated the U.S. Constitution’s Appropriations Clause, which requires that all expenditures of federal funds be approved by Congress. On this ground, it vacated the Rule. The decision will be binding in the Fifth Circuit’s jurisdiction, covering Louisiana, Texas and Mississippi, and persuasive in other circuits until there’s a competing case to contradict it. The CFPB has filed a certiorari petition asking the U.S. Supreme Court to review the Fifth Circuit’s panel decision and hear arguments in April 2023. Implementation of the Rule’s payment requirements is uncertain, but if it were to take effect it could require changes to the Company’s practices and procedures for such loans, which could materially and adversely affect the Company’s ability to make such loans, the cost of making such loans, the Company’s ability to, or frequency with which it could, refinance any such loans, and the profitability of such loans. Unless rescinded or otherwise amended, the Company will have to comply with the Rule’s payment requirements if it continues to allow consumers to set up future recurring payments online for certain covered loans such that it meets the definition of having a “leveraged payment mechanism” under the Rule. If the payment provisions of the Rule apply, the Company will have to modify its loan payment procedures to comply with the required notices and mandated timeframes set forth in the final rule. In its Fall 2015 rulemaking agenda, the CFPB stated that it expected to conduct a rulemaking to identify larger participants in the installment lending market for purposes of its supervision program. However, this initiative was classified as “inactive” on the CFPB’s Spring 2018 rulemaking, and its Fall 2022 rulemaking agenda showed no planned activity in this area. Though the likelihood and timing of any such rulemaking is uncertain, the Company believes that the implementation of such rules would likely bring the Company’s business under the CFPB’s supervisory authority which, among other things, would subject the Company to reporting obligations to, and on-site compliance examinations by, the CFPB. See Part I, Item 1, “Business - Government Regulation - Federal legislation,” for a further discussion of these matters and the federal regulations to which the Company’s operations are subject and Part I, Item 1A, “Risk Factors,” in the Company’s Form 10-K for the year ended March 31, 2021 for more information regarding these regulatory and related risks. Liquidity and Capital Resources The Company has historically financed and continues to finance its operations, acquisitions and branch expansion primarily through a combination of cash flows from operations and borrowings from its institutional lenders. As discussed below, the Company has also issued debt securities to finance its operations and repay a portion of its outstanding indebtedness. The Company has generally applied its cash flows from operations to fund its loan volume, fund acquisitions, repay long-term indebtedness, and repurchase its common stock. Net cash provided by operating activities for the nine months ended December 31, 2022 was $205.9 million. The Company believes that attractive opportunities to acquire new branches or receivables from its competitors or to acquire branches in communities not currently served by the Company will continue to become available as conditions in local economies and the financial circumstances of owners change. On September 27, 2021, we issued $300.0 million in aggregate principal amount of 7.0% senior notes due 2026 (the “Notes”). The Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s existing and certain of its future subsidiaries that guarantee the revolving credit facility. Interest on the Notes is payable semi-annually in arrears on May 1 and November 1 of each year, commencing May 1, 2022. At any time prior to November 1, 2023, the Company may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount plus a make-whole premium, as described in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. At any time on or after November 1, 2023, the Company may redeem the Notes at redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. In addition, at any time 38 Table of Contents prior to November 1, 2023, the Company may use the proceeds of certain equity offerings to redeem up to 40% of the aggregate principal amount of the Notes issued under the indenture at a redemption price equal to 107.0% of the principal amount of Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. We used the net proceeds from this offering to repay a portion of the outstanding indebtedness under our revolving credit facility and for general corporate purposes. The indenture governing the Notes contains certain covenants that, among other things, limit the Company’s ability and the ability of its restricted subsidiaries to (i) incur additional indebtedness or issue certain disqualified stock and preferred stock; (ii) pay dividends or distributions or redeem or purchase capital stock; (iii) prepay subordinated debt or make certain investments; (iv) transfer and sell assets; (v) create or permit to exist liens; (vi) enter into agreements that restrict dividends, loans and other distributions from their subsidiaries; (vii) engage in a merger, consolidation or sell, transfer or otherwise dispose of all or substantially all of their assets; and (viii) engage in transactions with affiliates. However, these covenants are subject to a number of important detailed qualifications and exceptions. The Company continues to believe stock repurchases are a viable component of the Company’s long-term financial strategy and an excellent use of excess cash when the opportunity arises. However, our revolving credit facility and the Notes limit share repurchases to up to 50% of consolidated adjusted net income for the period commencing January 1, 2019. As of December 31, 2022, subject to further approval from our Board of Directors, we could repurchase approximately $16.4 million of shares under the terms of our debt facilities. A dditional share repurchases can be made subject to compliance with, among other things, applicable restricted payment covenants under the revolving credit facility and the Notes. The Company has a revolving credit facility with a syndicate of banks. The revolving credit facility provides for revolving borrowings of up to the lesser of (a) the aggregate commitments under the facility and (b) a borrowing base, and it