goeasy Ltd.

Thank you, Operator, and good morning, everyone. My name is Hal Khouri, the company’s new Chief Financial Officer.

Thank you for joining us to discuss goeasy Limited results for the third quarter ended September 30, 2019. The news release, which was issued yesterday after the close of market is available on Globe Newswire and on the goeasy website.

Today, Jason Mullins, goeasy’s President and Chief Executive Officer, will talk about the highlights for the third quarter and review of our financial results before we open the lines for questions from investors. David Ingram, the company’s Executive Chairman; and Jason Appel, the company’s Chief Risk Officer are also on the call.

Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company’s investor website. All shareholders, analysts and portfolio managers are welcome to ask questions over the phone after management is finished.

The operator will poll for questions and provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management’s comments and responses to questions, any coverage.

However, we would ask that they do not poll callers unless the individual has granted their consent. Today’s discussion may contain forward-looking statements.

I am not going to read the full statement, but I will direct you to the caution regarding forward-looking statements, including in the MD&A. Now, I will turn the call over to Jason Mullins.

Thanks, Hal. Good morning everyone and thank you for joining today’s call.

As this is Hal’s first quarter as our new CFO, I’d like to publicly welcome him to the team as he will be valuable in helping support our ambitious growth plans. Looking first at the results for the third quarter, it was another productive period for our company, as we delivered strong loan growth, improved credit performance and record financial results, while concurrently making significant progress against our strategic plan.

During the quarter, we invested in the development of our new branded media campaign, which focuses on authentic and relatable moments for our customers, and the inspiration for a better tomorrow, with one in three of them graduating to prime credit and 60% increasing their credit score within 12 months of borrowing from us, we truly believe we can make a positive difference in their lives. The integrated campaign, which includes new TV and radio spots, as well as new digital print and out-of-home creative helped drive a 105% increase in web traffic year-over-year, lifted our aided brand awareness to 84% and produced a record level of loan application volume, which was up 25% over the third quarter of 2018.

As consumers continue to gravitate towards a digital experience, we had another quarter with 46% of our total application submissions originated online, up from 37% a year ago. The listed application volume translated into a record level of loan originations at over $286 million, up almost 30%.

Most notable was that we experienced another quarter of record new customer growth and issued 65% of the credit we advanced to new customers. We believe this highlights the strength of the consumer demand for non-prime lending alternatives, and that easyfinancial continues to be a trusted and reliable source for the 9 million Canadians that cannot access traditional prime credit.

The increased originations led to growth in the loan portfolio of $76 million, up 20% from the growth during the third quarter of last year and listed the average loan book per branch to $3.5 million. At quarter end, the consumer loan portfolio reached $1.04 billion, up 38% from $750 million at the end of the third quarter in 2018.

Total company revenue in the quarter was $156 million, up 20% from the third quarter of 2018, driven by the growth in the consumer loan portfolio. As we highlighted last quarter, the strong growth in the proportion of online applications and new customer growth has resulted in a moderation in the expected rate of decline for the total portfolio yield and the annualized net charge off rate.

During the third quarter, the total annualized portfolio yield reduced sequentially by 30 basis points to 50.1%, which was consistent with the yield reported back in the first quarter of this year. In tandem, the annualized net charge-off rate improved with the sequential decline of 30 basis points as well from 13.5% to 13.2% holding the risk adjusted yield flat for the third straight quarter.

With the strong performance we have seen in online acquisition and the record level of new customer growth, we continue to make enhancements to our credit strategies that will produce a gradual improvement in the credit quality of our portfolio, and a structural and long-term decline in the loss rate. Most important of all, we are focused on striking the right balance between growth, yield management and credit quality to maximize the long-term performance of the business.

In the quarter, we also recorded an incremental $2.7 million of bad debt expense related to the loan loss provision rate, which increased by 26 basis points from 9.38% in the second quarter of 2019 to 9.64%. This change served to reduce earnings in the quarter by approximately $0.12 per share.

As we have experienced in the past under the IFRS 9 accounting standard, the provision for future losses, much like the in-period net charge-off rate is susceptible to some fluctuations from quarter-to-quarter but expected to be quite stable over the long-term. The loan originations generated during the quarter had improved mix of credit quality, while we a saw slight downward shift in the credit mix within certain segments of our active portfolio.

This was the result of the combination of both seasonal shifts and improved collection results on our higher risk segment customers. Overall, the degree of change in the provision rate in the third quarter was a more moderate adjustment compared to both the comparable quarter of 2018 and the prior quarter of this year.

In addition, despite the natural fluctuations the rate remains within 3 basis points of one year prior, demonstrating its longer term stability. The revenue growth and improved operating leverage to produce an operating margin for the total company, 27.3%, up from 25.3% in the same quarter of 2018.

