Heights Acquisition Adds $472 million¹, or 30%, to Company Owned Gross Loans Receivable; Consolidated Revenue Grew 11.0% in the Quarter Compared to 2020

CURO Group Holdings Corp. (NYSE: CURO) (“CURO” or the “Company”), a tech-enabled, omni-channel consumer finance company serving a full spectrum of non-prime and prime consumers in the U.S. and Canada, today announced financial results for its fourth quarter ended December 31, 2021.

“For CURO, 2021 was a remarkable year on many different levels,” said Don Gayhardt, CURO’s Chief Executive Officer. “Though COVID-19 responses and variants continued to create periods of uncertainty in its second year, we maintained our momentum of loan and earnings growth with solid credit performance. However, I’m most proud of our execution on multiple large-scale acquisition and financing initiatives that continued to transform CURO to a full spectrum lender with a meaningfully lower cost of debt capital in 2021 by nearly 175 bps.”

“The year began and ended with transformational acquisitions. The acquisition of Flexiti in March 2021 diversified our channel, loan and revenue mix by adding established POS financing capabilities and private label credit cards to our Direct Lending capabilities in Canada. We capped 2021 off with the acquisition of Heights Finance, which primarily serves near- and non-prime customers in 11 southern and mid-western states through 390 branches. The Heights acquisition is expected to accelerate our transition into longer-term, higher-balance and lower-rate credit products. Both the Heights and Flexiti acquisitions will solidify our position as a full spectrum non-prime and prime consumer lender in the U.S. and Canada and accelerate our long-term revenue and earnings growth prospects.”

“We also executed on key financing initiatives that made these acquisitions possible. We refinanced our senior secured notes in July 2021, reducing the interest rate by 75bps, increasing capacity, and extending the maturity date to 2028. We added $250 million to the senior secured notes in the fourth quarter to finance, in part, the Heights acquisition. At Flexiti, we increased the capacity of our existing warehouse facility and added securitization capacity, bringing total funding capacity for Flexiti to over C$1 billion.”

“We also monetized a portion of our investment in Katapult. When Katapult became public in June 2021, we received cash of $146.9 million and we now retain 25.2% fully diluted ownership in Katapult (NASDAQ: KPLT).”

“Despite the above transactions, we did not take our eye off the ball at our core businesses. Organic growth in our legacy gross loans receivable at U.S. and Canada Direct Lending during the year combined with growth at Canada POS Lending since the date of its acquisition was 41.4%. Our net-charge offs stabilized as growth continued in all segments, while delinquencies remained at historically low levels, in large part due to excellent credit quality at Flexiti. In late December 2021, we launched First Phase, our new credit card program, which we'll begin rolling out across the U.S. in 2022. It will provide our non-prime customers with a Visa-branded credit card and a number of technology-enabled tools.”

“We added significantly to CURO’s transformation profile in 2021 but major acquisitions take a lot of work to achieve their long-term potential. I’ll close by saying that we will be intensely focused in 2022 on executing and realizing the value creation these opportunities represent.”

¹ Prior to the application of fair value adjustments for purchase accounting, acquired loans were $485 million.

Consolidated Summary Results - Unaudited

On December 27, 2021, we completed the previously announced acquisition of SouthernCo, Inc., a Delaware corporation d/b/a Heights Finance (“Heights”), which resulted in the addition of loans receivable of approximately $472 million in our U.S. segment, after the application of preliminary fair value purchase accounting adjustments, which created a discount on the acquired portfolio. Given the timing of the acquisition, the impact on the Consolidated Statement of Operations for the fourth quarter of 2021 was immaterial. The acquired balance sheet has been included, after the preliminary estimated effect of purchase accounting adjustments, in the Consolidated Balance Sheet as of December 31, 2021.

We reported Net loss of $28.9 million ($0.72 loss per share) for the three months ended December 31, 2021, primarily due to (i) upfront provisioning for loan losses on rapid customer growth late in the quarter in Canada POS Lending, sequential loan growth across our other lines of business, and new customer, channel mix and seasonality which affected NCO rates, (ii) an increase in operating expenses primarily for investments in the continued growth of Canada POS Lending, and (iii) costs associated with the acquisition of Heights. We reported Adjusted Net Loss of $12.3 million ($0.29 adjusted diluted loss per share) on revenue of $224.3 million for the three months ended December 31, 2021. For the year ended December 31, 2021, we reported Net income of $59.3 million ($1.38 diluted earnings per share) and Adjusted Net Income of $41.7 million ($0.97 adjusted diluted earnings per share) on revenue of $817.8 million.

Below are additional highlights of our performance during the three months and year ended December 31, 2021:

• Loans Receivable
  • Year-over-year growth in Company Owned gross loans receivable and combined gross loans receivable of $994.6 million, or 179.6%, and $996.8 million, or 166.7%, respectively, including Flexiti and Heights. Excluding loans acquired on March 10, 2021 and December 27, 2021, gross combined loans receivables increased $329.0 million, or 41.4%.
  • Canada Direct Lending gross loans receivable grew $96.9 million, or 29.3%, year over year and $36.4 million, or 9.3%, sequentially (described within this release as the change from the third quarter to the fourth quarter).
  • Canada POS Lending gross loans receivable were $459.2 million as of December 31, 2021. Sequentially, Canada POS Lending gross loans receivable grew $156.8 million, or 51.9%, primarily driven by the onboarding of Leon's Furniture Limited ("LFL"), Canada's largest home furnishings retailer, and holiday seasonal demand.
  • U.S. Company Owned gross loans receivable, excluding Heights, declined $33.1 million, or 14.8%, year over year. The decline was due to (i) regulatory changes impacting certain loan products in California effective January 1, 2020; in Virginia effective January 1, 2021; and in Illinois effective March 23, 2021, and (ii) the discontinuation of Verge Credit in April 2021. These impacted loans are collectively referred to as "Runoff Portfolios" throughout the remainder of this release. Excluding Runoff Portfolios, U.S. Company Owned gross loans receivable grew $22.1 million, or 14.9%, compared to the prior year, and $11.6 million, or 7.3%, sequentially.