includes a $300.0 thousand letter of credit under a $1.5 million subfacility. Subject to a borrowing base formula, the Company may borrow at the rate of one month SOFR plus .10% and an applicable margin of 3.5% with a minimum rate of 4.5%. At December 31, 2022, the aggregate commitments under the revolving credit facility were $685.0 million. The $300.0 thousand letter of credit outstanding under the subfacility expired on December 31, 2021; however, it automatically extends for one year on the expiration date. The borrowing base limitation is equal to the product of (a) the Company’s eligible finance receivables, less unearned finance charges, insurance premiums and insurance commissions applicable to such eligible finance receivables, and (b) an advance rate percentage that ranges from 62% to 80% based on a collateral performance indicator, as more completely described below. Further, under the amended and restated revolving credit agreement, the administrative agent has the right to set aside reasonable reserves against the available borrowing base in such amounts as it may deem appropriate, including, without limitation, reserves with respect to certain regulatory events or any increased operational, legal, or regulatory risk of the Company and its subsidiaries. For the nine months ended December 31, 2022 and fiscal year ended March 31, 2022, the Company’s effective interest rate, including the commitment fee and amortization of debt issuance costs, was 6.8% annualized and 5.5%, respectively, and the unused amount available under the revolving credit facility at December 31, 2022 was $258.2 million. Borrowings under the revolving credit facility mature on June 7, 2024. The Company’s obligations under the revolving credit facility, together with treasury management and hedging obligations owing to any lender under the revolving credit facility or any affiliate of any such lender, are required to be guaranteed by each of the Company’s wholly-owned domestic subsidiaries. The obligations of the Company and the subsidiary guarantors under the revolving credit facility, together with such treasury management and hedging obligations, are secured by a first-priority security interest in substantially all assets of the Company and the subsidiary guarantors. The agreement governing the Company’s revolving credit facility contains affirmative and negative covenants, including covenants that restrict the ability of the Company and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, pay dividends and repurchase or redeem capital stock, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, redeem or prepay subordinated debt, amend subordinated debt documents, make changes in the nature of its business, and engage in transactions with affiliates. The agreement allows the Company to incur subordinated debt that matures after the termination date for the revolving credit facility and that contains specified subordination terms, subject to limitations on the amount incurred that are imposed by the financial covenants under the agreement. The agreement also contains financial covenants, including (i) a minimum consolidated net worth of $325.0 million on and after December 31, 2020; (ii) a maximum ratio of total debt to consolidated adjusted net worth as further discussed below; (iii) a maximum collateral performance indicator as further discussed below; and (iv) a minimum fixed charges coverage ratio as further discussed below. 39 Table of Contents As further discussed in Note 10 to the Consolidated Financial Statements, on November 23, 2022, the Company entered into the Ninth Amendment to, among other things, (1) change the required ratio for net income available for fixed charges to fixed charges to 1.25 to 1.0 for the fiscal quarter ending December 31, 2022, 1.15 to 1.0 for the fiscal quarters ending March 31, 2023 and June 30, 2023, 1.50 to 1.0 for the fiscal quarter September 30, 2023, 2.0 to 1.0 for the fiscal quarter ending December 31, 2023, and 2.75 to 1.0 for each fiscal quarter thereafter, where the most recent four consecutive fiscal quarters must be at least 2.0 to 1.0 in order for the Company to declare dividends or purchase any class or series of its capital stock or other equity; (2) change the ratio of total debt to consolidated adjusted net worth to 2.5 to 1.0 for the fiscal quarter ending December 31, 2022, 2.25 to 1.0 for the fiscal quarters ending March 31, 2023 and June 30, 2023, 2.0 to 1.0 for the fiscal quarter ending September 30, 2023, 2.25 to 1.0 for the fiscal quarter ending December 31, 2023, and 2.5 to 1.0 for each fiscal quarter thereafter; (3) require a collateral performance indicator of less than or equal to 28% for the calendar months ending October 31, 2022 through June 30, 2023 and 26% thereafter; and (4) decrease the advance rate to as low as 62% from 74% for the calendar months ending October 31, 2022 through June 30, 2023. The collateral performance indicator is equal to the sum of (a) a three-month rolling average rate of receivables at least sixty days past due and (b) an eight-month rolling average net charge-off rate. The Company was in compliance with these covenants at December 31, 2022 and does not believe that these covenants will materially limit its business and expansion strategy. The agreement contains events of default including, without limitation, nonpayment of principal, interest or other obligations, violation of covenants, misrepresentation, cross-default and cross-acceleration to other debt, bankruptcy and other insolvency events, judgments, certain ERISA events, actual or asserted invalidity of loan documentation, invalidity of subordination provisions of subordinated debt, certain changes of control of the Company, and the occurrence of certain regulatory events (including the entry of any stay, order, judgment, ruling or similar event related to the Company’s or any of its subsidiaries’ originating, holding, pledging, collecting or enforcing its eligible finance receivables that is material to the Company or any subsidiary) which remains unvacated, undischarged, unbonded or unstayed by appeal or otherwise for a period of 60 days from the date of its entry and is reasonably likely to cause a material adverse change. The Company believes that cash flow from operations and borrowings under its revolving credit facility or other sources will be adequate to fund the expected cost of opening or acquiring new branches, including funding initial operating losses of