Net income for the quarter was a record $19.8 million, up 38% from $14.3 million in the third quarter of 2018 resulting in record diluted earnings per share of $1.28, up 32% from $0.97 per share in the third quarter of 2018. The strong earnings growth and stable financial leverage also helped produce improved return on equity of 24.1%, up 23.8% in the prior year.

Over the last several months, we have also made great progress against our strategic initiatives, as we continue on our journey to become Canada’s top non-prime consumer lender. First, we are making great strides in our ongoing expansion into Quebec and secured lending.

In Quebec, we have opened two new locations this year with an additional four new branches scheduled to open in the fourth quarter, finishing the year at 23 locations in that province. The loan book there has climbed to $64 million, representing 6.4% of the total portfolio.

Furthermore, the loss rate in that province continues to improve and is trending just above the portfolio average, giving us confidence that our custom credit strategy is having the desired effects. Our secured loan portfolio crossed over a $100 million in outstanding loan balances this quarter, now representing just under 10% of our total portfolio at double the prior year.

The product continues to perform exceptionally well and proved that consumers are responding well to our strategy to develop a whole suite of lending products for the non-prime borrower. Secondly, during the quarter we made significant progress in our plan to develop our omnichannel business model through the expansion into point-of-sale financing.

In September, we announced a strategic partnership and $34 million equity investment in PayBright, a Canadian fintech platform focused on instant point-of-sale consumer financing and installment payment plans. Through this new strategic partnership, easyfinancial will become the primary provider of non-prime financing using PayBright’s point-of-sale payments platform, each year in Canada, there is estimated to be more than $30 billion of credit extended to consumers through financing and buy now pay later programs offered at the point-of-sale.

PayBright has partnered with over 5000 merchants, allowing them to offer payment plans to their Canadian consumers in a quick and easy digital experience through both e-commerce and in-store. By partnering with PayBright, retailers provide their customers with additional spending power and experienced increased sales through higher checkout conversion, increased average order value and greater customer loyalty.

By integrating goeasy’s non-prime solid loan product into the PayBright platform, the companies together now offer Canada’s leading instant point-of-sale payment solution that serves the entire credit spectrum of Canadian consumers in a single, seamless user experience, each consumer purchase is paid for with a straightforward, easy to understand installment payment plan. Our e-commerce integration with PayBright will be completed by the end of November of this year and then new merchants will be gradually added to the non-prime program.

We will also aim to introduce the in-store platform in the first half of 2020, so together we can offer the ultimate omnichannel solution to retailers. In addition to the strategic partnership, we also acquired a minority equity interest at PayBright.

This investment serves to strengthen the commercial arrangement for goeasy and provides the opportunity to share in the value creation of PayBright’s business in the long term. Lastly, we were privileged to receive further acknowledgment of our accomplishments during the quarter as we ranked in the inaugural TSX30, a listing of the top 30 companies on the Toronto Stock Exchange based on cumulative three-year dividend adjusted share price appreciation and were included on the Report on Business list of top growing companies in Canada as a result of our three-year revenue growth.

This recognition highlights the hard work and dedication demonstrated by our passionate employees, we take great care of our customers and support them on their financial journey. I will now pass the call over to Hal to briefly review our balance sheet and liquidity position.

Thanks, Jason. Subsequent to quarter end we are pleased to announce an amendment to our senior secured revolving credit facility, which increased the maximum principal available by $120.5 million borrowing capacity, raising the limit from $189.5 million to $310 million.

In addition, the interest rate on advances from the credit facility was also reduced by 25 basis points from the previous rate of Canadian Bankers’ Acceptance rate of BA plus 325 basis points to BA plus 300 basis points. There was no change to rise where we select the lenders prime rate.

With this amendment, our weighted average interest rate when our facilities are fully drawn reduces from 6.8% to 6.5% and our liquidity to fund growth is extended. Based on the cash at hand at the end of the quarter and the borrowing capacity under our amended revolving credit facility, we had approximately $215 million in funding capacity to allow us to achieve our growth targets through to the first quarter of 2021.

We also estimate that once our existing available sources of capital are fully utilized, we could continue to grow the loan portfolio by approximately $150 million per year solely from internal cash flows. We will now turn our attention to exploring the opportunity to refinance our high yield notes, which became eligible for renewal on November 1st.

With our brands trading at a premium of approximately 104% par, we will carefully assess the market conditions and the economics associated with an early refinancing to determine the best path forward for the business. In addition, we will -- we continue to believe there are opportunities to explore a securitized funding facility in the future, as the next natural stage of evolution in our capital structure.

We will also continue to run the business at or below our targeted leverage ratio 70% net debt to total capitalization. Cash provided by operating activities before the net issuance consumer loans receivable and purchase of lease assets rose to $80.9 million this quarter, bringing the year-to-date total to $225 million, up 32% over the prior year.