• Revenue and Net Revenue
  • For the three months ended December 31, 2021, revenue increased $22.2 million, or 11.0%, year over year. Sequentially, revenue increased $15.0 million, or 7.2%, primarily driven by growth of $7.3 million, or 5.6% in the U.S., $3.4 million, or 29.5%, in Canada POS Lending and $4.3 million, or 6.6%, in Canada Direct Lending.
  • For the three months ended December 31, 2021, net revenue decreased $1.6 million, or 1.2%, year over year and decreased $7.9 million, or 5.7%, sequentially. The sequential decline in net revenue was due to upfront loan loss provisioning on accelerated sequential loan growth and higher NCO rate trends from new customer mix in originations, seasonality and channel origination mix shifts. Consolidated lending provision for loan losses, excluding Heights, exceeded NCOs by $14.9 million compared to both $6.8 million in the third quarter of 2021 and $4.8 million in the fourth quarter of 2020.

• NCOs and Delinquency Metrics
  • Consolidated quarterly NCO rates, excluding Heights, improved year over year by 220 bps, primarily from the relative growth of Canada POS Lending, which shifts portfolio mix to lower loss-rate products. Sequentially, consolidated quarterly NCO rates increased 100 bps due to relative loan growth, new customer mix in originations, seasonality and channel origination mix shifts.
  • Quarterly NCO rates for U.S., excluding Heights, increased 340 bps year over year and 275 bps sequentially, primarily driven by the aforementioned customer and origination channel mix shifts and diminishing COVID-19 Impacts, as defined later in this release. U.S. NCO rates remained 80 bps below the fourth quarter of 2019.
  • Quarterly NCO rates for Canada Direct Lending increased 85 bps year over year and 110 bps sequentially as product demand for Revolving LOC continues to hold steady, but remained 240 bps below the fourth quarter of 2019.
  • For the three months ended December 31, 2021, Canada Direct Lending past-due rate increased sequentially 200 bps, or 32.1%, due to growth and seasonality. U.S. past-due rate, including loans Guaranteed by the Company, improved sequentially by 75 bps, or 3.4%.

• Other Highlights
  • On December 27, 2021, we completed our acquisition of Heights for $360.0 million, consisting of $335.0 million of cash and $25.0 million of common stock. Heights is a consumer finance company with 390 branches across 11 U.S. states that provides secured and unsecured Installment loans to near-prime and non-prime consumers as well as customary opt-in insurance and other financial products. Heights' secured Installment loan portfolios are secured by both automobiles and, in some instances, non-essential household goods. The gross loans receivable and related revenue are included within the U.S. Installment loan portfolios.
  • Katapult's merger with FinServ Acquisition Corp. ("FinServ") closed on June 9, 2021. We received cash of $146.9 million and recorded a one-time gain of $135.4 million. During the fourth quarter of 2021, we acquired an additional 2.6 million shares of common stock of Katapult for an aggregate purchase price of $10.0 million, which increased our fully diluted ownership, including potential earn-out shares, from 19.3% to 25.2% as of December 31, 2021.
  • On December 9, 2021, we announced the closing of a new C$526.5 million asset-backed revolving credit facility ("Non-Recourse Flexiti Securitization Facility") to provide financing for Canada receivables generated under Canada POS Lending.
  • On November 12, 2021, we increased the capacity of our Non-Recourse Canada SPV Facility from C$175.0 million to C$350.0 million.
  • On July 30, 2021, we closed $750.0 million of 7.50% Senior Secured Notes due 2028. The proceeds were used: (i) to redeem our 8.25% Senior Secured Notes due 2025, (ii) to pay related fees, expenses, premiums and accrued interest and (iii) for general corporate purposes. This refinancing extended maturities and increased our borrowing capacity while maintaining related borrowing costs at levels under the $690.0 million 8.25% Senior Secured Notes. In connection with funding the Heights acquisition, we issued $250.0 million in aggregate principal amount of 7.50% Senior Secured Notes due 2028.
  • We closed and consolidated 49 U.S. stores, representing approximately a quarter of all U.S. stores, during the second and third quarters of 2021 to better align with changing customer trends, preferences for online transactions and certain states' regulatory considerations. The impacted locations generated 8% of our U.S. store revenue in 2020.
  • Effective July 1, 2021, Flexiti commenced a 10-year agreement to become the exclusive POS financing partner to LFL, which operates over 300 stores in Canada under multiple banners including Leon's and The Brick.
  • Under the terms of our $50.0 million share repurchase program announced in April 2021, we purchased 3,037,699 shares for $49.9 million through February 7, 2022.
  • We completed our acquisition of Flexiti on March 10, 2021.
  • Declaration of the next quarterly dividend of $0.11 per share, payable on March 1, 2022 to stockholders of record as of February 18, 2022.
  • Authorization by our Board of Directors of a new share repurchase program for the repurchase of up to $25.0 million of CURO common stock. The repurchase will commence at our discretion and continue until completed or terminated. We expect the purchases to be made from time-to-time in the open market and/or in privately-negotiated transactions at our discretion, subject to market conditions and other factors. Any repurchased shares will be available for use in connection with equity plans and for other corporate purposes.

From the second quarter of 2020 through the first half of 2021, we experienced lower customer demand in the U.S. and Canada Direct Lending, good credit performance, increased or accelerated repayments and favorable payment trends as customers were aided by government stimulus programs while periodically enduring pandemic lockdowns (collectively "COVID-19 Impacts"). In the third and fourth quarters of 2021, our markets were less affected by COVID-19 Impacts, resulting in positive growth trends in revenue and receivables.