new branches and funding loans receivable originated by those branches and the Company's other branches (for the next 12 months and for the foreseeable future beyond that). Except as otherwise discussed in this report including, but not limited to, any discussions in Part 1, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K (as supplemented by any subsequent disclosures in information the Company files with or furnishes to the SEC from time to time), management is not currently aware of any trends, demands, commitments, events or uncertainties that it believes will or could result in, or are or could be reasonably likely to result in, any material adverse effect on the Company’s liquidity. Share Repurchase Program On February 24, 2022, the Board of Directors authorized the Company to repurchase up to $30.0 million of the Company’s outstanding common stock, inclusive of the amount that remained available for repurchase under prior repurchase authorizations. As of December 31, 2022 the Company had $1.1 million in aggregate remaining repurchase capacity under its current share repurchase program. The timing and actual number of shares repurchased will depend on a variety of factors, including the stock price, corporate and regulatory requirements, available funds, alternative uses of capital, restrictions under the revolving credit agreement, and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time. The Company continues to believe stock repurchases are a viable component of the Company’s long-term financial strategy and an excellent use of excess cash when the opportunity arises. Additional share repurchases can be made subject to compliance with, among other things, applicable restricted payment covenants under the revolving credit facility and the Notes. Our first priority is to ensure we have enough capital to fund loan growth. As of December 31, 2022, subject to further approval from our Board of Directors, we could repurchase approximately $16.4 million of shares under the terms of our debt facilities. To the extent we have excess capital, we may repurchase stock, if appropriate and as authorized by our Board of Directors. As of December 31, 2022, the Company's debt outstanding was $722.5 million, net of $3.9 million unamortized debt issuance costs related to the unsecured senior notes payable, and its shareholders' equity was $359.6 million resulting in a debt-to-equity ratio of 2.0:1.0. Management will continue to monitor the Company's debt-to-equity ratio and is committed to maintaining a debt level that will allow the Company to continue to execute its business objectives, while not putting undue stress on its consolidated balance sheet. Inflation 40 Table of Contents The Company does not believe that inflation, within reasonably anticipated rates, will have a material, adverse effect on its financial condition. Although inflation would increase the Company’s operating costs in absolute terms, the Company expects that the same decrease in the value of money would result in an increase in the size of loans demanded by its customer base. It is reasonable to anticipate that such a change in customer preference would result in an increase in total loans receivable and an increase in absolute revenue to be generated from that larger amount of loans receivable. The Company believes that this increase in absolute revenue should offset any increase in operating costs. In addition, because the Company’s loans have a relatively short contractual term and average life, it is unlikely that loans made at any given point in time will be repaid with significantly inflated dollars. Quarterly Information and Seasonality See Note 3 to the unaudited Consolidated Financial Statements. Recently Adopted Accounting Pronouncements See Note 3 to the unaudited Consolidated Financial Statements. Critical Accounting Policies The Company’s accounting and reporting policies are in accordance with GAAP and conform to general practices within the finance company industry. Certain accounting policies involve significant judgment by the Company’s management, including the use of estimates and assumptions which affect the reported amounts of assets, liabilities, revenue, and expenses. As a result, changes in these estimates and assumptions could significantly affect the Company’s financial position and results of operations. The Company considers its policies regarding the allowance for credit losses, share-based compensation and income taxes to be its most critical accounting policies due to the significant degree of management judgment involved. Allowance for Credit Losses Accounting policies related to the allowance for credit losses are considered to be critical as these policies involve considerable subjective judgement and estimation by management. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance account represents management’s best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions, and reasonable and supportable forecasts. Share-Based Compensation The Company measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest. The fair value of restricted stock is based on the number of shares granted and the quoted price of the Company’s common stock at the time of grant, and the fair value of stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions, including expected volatility, risk-free interest rate and expected life, changes to which can materially affect the fair value estimate. Actual results and future changes in estimates may differ substantially from the Company’s current estimates. Income Taxes Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a periodic basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by management or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings, changes in the tax code, or assessments made by the IRS, state, or foreign taxing authorities. The Company is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered 41 Table of Contents deductible either now or in future periods, and the dependency on the generation of future taxable income in order to ultimately realize deferred income tax assets. Under FASB ASC Topic 740, the Company will include the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While the Company supports its tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis of what it considers to be all relevant facts, circumstances and regulations, management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position. 42 Table of Contents