During the quarter, we also continue to exercise our normal course issuer bid to repurchase 79,260 shares at a weighted average share price of $52.81. Since implementing the NCIB last October, our total repurchases now total 856,712 shares, bought at a weighted average price of approximately $41.19.

I will now have to call back over to Jason.

Thanks, Hal. With the final stretch of the year in front of us, we are proud of our accomplishments but even more excited about the future.

We are operating in a healthy economic environment with record levels of consumer demand and stable credit performance complemented by a well capitalized balance sheet that is ready for growth. We remain on track to achieve all of our stated targets for 2019 and beyond and we continue to be confident in our strategy as a strength of our team and our culture.

Most importantly, we believe strongly in our vision of giving every day Canadians a path to a better tomorrow today. We are truly just getting started.

With those comments complete, we will now open the call for questions.

Okay. Thanks.

I want to start with a question on understanding the increase in the provision rate sequentially. Jason, I think, if I caught it correctly, you mentioned in your prepared remarks, there was a bit of a shift that occurred within the existing portfolio that contributed to the higher ratio and it may have had less to do with the actual mix shift of new originations toward new borrowers in digital channels.

But if I look at the proportion of loans in the Stage 1 bucket, it actually looks very consistent sequentially, I was just wondering if you could expand on that a bit for us.

Yeah. Sure.

So, as you know, the provision rate is a function of multiple factors. We have the inbound quality of the originations, we have the historical loss rates, we have the credit quality of the customers on the portfolio today and we have the forward-looking indicators.

All of that goes into a multi-dimensional formula. So there is a number of factors that play.

Essentially what we saw was the quality of the originations coming through the door continue to improve and was right in line with as we expect it to be based on our credit risk tolerance. So that was very, very positive.

On the flip side, as you pointed out, we did see a slight shift in the credit mix of the existing portfolio we have active on the books and essentially what you saw is about 0.5% of the portfolio move from a low to the high risk segment and as we look at the contributing factors to that and compare it to other periods, what’s actually what we saw was a little bit of what we believe to be some seasonality, as you know we saw a similar increase in the third quarter of last year. I think it makes sense coming out of the summer months and how our customers were expected to be performing from a credit point of view.

And then the other thing that we saw is as we have increased the effectiveness in collections on our higher risk segment customers, that allowed those customers to have more of an opportunity to try and improve performance and so we saw a little bit of a shift as a result of that as well. So it’s good for the net charge-off rate and for the performance of the book.

But the counter effect is it does have a minor shift in the underlying credit mix.

Got it. Okay.

That’s helpful. That’s good color.

And then, just shifting gears, I also wanted to ask about the future evolution of the funding model. You kind of alluded to this in your opening remarks as well, but I think last quarter you talked about exploring a potential ABS facility as well.

Looking at Fairstone’s inaugural facility, I think, that was over $300 million. I was wondering if you could just kind of speak to that in terms of how big potential ABS transaction would have to be for goeasy, how cost competitive that type of facility might be compared to alternative funding sources?

And just what type of loans will be included in that, whether it’s skewed towards like secured lending or risk adjusted, et cetera?

Yeah. Sure.

I think, I will make a couple of comments and then I will pass it to Hal if he has anything additional to add. So it continues to be the type of facility we are exploring that’s where Hal is spending a lot of his time.

Looking at what forms of securitization are available, could it include a bank, but warehouse type facility or could it include an ABS in the public markets. In terms of the type of business we would envision fits into a securitized portfolio.

You have hit it right on the head, it’s essentially a combination of our secured lending product and the customers within our unsecured that are risk based priced are either or better credit quality customers. As for the size of the other facility, I think, similar to other forms of debt, somewhere in and around the $200 million level, give or take, tends to be the right entry point, where it’s sizable enough to be worth doing the work, but isn’t too significant.

So, I think at this point, we believe and feel confident there is some opportunity there. We don’t have the exact line of sight as to what or when, but we are working on it.

As for the rate, it’s really hard to say, because it’s conditional on a number of market dynamics. But clearly, you would expect that a securitized facility would of course be priced better than the unsecured high yield notes and the traditional senior secured revolving facility.

So that’s how we think about just in terms of reducing borrowing costs.

Okay. Okay.

Great. And then one last one for me, I also wanted to ask a question about the PayBright transaction.

I mean, you have committed a pretty significant investment to that platform, I was wondering if you could just help us size the potential market opportunity afforded by that new partnership?

Yeah. Sure.

So, I think, the way we look at the investment, just to touch on that briefly is, I will just provide a brief background context that I think is important. So we have been in point-of-sale lending now for a couple of years through easyfinancial operating non-prime point-of-sale loans.