Consolidated Revenue by Product and Segment

The following table summarizes revenue by product, including revenue we earn from operating as a credit services organization ("CSO") by charging a customer a fee for arranging an unrelated third party to make a loan to that customer, which we refer to as "CSO fees", for the period indicated:

During the three months ended December 31, 2021, total revenue increased $22.2 million, or 11.0%, to $224.3 million, compared to the prior-year period. The year-over-year increase was primarily due to an increase in Canada Direct Lending revenue of $15.0 million, or 27.1%, and $14.8 million of Canada POS Lending revenue, which was acquired in March 2021. This increase was partially offset by a decrease in U.S. revenue of $7.6 million, or 5.2%, as a result of Runoff Portfolios. Excluding Runoff Portfolios, U.S. revenues increased $10.3 million, or 8.4% for the three months ended December 31, 2021 compared to the three months ended December 31, 2020.

Canada POS Lending revenue includes merchant discount revenue ("MDR") for Flexiti, which is recognized over the life of the underlying loan term. For the three months ended December 31, 2021, Canada POS Lending results were impacted by acquisition-related adjustments that reduced total revenue by $1.7 million and net revenue by $4.2 million ("acquisition-related adjustments"). The acquisition included a loan portfolio with a fair value of approximately $196.1 million ("Acquired Portfolio"). The fair value discount of $12.5 million was based on estimated future net cash flows and is recognized in net revenue over the expected life of the Acquired Portfolio (approximately 12 months). This amortization resulted in an increase of $2.5 million for both revenue and loan loss provision for the three months ended December 31, 2021. The Acquired Portfolio also included $14.1 million of unearned MDR and annual and administrative fees, which are not amortized to revenue for the Acquired Portfolio because they did not represent future cash flows post acquisition. For the fourth quarter of 2021, Canada POS Lending revenue and net revenue were both lower by $4.2 million compared to what would have been otherwise reported if the unearned MDR and fees had been recognized over the expected life of the Acquired Portfolio. The acquisition-related adjustments related to the unearned MDR, annual and administrative fees will decline each quarter, until becoming fully amortized by the end of the first quarter of 2022.

The table below recaps acquisition-related adjustments to Canada POS Lending's revenue and net revenue for the periods indicated:

From a product perspective, Revolving LOC revenue for the three months ended December 31, 2021 increased $22.5 million, or 35.6%, year over year, primarily driven by growth in Canada Direct Lending revenue of $12.0 million, or 37.5%, and Canada POS lending of $13.7 million, partially offset by a decline in U.S. revenue of $3.2 million, or 10.3%. Excluding the effects of the Runoff Portfolios, U.S. Revolving LOC revenue increased $2.0 million, or 8.1%, for the three months ended December 31, 2021 compared to the prior-year period.

For the three months ended December 31, 2021, Installment revenue decreased $4.0 million, or 3.2%, compared to the prior-year period. Excluding the Runoff Portfolios, Installment revenue increased $8.7 million, or 8.3%, for the three months ended December 31, 2021 compared to the prior-year period.

Ancillary revenue increased $3.7 million, or 23.4%, versus the prior-year period, primarily due to the sale of insurance products to Revolving LOC and Installment loan customers in Canada.

The following table summarizes revenue by product, including CSO fees, for the period indicated:

For the year ended December 31, 2021, total revenue declined $29.6 million, or 3.5%, to $817.8 million, compared to the prior year. Excluding Runoff Portfolios, total revenue for the year ended December 31, 2021 increased $33.7 million, or 4.6%, compared to the prior year. Geographically, U.S. revenues declined 17.6% year over year (9.5% excluding Runoff Portfolios) largely due to COVID-19 Impacts, while Canada Direct Lending revenues increased 23.1% due to the continued popularity and growth of Revolving LOC loans. For the year ended December 31, 2021, Canada POS Lending revenue was $34.8 million, inclusive of acquisition-related adjustments which reduced total revenue by $7.5 million.

As described above, certain acquisition-related adjustments related to the amortization of the fair value discount on acquired loans receivable increased Canada POS Lending revenue and net revenue for the year ended December 31, 2021 by $6.6 million and $0.2 million, respectively. For the year ended December 31, 2021, Canada POS Lending revenue and net revenue were both lower by $14.1 million compared to what would have been reported if the unearned MDR and fees had been recognized over the expected life of the Acquired Portfolio.

From a product perspective, Revolving LOC revenues increased $45.1 million, or 18.1%, compared to the prior year, primarily due to growth in Canada Direct Lending revenue of $40.9 million, or 35.6%, and Canada POS Lending of $32.3 million, partially offset by declines in U.S. revenue of $28.1 million, or 20.9%. Excluding Runoff Portfolios, U.S. Revolving LOC revenue decreased $1.6 million, or 1.6%, for the year ended December 31, 2021 compared to the prior year.

For the year ended December 31, 2021, Installment revenues decreased $89.5 million, or 16.6%, compared to the prior year. Excluding Runoff Portfolios, Installment revenue decreased $52.9 million, or 11.6%, primarily as a result of COVID-19 related constraints on demand and the continued shift to Revolving LOC loans.

Ancillary revenues increased $14.9 million, or 25.2%, versus the prior year from the sale of insurance products to Revolving LOC and Installment loan customers in Canada.

The following table presents online revenue and online transaction compositions, including CSO fees, of the products and services that we currently offer within the U.S., excluding Heights, and Canada Direct Lending segments:

Online revenue as a percentage of consolidated revenue was stable for the three months ended December 31, 2021 compared to the prior-year period. For the year ended December 31, 2021, online revenue as a percentage of consolidated revenue increased as a result of our store closures during the second and third quarters of 2021, as well as the continued transition of customers to our online channel.

Consolidated Loans Receivable

The following table reconciles Company Owned gross loans receivable, a GAAP-basis balance sheet measure, to Gross combined loans receivable, a non-GAAP measure⁽¹⁾. Gross combined loans receivable includes loans originated by third-party lenders through CSO programs, which are not included in the Consolidated Financial Statements but from which we earn revenue by providing a guarantee to the unaffiliated lender.

Gross combined loans receivable increased $996.8 million, or 166.7%, to $1,594.6 million as of December 31, 2021, from $597.8 million as of December 31, 2020. Gross combined loans receivables as of December 31, 2021 included $196.1 million and approximately $472 million of receivables acquired on the date of acquisition of Flexiti and Heights, respectively. Canada POS Lending has continued to grow rapidly throughout the year, particularly beginning in July 2021 with Flexiti beginning its exclusive POS financing partnership with LFL Group. In addition, the holiday season drove $114.4 million of Canada POS Lending loan growth in November and December. Excluding loans acquired on March 10, 2021 and December 27, 2021, gross combined loans receivables increased $329.0 million, or 41.4%, primarily driven by Canada Direct Lending growth of $96.9 million, or 29.3%. U.S. gross combined loans receivable, excluding Heights, decreased $30.9 million, or 11.6%, primarily due to (i) COVID-19 Impacts and (ii) the aforementioned Runoff Portfolios. Excluding Runoff Portfolios and gross loans receivables acquired with Heights, U.S. gross combined loans receivable grew $24.3 million, or 12.6%.

Sequentially, gross combined loans receivable increased $668.9 million, or 72.2%. Geographically, U.S. grew sequentially by $475.7 million, or 204.5%, as a result of our acquisition of Heights, which accounted for approximately $472 million of loans receivable as of December 31, 2021. Canada grew sequentially by $193.2 million, or 27.9%, primarily driven by Canada POS Lending growth of $156.8 million, or 51.9%, and Canada Direct Lending Revolving LOC growth of $35.9 million, or 9.8%. Excluding Heights, gross combined loans receivable increased $197.2 million, or 21.3%, sequentially, as consumer demand increased in the fourth quarter. Gross combined loans receivable performance by product and segment is described further in the following sections.

Results of Consolidated Operations

Beginning December 31, 2021, we changed our presentation of operating expenses on our Statements of Operations. The December 31, 2020 presentation has been revised to conform to the current year presentation. Refer to the comparison of "Three Months Ended December 31, 2021 and 2020" below for a description of expenses included within each operating expense line item.

Consolidated Statements of Operations

Reconciliation of Net (Loss) Income from Continuing Operations and Diluted (Loss) Earnings per Share to Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings per Share, non-GAAP measures

Reconciliation of Net (Loss) Income from Continuing Operations to EBITDA and Adjusted EBITDA, Non-GAAP Measures

For the Three Months Ended December 31, 2021 and 2020

Revenue and Net Revenue

For a discussion of revenue, see "Consolidated Revenue by Product and Segment" above.

Provision for losses increased by $23.8 million, or 34.1%, for the three months ended December 31, 2021 compared to the prior-year period, primarily driven by upfront provisioning on rapid customer growth late in the quarter in Canada POS Lending and higher past-due rates and NCO rates year over year in Canada Direct Lending. Refer to "Loan Volume and Portfolio Performance Analysis" and "Segment Analysis" sections below for additional details.

Operating Expenses

Salaries and benefits, which consist of salaries and personnel-related costs, including benefits, bonuses and share-based compensation expense, were $61.8 million for the three months ended December 31, 2021, an increase of $9.2 million, or 17.5%, compared to the prior-year period. Excluding costs associated with Canada POS Lending, salaries and benefits increased $3.1 million, or 5.9%, primarily due to timing and level of performance-based variable compensation.

Occupancy costs, which include rent expense on our leased facilities and equipment, utilities, insurance and certain maintenance expenses, were $13.7 million for the three months ended December 31, 2021, a decrease of $1.2 million, or 7.9%, compared to the prior-year period. Excluding costs associated with Canada POS Lending, occupancy costs decreased $1.4 million, or 9.5%, primarily due to store closures in the U.S. during the second and third quarters of 2021.

Advertising costs increased $1.8 million, or 14.6%, year over year in response to product demand changes. Excluding costs associated with Canada POS Lending, advertising costs increased $1.0 million, or 8.1%. The prior year was influenced by COVID-19 Impacts and pandemic-induced lockdowns.

Direct operations, which include all expenses associated with the direct operations and technology infrastructure related to loan underwriting, collections and processing, were $19.5 million for the three months ended December 31, 2021, an increase of $8.4 million, or 75.4%, compared to the prior-year period. Excluding costs associated with Canada POS Lending, direct operations increased $1.6 million, or 14.2%, primarily due to higher consumer demand year over year, resulting in higher collection and processing costs.

Depreciation and amortization expense for the three months ended December 31, 2021 increased $3.1 million, or 73.7%, compared to the prior-year period. Excluding costs associated with Canada POS Lending, depreciation and amortization expense decreased $0.2 million, or 5.4%. primarily due store closures in the U.S. during the second and third quarters of 2021.

Other operating expenses, which include office expenses, legal and professional fees, and certain store closure costs, were $25.8 million for the three months ended December 31, 2021, an increase of $13.5 million, or 109.2%, compared to the prior-year period. Excluding costs associated with Canada POS Lending, other operating expenses increased $9.2 million, or 74.6%, primarily driven by (i) $7.3 million of transaction costs related to our acquisition of Heights in the fourth quarter of 2021 and (ii) $1.0 million of certain store closure costs in the U.S., as further described in "Segment Analysis" below.

Other Expense (Income)

Interest Expense

Interest expense for the three months ended December 31, 2021 increased $9.9 million, or 52.7%, compared to the prior-year period, primarily related to (i) interest on debt acquired with the acquisition of Flexiti, (ii) interest expense associated with our additional $250.0 million issuance of our 7.50% Senior Secured Notes, and (iii) higher year-over-year interest on our Non-Recourse U.S. SPV Facility.

Equity Method Investment

We account for our investment in Katapult using the equity method of accounting. The investment is included in "Investments in Katapult" on the Consolidated Balance Sheet. Our share of Katapult's earnings was $3.0 million for the three months ended December 31, 2021, which we recognize on a one-quarter lag. Those earnings included a gain from revaluing Katapult's public and private warrant liability. During the fourth quarter of 2021, we purchased an additional 2.6 million of Katapult's common stock for $10.0 million, which increased our ownership in Katapult from 19.3% to 25.2% on a fully diluted basis assuming full pay-out of earn-out shares as of December 31, 2021.