As you know, we have had some really great partnerships like [inaudible] that’s been ongoing now for several years and have great relationships with. As we have highlighted a couple of times in the past that the most significant hurdle that we came across was when you offer the retailer a non-prime offer and it’s not integrated with the prime offer that they have, the friction creates a substantial amount of drop off on the transaction.

And so, about a year ago, our focus and our quest was to work on what are all the options and the best fit option for how we could integrate directly with the prime lender. And so, we explored bank relationships, private company relationships, companies in other markets that might have appetite in Canada, looked at a whole variety of sources and concluded PayBright was the company we thought was the best fit for success in Canada, a great management team, a great platform and they had already subscribed a number of major brand partnerships like Wayfair, Samsung, and so on and so forth.

So we decided to work with them. As we got into those discussions, it became clear that the opportunity for an equity investment would not only strengthen the quality of the commercial arrangement for goeasy, but it would also mean that because we will be working together to help make the full offering, and therefore, by default PayBright’s business successful, being an equity holder would allow us to participate in some of that value creation over the long haul.

So, it’s not a speculative thing for us, we see it as a long-term investment, where as we work d together and build a platform, there might be some additional upside for goeasy in the long run. We have built the investment thesis purely around the funnel of originations.

So we are not -- we didn’t build the investment thesis on the basis that there has to be a payback on the equity, it is built on originations, we see that as purely the upside. In terms of the market potential, I think, a couple of points of reference, we talked about the size and the magnitude of the originations we see in Canada that are at point-of-sale $30 billion plus, so there a big proportion of originations available and up for grabs.

I think if you look at another reference point, as far as, we understand it, Fairstone our primary competitor, who is also in point-of-sale and has been doing it for much longer than us. They would have about 10% to 15% of their loan book that would be point-of-sale originated consumers, of course, they also have the opportunity as will lead to then cross-sell those customers into others loans.

So, I think, we will probably be as we normally are, a little bit more slow and cautious in the early months. But as far as the long-term potential, it can certainly be a very significant contributor to the future of business.

Got it. Okay.

That’s great. Thanks, Jason.

Thanks. Good morning.

Jason, maybe just continuing on with that point-of-sale discussion, you mentioned Fairstone around 10% to 15%. Can you disclose where you guys are at right now with the point-of-sale channel?

What is the penetration either in loan book or in terms of originations?

Yeah. So in our investor deck we do show the amount of application volume in originations from indirect.

Although that includes a combination of both point-of-sale and third-party partnerships where we are taking referrals from other providers and online resources, as you know, we are down to just point of sale, today it is very small, that would be like single-digit percentage small, of course that is focused on just the point-of-sale book. We have then of course cross-sell those customers and then they just show up as part of our regular unsecured and secured portfolios, but today the point-of-sale is still quite small.

A, because of the channels that I mentioned we have experienced around integration with prime, but we -- once we realized that that was the gap we had to close, we didn’t spend over the last year a lot of effort to try and build new relationships to really sell the product, because it just didn’t make sense until we lock down that partnership. So today it’s still quite small.

And as I said, when we think, one year, two years, three years out, we think it can be more material and look more in line with how our competitor would look.

Got it. So you think over the next call, probably, like three years to five years, you guys can get to that 15% to 20% loan book that Fairstone is at currently?

I think that’s reasonable, I mean, that’s certainly…

Okay.

… the appropriate reference point for how we should think about it.

Okay. And does your equity investment in PayBright prevent you from partnering with someone else, is there any clause in there that you can’t partner with someone else?

So as it relates to the Canadian market, it doesn’t preclude us from going directly and partnering with a merchant for offering non-prime, if they have an alternative prime provider. But our relationship and our exclusivity to them is reciprocal and that we won’t go integrate with other prime lenders.

And it really would make sense for us to do that given the amount of work and time and effort that goes into building the full integration and of course layering on our equity investments. So we have and will continue to have regional relationships where we are the non-prime provider behind somebody else that’s already prime.

But as far as working together and doing the full integrated offering we will be working in the Canadian market with just PayBright.

Got it. Okay.

And then, I guess, the second question just on the credit migration, you kind of gave some good color on what happened. But just wondering anything to read through there, is there anything that’s trended that do you think could be more permanent in terms of the credit migration or is it more of a seasonal shift that you mentioned.

So a couple of comments and I will save Jason comment to add. So from our perspective, as we deconstructed, nothing that we have concerns over.

The things that we watched and tell that help us to book are the through the door origination mix. So what is the credit quality of the customers of the loans were booking.

That’s a significant indicator for us. Second one is the vintage loss rate performance.

So tracking each vintage of historical originations to see how they are trending. Those continue to look stable and/or improving, and so although we spent a lot of time to deconstruct what influences the mix of the provision, knowing that it is susceptible to a number of factors that can create those fluctuations, those other metrics really give us the best indication of the credit quality of the book.

So nothing that we saw we considered to be anything other than normal quarter-to-quarter shifts. Anything to add to that, Jason?

Yeah. Gary, it’s Jason.

The only comment I would say and it was mentioned in the opening remarks is just going to see fluctuations from quarter-to-quarter. That’s just a natural byproduct of the fact that the provisions kind of data from the past, the present and the future.

But I would suggest the key take away from the quarter is, we saw a 26 point adjustment in the quarter, which was quite a significant lower by comparison to 47 basis point adjustment we saw in Q3 2018. And I think, generally, I would view that as a part of the sign, because we prefer less modification and more, and I would say, that’s more a reflection of the fact that as we continuously improve that through the third-party, the originations coming in, we would expect to see those modifications continue along the path that they are going down.

So that will be the other key takeaway we leave you with.

And what drives that seasonality, can you elaborate on what -- you guys said that a couple of times kind of what drives that.

Yeah.

Go ahead.

So, I think, it’s a couple of things, obviously, there are different periods throughout the year where the customers face different types of cash flow expenses. Some are periods, back-to-school periods as an example.

The other factor that what we refer to seasonality is really just the way in which the quarter ends. So as you will have noticed over the last couple of years when we provide our financial disclosures and we report the delinquency rate, one of the things that we did was showed the average delinquency as on a typical Saturday.

So weekend close versus just whatever the actual calendar day is at the end of the quarter and because our customers get paid biweekly, we did all their payments biweekly and those are typically on Fridays. And so the typical cycle for us is customers paying on Friday and then if they do miss a payment, we would find out the Tuesday, Wednesday.

And so the delinquency throughout the week kind of goes through peaks and valleys in which case, depending on the day that the quarter ends, that can also create a little bit of noise in these staging of the book at the provision. So taking a couple of things that we are referring to so we talk about seasonality and we saw the same thing as Jason said in the third quarter of last year.

Okay. Great.

That’s it from me. Thank you very much.

Hi, there. Good morning, everyone.

So, Jason, I just wanted to focus in on the 2020 targets as we are heading into the next year here before too long. And maybe the one that stands out to me that you have maintained here is the operating margin for easyfinancial moving up to that 44% to 46% range.

Could you just run us through what we should be expecting or what are the levers that we should be watching for you to move in the business, just begin to move to that level, you have been running, give or take, between 39 and 40 for the last few quarters, how should we expect that movement to begin to play out here?

Yeah. Sure.

So we do expect an increase in the operating margin in the fourth quarter, over the trend we saw in the last two quarters, that will list the full year operating margins and move us into the guided range that we provided as the revised target a few quarters ago. We do expect to continue to see the operating margin elevate as we go more efficiency and more scale.

At this moment, we feel fine and comfortable with the target range that we provided. As we get to February, when we provide the new fresh three-year guidance, we will be able to then see where the buck finishes at year end, look at the guidance around both yields and losses and margin and see if we need to make any adjustments.

But at this point based on the fact that we will continue to see scale and leverage, we will see the margin expand and will provide a more narrow and updated range at the next quarter end.

So this really is to view that the store footprints largely built out now. So there’s not a lot of incremental spend there, the marketing campaign sort of laid out in terms of spending around where you are going to be with other big step function from here.

So it really is just that topline growth driving some operating leverage for you?

Yeah. That’s right.

The primary leverage that we generate in our business is from the growing loan book in the existing store base. So we at -- we were just at 250 locations today.

We think there is capacity for north of 300. So we will continue opening kind of 10, 20 a year.

But the vast majority of the growth we experience now is coming inside the existing store footprint, where essentially the only incremental operational expense variable wise is just some small additional labor or extra financial services representatives. But otherwise it’s a fairly significant amount of operating leverage from that base.

Okay. Great.

And then I just wanted to shift a little over to the secured loan product. I mean, it’s now a pretty sizable percentage of the total for you, can you give us some comments about.

Do you have a large enough sample size of running through the process of loans falling into arrears and dealing with them versus looking at how the performing ones play out just to have a good level of comfort now around the expectations for how that product should be performing?

Hey, Jeff. It’s Jason Appel here.

Yeah. We are pretty pleased with how the secured zone has been performing.

And as you know, we went into that market very conservatively, choosing to obviously modify the underwriting of that product as we began to see experience. Obviously, as you know, we are sitting at just over $100 million as of end of Q3.

Delinquency is quite healthy, it’s probably significantly below what you would see the unsecured book. The unsecured book would be at around the 4 to 5 range.