Provision for Income Taxes

The effective income tax rate for the three months ended December 31, 2021 was 21.7%. The effective income tax rate was lower than the blended federal and state/provincial statutory rate of approximately 26%, primarily as a result of proportionally more losses in lower-tax rate jurisdictions. In addition, we recorded an income tax benefit for share-based compensation of $0.6 million. These benefits were offset by nondeductible expenses related to the change in fair value of contingent consideration of $0.6 million and nondeductible transaction costs of $0.9 million. The effective income tax rate of adjusted tax expense included in Adjusted Net Loss for the three months ended December 31, 2021, was 21.7%.

For the Year Ended December 31, 2021 and 2020

Revenue and Net Revenue

For a discussion of revenue, see "Consolidated Revenue by Product and Segment" above.

Provision for losses decreased by $43.1 million, or 14.9%, for the year ended December 31, 2021 compared to the prior year. The decrease in provision for losses was primarily a result of lower average loan balances in the U.S. and multiple rounds of U.S. government stimulus associated with COVID-19, partially offset by provisioning on Canada Direct Lending growth and upfront loss provisioning on rapid customer receivables growth late in the quarter in Canada POS Lending. Refer to "Loan Volume and Portfolio Performance Analysis" and "Segment Analysis" sections below for additional details.

Operating Expenses

Salaries and benefits were $237.1 million for the year ended December 31, 2021, an increase of $40.3 million, or 20.5%, compared to the prior year. Excluding costs associated with Canada POS Lending, salaries and benefits increased $25.8 million, or 13.1%, primarily due to timing and level of performance-based variable compensation and personnel investments to support Canada Direct Lending growth.

Occupancy costs were $55.6 million for the year ended December 31, 2021, a decrease of $1.7 million, or 3.0%, compared to the prior year. Excluding costs associated with Canada POS Lending, occupancy costs decreased $2.2 million, or 3.9%, primarily due to store closures in the U.S. during the second and third quarters of 2021.

Advertising costs decreased $5.8 million, or 13.0% year over year, and $7.1 million, or 15.9%, excluding Canada POS Lending. The prior-year period included costs for Verge Installment loans which have since been suspended, as described further in "Segment Analysis" below.

Direct operations were $60.1 million for the year ended December 31, 2021, an increase of $13.2 million, or 28.1%, compared to the prior year. Excluding costs associated with Canada POS Lending, direct operations decreased $1.2 million, or 2.6%, primarily driven by lower collection fees in the U.S. due to lower year over year demand and multiple rounds of significant U.S. government stimulus associated with the COVID-19 pandemic.

Depreciation and amortization expense increased $9.5 million, or 54.0%, year over year. Excluding costs associated with Canada POS Lending, depreciation and amortization expense decreased $1.0 million, or 5.6%, primarily driven by our store closures in the U.S. during the second and third quarters of 2021.

Other operating expenses were $74.7 million for the year ended December 31, 2021, an increase of $27.6 million, or 58.7%, compared to the prior year. Excluding costs associated with Canada POS Lending, other operating expenses increased $17.8 million, or 37.9%, primarily due to (i) $13.7 million of transaction costs related to our acquisition of Flexiti in March 2021, our acquisition of Heights in December 2021, and the Katapult and FinServ merger in June 2021, and (ii) $8.8 million of certain restructuring costs related to our second and third quarter store closures in the U.S..

Other Expense (Income)

Interest Expense

Interest expense for the year ended December 31, 2021 increased $24.6 million, or 33.9%, primarily related to (i) interest on debt acquired as part of the acquisition of Flexiti, (ii) higher year-over-year interest on our Non-Recourse U.S. SPV Facility, and (iii) interest expense associated with the additional issuance of our 7.50% Senior Secured Notes. An additional $2.1 million of interest was incurred for the year ended December 31, 2021, which represents interest on the 8.25% Senior Secured Notes for the period between July 30, 2021 and August 12, 2021. This is the period during which both the 8.25% Senior Secured Notes and 7.50% Senior Secured Notes were outstanding.

Equity Method Investment

We recognize our share of Katapult’s earnings or loss on a one-quarter lag. Our share of Katapult's earnings was $3.7 million for the year ended December 31, 2021, which included a gain from revaluing Katapult's public and private warrant liability. During the fourth quarter of 2021, we purchased an additional 2.6 million of Katapult's common stock for $10.0 million, which increased our ownership in Katapult from 19.3% to 25.2% on a fully diluted basis assuming full pay-out of earn-out shares as of December 31, 2021.

On June 9, 2021, Katapult completed its merger with FinServ. As part of the merger, we received cash consideration of $146.9 million and retained ownership through shares after the merger. As of December 31, 2021, our total cash investment in Katapult is $37.6 million.

Loss on Extinguishment of Debt

Loss on extinguishment of debt for the year ended December 31, 2021 was due to the redemption of the 8.25% Senior Secured Notes.

Provision for Income Taxes

The effective income tax rate for the year ended December 31, 2021 was 26.3%, consistent with the blended federal and state/provincial statutory rate of approximately 26%. The income tax expense includes nondeductible expense items related to the change in fair value of contingent consideration of $1.6 million, and nondeductible transaction costs of $1.2 million, partially offset by proportionally more net income in lower-tax rate jurisdictions, driven by the gain on the Katapult transaction of $146.9 million in the second quarter of 2021 and the loss on extinguishment of debt of $40.2 million in the third quarter of 2021.

Additionally, income tax expense includes the release of a valuation allowance of $0.4 million due to our share of Katapult's income, tax benefits related to share-based compensation of $0.8 million, $0.2 million tax expense of additional Texas accrual for 2020 due to the settlement of 2013 to 2019 Texas returns, and a tax benefit of $0.9 million for the recognition of research and development tax credit.

The effective income tax rate of adjusted tax expense included in Adjusted Net Income for the year ended December 31, 2021 was 23.5%.

Segment Analysis

The following is a summary of portfolio performance and results of operations for the segment and period indicated (all periods unaudited except for Q4 2020).