The secured book would be in and around 1 to sub-1 range. And I would say the loss rates, we are going to get quite pleased by them, extremely low, if not slightly below the very lowest-to-single digits.

And we would expect that to obviously rise over time, but, obviously, significantly below where the average portfolio is trending as we continue to build that book. We think that there is some opportunity for us in future growth and expansion of that portfolio, but obviously with most things, we are going to tread carefully as we grow that book over time.

But I’d say, by and large, you are spot on, we have been pretty pleased with the book and not using the opportunity where the market is at to get too aggressive, because we are still pretty tight when it comes to our LTVs and how we price. So, overall, we are pretty pleased with how it is performing.

Okay. It’s helpful.

Thank you. And then, maybe just on easyhome and the rollout of the kiosks, the lending kiosks and then within those stores, looks like you have sort of slowed the expansion of that there.

So are you -- in terms of footprint across the store locations, are you around where you want to be and are we seeing what you think is a relatively representative run rate of how that segment is going to perform going forward?

Yeah. So I believe we have maybe about a dozen of the prior, older easyfinancial kiosks that we still need to move to their own dedicated standalones.

As we do that that allows the easyhome store to then also begin to offer lending as part of its product range. So there is still a little bit more expansion to come with rollout within easyhome for the lending offering.

Although, relative to the base we have now of just over 100 locations that are actively lending, it’s -- the amount of growth there is still going to be minimal. But as far as the actual overall profit contribution, we still have a high degree of confidence we will see a slow and steady rate of growth in revenues and operating income as a result of the fact that the loan growth -- the lease portfolio winds down, generally speaking, it’s not running that decline.

So, net-net, I believe we will continue to see slow and steady expansion there.

Okay. Okay.

Thank you for that. I will re-queue.

Hi, guys. A quick question on the charge-off ratio, so given your guidance for 2020, my expectation is it safe to say that in Q4 you are going to start to see another drop -- another decline of maybe 30 plus basis points in the charge-off?

So, I think, the charge-off rate decline is going to be a bit longer term more so than straight linear. So we are continuing to see a gradual improvement and to the degree of change that we would expect in the fourth quarter I think would be more minor than that.

But as far as we get into 2020, we definitely expect that the full year’s loss rate is going to come in within the guidance that we provided, because of the various factors we have already highlighted, are probably being ones mid to the upper end of the reduced guided range, which still of course means a year-on-year reduction. But it may not be a perfectly linear story the entire way, but the full year will come in on with that expectation.

Okay. And on the secured loan side of things, so I guess, it’s 10% give or take of the total book now, embedded in your guidance for revenue yield presumably you have an assumption of what that secured loan book is going to make up in your portfolio in 2020 and 2021.

Can you give us sort of ballpark numbers just in a percent basis what your target is for that?

Yeah. Sure.

So we are at 10% today. One of the upper boundary figures that we have quoted before is that about 20% of our customers are homeowners and so that would be all of the eligible homeowners borrowed, and of course, we still screen a number of those out because of various credit affordability factors.

So, we will expect the 10% to continue to grow but it’s not going to be a significant shift. So maybe it goes from 10% to 12% to 15% or so as opposed to it jumping to 20% or 30% because of just the natural mix of our homeowner base.

Okay. That’s very useful.

Last question for me, do you guys have a target mix for Quebec. Now that it seems like you have sort of sorted out all the growing pains and you are going to really focus on originations in that province.

Do you have a target mix in terms of, is this going to make up its proportionate share for Canada for your book or is it still going to be a little bit under penetrated in the next year or two?

I think because we have still set a slightly more conservative credit tolerance given the experience we have had and that we are trying to make sure we are really building healthy originations. We will probably see Quebec still under index its population proportion.

But given that it’s 22% of the population, even if it under indexes obviously it continues to become a very healthy and profitable part of our business. So, right now, I would say, our view would be do you want to continue to grow it, but it will under index population, over time as we get more and more history and we refine and fine tune the credit models, one day our hope would be that if they are as accurate and predictive as the models we built everywhere else over that longer period, in which case we might get to an exact proportion of distribution but right now we would be expecting it to still under index.

Sounds good. Thanks.

Hi. Good morning.

So I wanted to start …

Hey, Brenna.

… with loan growth and just how we should be thinking about your decision to incrementally add there. Are you looking at the risk adjusted yield and sort of managing to a target of charge-offs versus the revenue yield you are getting?

And just in the context of record origination quarter, record applications, really big increases in online applications, but the net loan growth on an absolute basis was not your biggest quarter?

Yeah. I think that, so, yeah, those are the right observations.