U.S. Portfolio Performance

On December 27, 2021, we acquired Heights which accounted for approximately $472 million of U.S. Installment loans as of December 31, 2021. As the period between December 27, 2021 and December 31, 2021 did not result in material loan performance, we have excluded Heights from the table and related analysis below for the fourth quarter of 2021.

U.S. Net Revenue

U.S. revenues, excluding Heights, decreased by $11.3 million, or 7.7%, to $135.3 million, compared to the prior-year period for the three months ended December 31, 2021, primarily as a result of the COVID-19 Impacts on gross combined loans receivable and Runoff Portfolios due to regulatory changes. See the loan performance discussions below for further details. Excluding Runoff Portfolios, U.S. revenues increased $6.6 million, or 5.4%.

The provision for losses decreased $2.2 million, or 3.8%, year over year, primarily as a result of sustained favorable NCO rates and stable past-due rates since the onset of COVID-19. U.S. past-due rates, including for loans Guaranteed by the Company, increased by 90 bps, or 4.5%, year over year, but improved 75 bps, or 3.4%, sequentially. For the three months ended December 31, 2021, the U.S. NCO rate increased 340 bps, or 16.4%, year over year, and increased 280 bps, or 12.9%, sequentially, primarily due to loan growth, and a mix shift in customer and origination channel.

U.S. Revolving LOC loan performance

U.S. Revolving LOC loan balances as of December 31, 2021 decreased $3.0 million, or 5.5%, compared to the prior year, resulting in a related revenue decrease of $3.2 million, or 10.3%, primarily due to the runoff of Virginia Revolving LOC loans. Excluding the Runoff Portfolios, U.S. Revolving LOC gross loans receivable increased $3.8 million, or 8.2%, year over year, and related revenue increased $2.0 million, or 8.1%. Sequentially, U.S. Revolving LOC loan balances increased $1.3 million, or 2.6%. The Revolving LOC allowance coverage decreased year over year from 34.5% to 25.9% for the three months ended December 31, 2021. The decrease was due to stable past-due rates, a decline in troubled debt restructuring ("TDR") loans as a percentage of total gross loans receivable and sustained favorable NCO trends during 2021. For the three months ended December 31, 2021, NCO rates improved from 22.3% to 22.1% year over year and past-due rates improved from 30.7% to 30.5%.

U.S. Installment loan performance - Company Owned

U.S. Installment loan balances as of December 31, 2021 decreased $30.1 million, or 17.9%, year over year and revenue decreased $12.1 million, or 17.6%, compared to the prior year, primarily due to COVID-19 Impacts and Runoff Portfolios. Excluding the Runoff Portfolios, U.S. Installment loans increased $18.3 million, or 17.9%, year over year, and related revenue increased $0.5 million, or 1.1%. The Installment loans allowance coverage decreased from 19.0% in the prior year to 12.7% as of December 31, 2021, largely due to the aforementioned Runoff Portfolios, stable past-due rates and sustained favorable NCO rates. Sequentially, allowance coverage decreased from 13.4% to 12.7% as a result of lower past-due loans and stable NCOs.

We launched Verge Installment loans originated by Stride Bank in the fourth quarter of 2019 and executed pilot programs in several states. After testing various offers, rates, terms and approval criteria, Stride informed us in the first quarter of 2021 that it planned to focus on near-prime loans as they represented a larger addressable market and offered greater opportunity to scale. As a result, Stride discontinued new Verge Credit loans in April 2021. Verge loan balances totaled $6.2 million as of December 31, 2021. We expect to continue to see an orderly runoff of these balances over approximately the next 15 months.

U.S. Installment loan performance - Guaranteed by the Company

U.S. Installment loans Guaranteed by the Company increased $2.2 million, or 5.0%, year over year and increased $2.9 million, or 6.7%, sequentially. The CSO liability for losses rate decreased from 16.4% to 14.9% year over year due to sustained favorable NCO rates since the onset of COVID-19. Sequentially, the CSO liability for losses coverage decreased from 16.1% to 14.9% for the three months ended December 31, 2021 as a result of lower past-due rates. For the three months ended December 31, 2021, the past-due rate improved sequentially from 19.8% to 17.7%. The NCO rate for U.S. Installment loans Guaranteed by the Company increased 660 bps, or 12.8%, year over year, and increased 490 bps, or 9.3%, sequentially, primarily due to loan growth, and new customer, channel mix and seasonality.

Following is a summary of results of operations for the U.S. segment for the periods indicated.

U.S. Results of Operations

U.S. Segment Results - For the Three Months Ended December 31, 2021 and 2020

For a discussion of revenue, provision for losses and related gross combined loans receivables for the three months ended December 31, 2021 and 2020, see "U.S. Portfolio Performance," above.

Operating expenses for the three months ended December 31, 2021 were $93.1 million, an increase of $9.6 million, or 11.6%, compared to $83.4 million for the three months ended December 31, 2020, primarily driven by (i) $7.3 million of transaction costs related to our acquisition of Heights in the fourth quarter of 2021, (ii) $1.3 million of store closure costs, as further described below, and (iii) $0.4 million of higher share-based compensation expense as a result of our acquisition of Flexiti. Excluding these expenses, comparable operating costs increased $0.5 million, or 0.6%.

As previously announced, we closed 49 U.S. stores during the second and third quarters of 2021 in response to evolving customer channel preferences that were accelerated by the impacts of COVID-19. The store closures represented nearly 25% of our U.S. stores and, other than Illinois, which were closed earlier in the year due to regulatory changes, reflect strategic consolidation of locations in dense local markets. The impacted locations generated 8% of our U.S. store revenue in 2020. As our omni-channel platform allows customers to transition seamlessly online, to an adjacent store or to contact centers, this consolidation reduces annual operating costs by approximately $20 million while maximizing the likelihood of retaining a large percentage of customers that had utilized the impacted stores.

As a result of the store closures, we incurred $1.3 million of closure-related charges during the three months ended December 31, 2021 and $12.7 million during the year ended December 31, 2021. These costs consisted of (i) severance and employee costs, (ii) lease termination costs and (iii) net accelerated depreciation and write-off of ROU assets and liabilities. As of December 31, 2021, we operated 160 stores in the U.S., excluding the stores acquired with the Heights acquisition. Subsequent to the Heights acquisition, we operated in 550 stores in the U.S. as of December 31, 2021.

U.S. interest expense for the three months ended December 31, 2021 increased $3.0 million, or 18.5%, related to our additional 7.50% Senior Secured Notes issued in conjunction with our Heights acquisition and higher interest on our Non-Recourse U.S. SPV Facility.

As previously described, we recognize our share of Katapult’s income or loss on a one-quarter lag. We recorded income of $3.0 million for the three months ended December 31, 2021. During the fourth quarter of 2021, we purchased an additional 2.6 million of Katapult's common stock for $10.0 million, which increased our ownership in Katapult from 19.3% to 25.2% on a fully diluted basis assuming full pay-out of earn-out shares as of December 31, 2021.

U.S. Segment Results - For the Year Ended December 31, 2021 and 2020

U.S. revenues decreased $112.6 million, or 17.6%, compared to the prior-year period for the year ended December 31, 2021 as a result of decreases in combined gross loans receivable from COVID-19 Impacts and the Runoff Portfolios. Excluding the impact of Runoff Portfolios, U.S. revenues decreased $49.3 million, or 9.5%, as a result of lower consumer demand, driven by COVID-19 Impacts.

The provision for losses decreased $64.1 million, or 27.9%, for the year ended December 31, 2021, compared to the prior-year period, primarily as a result of (i) lower year over year demand, excluding Heights, (ii), sustained favorable lower NCO rates since the onset of COVID-19 and (iii) continued improved credit quality.

Operating expenses were $338.7 million for the year ended December 31, 2021, an increase of $23.4 million, or 7.4%, compared to $315.3 million for the year ended December 31, 2020, primarily driven by (i) $13.7 million of transaction costs related to our acquisition of Flexiti in March 2021, our acquisition of Heights in December 2021, and the Katapult and FinServ merger, (ii) $12.7 million of store closure costs as previously discussed, and (iii) $0.7 million of higher share-based compensation expense compared to the prior year. Excluding these costs, operating expenses for the year ended December 31, 2021 decreased $2.8 million, or 0.9%, compared to the prior year.

U.S. interest expense for the year ended December 31, 2021 increased $9.1 million, or 14.4%, primarily related to interest on the additional 7.50% Senior Secured Notes issued in conjunction with our Heights acquisition and $5.0 million of interest on our Non-Recourse U.S. SPV Facility compared to prior year as the facility was entered into in April 2020. An additional $2.1 million of interest was incurred for the year ended December 31, 2021, which represents interest on the 8.25% Senior Secured Notes for the period between July 30, 2021 and August 12, 2021. This is the period during which both the 8.25% Senior Secured Notes and 7.50% Senior Secured Notes were outstanding.

As previously described, we recognize our share of Katapult’s income or loss on a one-quarter lag and recorded income of $3.7 million for the year ended December 31, 2021. As a result of the merger between Katapult and FinServ, which closed during the second quarter of 2021, we recorded an additional gain of $135.4 million during the year ended December 31, 2021, which represents cash we received, net of the basis of our investment in Katapult. During the fourth quarter of 2021, we purchased an additional 2.6 million of Katapult's common stock for $10.0 million, which increased our ownership in Katapult from 19.3% to 25.2% on a fully diluted basis assuming full pay-out of earn-out shares as of December 31, 2021.

Loss on extinguishment of debt of $40.2 million for the year ended December 31, 2021 was due to the redemption of the 8.25% Senior Secured Notes due 2025.

Canada Direct Lending and Canada POS Lending Portfolio Performance

Canada Direct Lending Net Revenue

Canada Direct Lending revenue increased year over year by $15.0 million, or 27.1%, ($12.7 million, or 23.0%, on a constant currency basis), for the three months ended December 31, 2021, due to the growth of Revolving LOC loans in Canada. Sequentially, Canada Direct Lending revenue increased $4.3 million, or 6.6%.

The provision for losses increased $12.5 million, or 116.4%, ($11.8 million, or 109.7%, on a constant currency basis), to $23.2 million for the three months ended December 31, 2021, compared to $10.7 million in the prior-year period. The increase in provision for losses was primarily due to higher past-due rates, which increased from 6.4% to 8.5% year over year. NCO rates increased from 3.5% to 4.4% year over year and increased from 3.3% to 4.4% sequentially due to new customer, channel mix and seasonality. Although NCOs increased from December 31, 2020 to December 31, 2021, NCO rates have remained stable since the onset of COVID-19, resulting in an allowance coverage decrease year over year of 250 bps, or 24.2%.

Canada Direct Lending Revolving LOC loan performance

Canada Direct Lending Revolving LOC gross loans receivable increased $99.1 million, or 32.7%, ($99.9 million, or 32.9%, on a constant currency basis) year over year and $35.9 million, or 9.8% ($36.1 million, or 9.9%, on a constant currency basis) sequentially. Revolving LOC revenue increased $12.0 million, or 37.5%, year over year and $3.7 million, or 9.2%, sequentially ($10.5 million, or 33.0%, and $3.7 million, or 9.3%, respectively, on a constant currency basis). The quarterly NCO rate increased by 80 bps, or 25.5%, year-over-year and 110 bps, or 40.0%, sequentially due to new customer, channel mix and seasonality. Although NCOs increased from December 31, 2020 to December 31, 2021, NCO rates have remained stable since the onset of COVID-19, resulting in an allowance coverage decrease year over year from 10.8% to 8.0% as of December 31, 2021.

Canada Direct Lending Installment loan performance

Canada Direct Lending Installment revenue increased $0.3 million, or 2.8%, (a decrease of $0.1 million, or 0.6%, on a constant currency basis) year over year. Installment gross loans receivable decreased $2.2 million, or 8.0% ($2.1 million, or 7.8%, on a constant currency basis) year over year. The year-over-year decrease in Installment loans was due to a continued shift to Revolving LOC loans, as well as COVID-19 related constraints on demand, particularly as related to store-originated Installment loans. The Installment allowance coverage decreased year over year from 8.3% to 8.0% primarily as a result of lower sustained NCOs since the onset of COVID-19 and stable past-due rates. The year-over-year past-due rate for Installment loans improved by 15 bps, or 8.1%. Sequentially, Installment gross loans receivable and related revenue remained consistent.