As for our management business, yeah, the key takeaway is we are managing the relationship between yield, losses, growth and then ultimately long-term profitability. So, as a part of our strategy to continue to evolve the mix of the portfolio and given the headwinds that we have highlighted in the past about the higher proportion of online applicants and new customers, we are of course, making ongoing credit enhancements to ensure that the quality of the originations that we take in are really healthy and being quite disciplined about that.

So as we have said before, we could certainly take on more velocity at the expense of a higher loss rate or we can manage the growth to a level where we get the right mix of yield and losses for long-term value and so that process is an ongoing analysis. And so right now we believe we have the dial set at the point where the originations we are taking on are strong.

They will improve the overall credit quality of the book in the long term. And we continue to have to reevaluate that right tolerance every single year.

So that’s kind of how you think about the growth we have in the quarter.

So is that something that you are analyzing and trying to manage, as well as optimizing the ratio of approved loans to online applications.

That’s right. The process of evaluating what credit tolerance you want to accept of your through the door applicant pool in order to derive a certain mix of originations that will come in and be on board at a certain price point that you expect them to deliver a certain loss rate and what influence that has on the existing book that you have is an ongoing process.

We analyze and study those relationships every single month and then make the appropriate adjustments that we think we need to make. And so as we looked at the higher proportion of online applicants and new customers, which as you know, that it would produce a slightly higher loss rate albeit also with a slightly higher yield.

Hence, why the risk adjusted yield held flat. We have set the appropriate dials and tolerance to maximize long-term profitability and to achieve the guidance and the target range that we provided.

Right. Okay.

So, I guess, what I was getting to with my next question is that ratio of applications to successfully originated loans, that’s in-turn almost a function of your ad spent. So in the context of the operating margin expansion that you are guiding to next year is, I am just curious how you think about the absolute dollars of ad spend versus what you are actually on boarding and at a certain point, those applications, that volume growth is great, but you have to be converting those?

Yeah. So, I think, maybe just I will try and summarize how we think about it.

So, first of all, our approach to invest about 4% of our revenue into marketing and advertising remains consistent philosophy. So each quarter this year, we have run on average just a bit above the 4% and we would continue to use that level of investment as our guiding philosophy going forward.

What we are also always trying to do is improve the efficacy of that spend, so that we can get the most application volume through the door for every dollar we invest and that gives us more choice around which customers we want to originate book based on the price, the loss rate and the growth that we are trying to achieve. The scale in the operating leverage comes from primarily the revenue on a fixed cost base as opposed to reducing the ad spent as a proportion of revenue.

We are going to continue to invest that spend in growth brand awareness and attracting applicant volume and then setting what tolerance we want to accept from a credit point of view. Obviously, the one thing that we then look at is the mix of the applicants that’s coming in, if the mix of the applicant coming in is of slightly lower credit quality, we adjust for that, if the mix of the applicant coming in is of better credit quality, we adjust for that.

Okay. That’s helpful.

Thank you. Next question is there any early results you can share with your partnership with Mogo?

So we have had the pilot going with Mogo for 30 days or so. We have -- as we do with every process and that is a fairly conservative test of our strategy, so hence why it’s a pilot, so we have done a bit of business there, few hundred thousand originations or so.

So far it looks good, so far makes sense to us, performing well, customers look good, loans look good, but it’s a small amount of business that’s in early days. So like any other third-party partnership we have got or have done, start slow, look at the quality of what you are booking, and then adjust from there.

But so far Mogo it’s going well and we think that can still be a good partnership for the long haul.

Okay. And what do you expect there to be a noticeable impact from the relationship with PayBright going live at the end of the month in just one month of Q4?

No. It’s going to be a longer term that’s plays in that.

We will turn the integration on at the end of November. But, again, we will approach it the same way we have everything, start out a little bit slower, on board merchants slowly to make sure we are happy with the performance, make sure quality is good, credit mix is good, bugs are working, customer experience is working and then we will slowly add merchant.

So we have not embedded any significant assumption for growth into our estimates. We believe it will be a more meaningful contributor, primarily if you think about the back half of 2020 and beyond versus the first six months to nine months.

Okay. And then last one from me, just going back to that increase in the provision rate, any little bit of further clarity you could provide, if you are saying like you saw an actual decline in the net charge-offs and increased effectiveness in collections.

What is causing that analysis or conclusion that there is a bucket that’s being deemed higher risk.

So maybe just to connect the dot there, what, I think, we are really saying is that, if you were more effective in collections on higher risk segments of your customer base, by default those customers now remain on your portfolio, because you are now extending their life and you are improving the rate of collection on those customers. They are ultimately paying you back more than they otherwise would have, if you work as effective.

And so as we have improved the collections effectiveness in those segments, you get the effect of the charge-off rate declining, but you see a small shift in the mix of those customers as a proportion of your portfolio. So we believe that part of the minor shift that we saw in the staging in the credit mix would be how we would attribute that.

But again that is the right thing for the business and positive for the long-term, because you are ultimately generating about a return and collecting more of your capital.

Okay. So that shows up as a proportionate or percentage decline in your level of gross charge-offs?

Correct. Exactly.

So…

Okay.

Exactly.

Okay.

If you see -- those customers have charged-off. They would no longer be in your active portfolio, so they would no longer show up in your mix, but you would have taken the actual charge-off.

If you prevent the actual charge-offs and the customer continues to pay you, then they are now going to be within your portfolio mix and those customers are as we by default higher risk segment. So you are ultimately aiming for maximum collection rate on your book over the long-term, but these are the kind of moving parts that you experienced quarter-to-quarter, what you are focused on the right long-term thing.

Okay. Great.

Thank you.

Yeah. Thanks.

Good morning. First question is on PayBright, which I see is held on the balance sheet as a fair value through profit and loss, and that factor such as equity market risk and interest rates will drive a change in fair value that will run through the income statement.

I am just wondering if you can put some magnitude around the volatility that we can expect with PayBright?

Good morning. It’s Hal here.

So in terms of the overall investment, it’s $34 -- just north of $34 million. We would continue to evaluate that investment from a fair value standpoint as you have alluded to.

However, certainly, within the short- to mid-term, we would not expect any material sort of volatility in the fair value of that asset on the balance sheet.

Yeah. I guess what I am getting at is, if interest rates are moving up 100 basis points over the next 12 months, what could be the impact of the value of PayBright, or let’s say, equity market prices like the TSX declines 10%, is there an impact on PayBright in the next 12 months, is that how I should be thinking about this?

Well, certainly, market conditions could affect valuation. But in this case we would really see that as a valuation based off of looking at a revenue multiple on this particular book of business.

So, therefore, we would not see any material sort of fluctuation associated with broader macro economic conditions, having a substantial and material effect on our valuation.

Yeah. Jaeme, just add to that, the way to think about PayBright’s business as a prime lender.

They are generating a combination of yield from the consumer for the prime loans that they land, as well as these -- a very sizable portion of their income coming from the discount rates that the retailer contributes to the economics of the program, and because they are a prime lender and do have quite a decent amount of history behind them, they have access to quite an attractive level of and cost of funding. And so if you roll up over their business model, it seems very unlikely there’s is going to be any material macro change that is going to really impact them.

And then if you flip to the value, we looked at the valuation of them and priced it accordance to the way the market historically globally for that sector was priced, and then, of course, got credit and value for the fact that we are bringing additional value to their business. So we don’t know [Technical Difficulty] adjust the value of that investment on our balance sheet and record the change in that.

But we are -- we think of this very long-term and not what the quarter-to-quarter change is going to be. So, in the long-haul, if they do what we believe they will and we contribute to that success in the way we think we will, we just would expect that that value rises over time.

Okay. Great.

Thank you. Clarification question on the ad spend, holding the expense at 4% of revenue, that would suggest that Q4 is going to come down quite a bit, but historically, the ad spend has been in Q4.

So should we expect that 2019 is going to have ad spend sort of in like that 4.5% range and we will see it come back to the 4% range in 2020. Is that -- do I understand that correctly?

Yeah. I think, yeah, so one comment which you noted, in the past year, we had spent marketing dollars in a bit more of a peak and valley manner.

We saw lower levels of ad spend in the 2% to 3% range in Q1 and Q3. And then higher levels close to 5% in Q2 and Q4, resulting in the full year coming in around the 4% level.

This year you will see that the ad spend has been a little bit more consistent at around 4% to 4.5% each quarter and that’s what you saw in Q3 and what you would also expect in Q4 as well, bringing the full year in and around just over 4%, 4.2% to 4.3% range kind of thing. So that’s kind of how we would expect it and then that same trend would continue next year, whether or not we choose to revert back to a more quarterly specific ad spend strategy or be a bit more consistent throughout the year as we did this year, that is part of our assessment as we look at this year and the prior year and decide how do we think is the most effective way to spend those ad dollars.

Great. Appreciate that.

And just about going back to the increase in the provisioning rate, did any macroeconomic factors have a play in that related to the forward-looking indicators, was that at all a factor or is it just related to this better collections and seasonality impacts.

Hey, Jaeme. It’s Jason Appel here.

You hit it spot on. The FLIs really didn’t have a fairly large role to play this quarter, they were pretty benign.

Most of the changes were for the reasons you have outlined, seasonality impact and the shift to the higher risk groups as a result of improved collection.

Okay. Thank you very much.

Okay. Great.

Thank you. So with questions now closed, I’d like to thank everyone for participating in today’s call.

I would look forward to updating you in February when we release our year end results and share more of our plans for 2020. Thanks everyone.