Canada POS Lending Revolving LOC loan performance

Canada POS Lending Revolving LOC gross loans receivable as of December 31, 2021 was $459.2 million, including a discount of $2.3 million related to purchase accounting adjustments ($461.5 million prior to purchase accounting adjustments). For the three months ended December 31, 2021, Canada POS Lending revenue was $14.8 million, net of a $1.7 million reduction from acquisition-related adjustments for the period. For a full discussion of the purchase accounting and acquisition-related adjustments, refer to "Consolidated Revenue by Product and Segment" above.

For the three months ended December 31, 2021, allowance coverage was 4.8%, up sequentially from 3.8%. Excluding acquisition-related adjustments, allowance coverage was 5.3%, down sequentially from 5.5%, primarily due to sustained favorable NCO trends. Revolving LOC gross loans receivable generally charge-off at 180 days past due. NCOs were $1.7 million for the three months ended December 31, 2021. The Canada POS Lending NCO and past-due rates for the quarter were 0.5% and 4.1%, respectively, down sequentially from 0.7% and 4.8%, respectively.

Originations for the three months ended December 31, 2021 were $322.1 million in Canadian dollars ("C$"), an increase of C$200.8 million, or 165.6%, from the prior-year period of C$121.3 million. Sequentially, Canada POS Revolving LOC gross loans receivable increased $156.8 million, or 51.9%.

Canada Direct Lending Results of Operations

Canada Direct Lending Segment Results - For the Three Months Ended December 31, 2021 and 2020

For a discussion of revenue, provision for losses and related gross combined loans receivables for the three months ended December 31, 2021 and 2020, see "Canada Direct Lending and Canada POS Lending Portfolio Performance" above.

Canada Direct Lending operating expenses were $27.4 million for the three months ended December 31, 2021, an increase of $3.6 million, or 15.1%, ($2.7 million, or 11.4%, on a constant currency basis), compared to the prior year, primarily due to (i) the timing and level of performance-based variable compensation, (ii) higher store operating costs as the prior year was impacted by COVID-19 store closures, and (iii) higher variable costs, primarily collection and financial service fees, on higher volume year over year.

Interest expense for the three months ended December 31, 2021 was $2.5 million compared to $2.3 million for the three months ended December 31, 2020. During the fourth quarter of 2021, we increased the capacity of the Non-Recourse Canada SPV Facility from C$175.0 million to C$350.0 million.

Canada Direct Lending Segment Results - For the Year Ended December 31, 2021 and 2020

Canada Direct Lending revenue increased $48.2 million, or 23.1%, ($31.6 million, or 15.1%, on a constant currency basis), to $257.0 million for the year ended December 31, 2021, from $208.9 million in the prior year, primarily due to higher consumer demand as COVID-19 Impacts lessened. Canada Direct Lending Revolving LOC gross loans receivable grew $99.1 million, or 32.7%, year over year, contributing to related revenue growth of $40.9 million, or 35.6%, for the year ended December 31, 2021 compared to the prior year.

The provision for losses decreased $3.7 million, or 6.2%, ($7.0 million, or 12.0% on a constant currency basis), to $55.0 million for the year ended December 31, 2021, compared to $58.6 million in the prior year. The decrease in provision for losses was the result of sustained lower NCOs since the onset of COVID-19 and the related impact of changes in allowance coverage due to an increase in credit quality for Revolving LOC loans. Refer to "Canada Direct Lending and Canada POS Lending Portfolio Performance" above for additional details on quarterly loss and allowance rates.

Canada Direct Lending operating expenses for the year ended December 31, 2021 were $103.5 million, an increase of $8.8 million, or 9.2%, ($2.1 million, or 2.2%, on a constant currency basis), compared to $94.8 million for the year ended December 31, 2020, primarily related to (i) the timing and level of performance-based variable compensation, (ii) higher store operating costs as the prior year was impacted by COVID-19 store closures, and (iii) higher variable costs, primarily collection and financial service fees, on higher volume year over year.

Canada Direct Lending other expense for the year ended December 31, 2021 was $9.8 million, an increase of $0.5 million, or 5.4%, for the year ended December 31, 2020, primarily due to higher borrowings on the Non-Recourse Canada SPV Facility. During the fourth quarter of 2021, we increased the capacity of the Non-Recourse Canada SPV Facility from C$175.0 million to C$350.0 million.

Canada POS Lending Results of Operations

Canada POS Lending Segment Results - For the Three Months and Year Ended December 31, 2021

Canada POS Lending revenue includes revenue from merchant discounts and ancillary products. MDR represents the discount merchant partners provide to help facilitate customer credit card purchases at merchant locations. The fee is recognized over the estimated average loan term of 12 months. Ancillary revenue includes administrative fees, annual fees, insurance product fees and other fees charged to customers.

For a discussion of revenue, provision for losses and related gross loans receivables, see the "Canada Direct Lending and Canada POS Lending Portfolio Performance," above for the three months ended December 31, 2021. For the three months ended December 31, 2021, revenue and related gross loans receivable increased $3.4 million, or 29.5%, and $156.8 million, or 51.9%, sequentially primarily due to the continued loan growth since the onboarding of LFL as previously discussed.

For the year ended December 31, 2021, Canada POS Lending revenue was $34.8 million, and included a $7.5 million reduction as a result of acquisition-related adjustments. For a full discussion of acquisition-related adjustments, refer to "Consolidated Revenue by Product and Segment" earlier within this release.

Provision for losses for the year ended December 31, 2021 was $24.6 million, and included a $6.4 million increase as a result of acquisition-related adjustments. Refer to "Canada Direct Lending and Canada POS Lending Portfolio Performance," above for additional details on quarterly loss and allowance rates.