Operator: Good day, and thank you for standing by. And welcome to the goeasy’s First Quarter 2022 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Farhan Ali Khan. Thank you. Please go ahead. Farhan

Ali Khan: Thank you, operator, and good morning, everyone. My name is Farhan Ali Khan, the company’s Senior Vice President and Chief Corporate Development Officer.

And thank you for joining us to discuss goeasy Ltd. results for the first quarter ended March 31, 2022. The news release, which was issued yesterday after the close of market is available on GlobeNewswire and on the goeasy website. Today, Jason Mullins, goeasy’s President and Chief Executive Officer, will review the results for the first quarter and provide an outlook for the business. Hal Khouri, the company’s Chief Financial Officer, will also provide an overview of our capital and liquidity position.

Jason Appel, the company’s Chief Risk Officer is also on the call. After the prepared remarks, we will then open the lines for questions from investors. 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 and supplemented by a quarterly earnings presentation. For those dialing in directly by phone, the presentation can also be found directly on our investor site. All shareholders, analysts, and portfolio managers are welcome to ask questions over the phone after management has finished the prepared remarks.

The operator will poll for questions and will 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 at any coverage. However, we would ask that to do not quote callers unless that individual has granted their consent. Today’s discussion may contain forward-looking statements. I’m not going to read the full statement, but I will direct you to the caution regarding forward-looking statements included in the MD&A.

I will now turn the call over to Jason Mullins.

Jason Mullins: Thanks, Farhan, and welcome to the call, everyone. Today, I will recap the highlights from the quarter and the progress we have made on our strategic initiatives, and then pass it over to Hal to provide an update on our capital position and funding capacity. I will then spend some time talking about why we are confident, our business is well-positioned to perform through the current and projected economic conditions before wrapping up with an up update on our outlook. The first quarter continued to highlight the growth potential of our business model as all products and channels experienced a lift and origination volume, leading to a material increase in loan growth during a typically seasonally slower period.

During the quarter, we continue to experience healthy consumer demand, as Canadians have largely adjusted to life with COVID-19 and borrowing and payment behavior has returned to more normal levels. Combined across all channels, we received a record number of applications for credit at over 330,000, a 62% increase year-over-year. The increase in application volume led to loan originations in the quarter, a $476 million an increase is 75% over the first quarter of 2021. With elevated lending activity, the consumer loan portfolio grew $124 million during the quarter, a record level of first quarter loan growth and a 300% increase over the $30.5 million of net growth in the first quarter of last year, a strong signal that our business strategy is proving effective. The growth in the quarter resulted in an ending consumer loan portfolio of $2.15 billion, up 65% from the prior year.

Of note, we experienced performance that exceeded our expectations in several key areas. Auto lending activity in the quarter continued to scale up. As we increased our automotive business development team to 17 reps who have done a remarkable job increasing our active dealer network from 1,400 to over 1,700 today. In total 7% of all the customers we acquired in the quarter were issued an auto loan. We also experienced strong performance in our home equity loan product, producing $50 million in loan originations, nearly double the volume from the prior year.

This product has an excellent credit profile with the customers typically living in suburban and rural communities and an average home value of under $500,000, inclusive of our home equity loan, the average loan to value ratios on this portfolio are approximately 65%. This product has always carried the lowest level of credit risk in our portfolio. Lastly, we continue to see strong cross selling activity across our customer base. A key synergy identified in the acquisition of LendCare. While our cross-selling activity remains only a fraction of the future potential, our data continues to show that when we make offers to active customers between 10% and 30% of them will convert into a subsequent loan product after 12 months, depending on the initial loan product they took.

This performance is proving that our strategy to become the one stop provider of all forms of credit for the non-prime consumer is beginning to prove out. By graduating our borrowers to lower priced products, we continue to bring down the weighted average interest rate for our customers. During the quarter, the weighted average interest rate on the portfolio declined a 33.3% down from 37.8% last year, combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 38.7%. Total revenue in the quarter was a record $234 million, up 35% over the same period in 2020. We also continued to experience stable credit performance with the annualized net charge-off rate finishing at 8.8% in the quarter within our target range of 8.5% to 10.5% in 2022.

With credit performance performing well, our loan loss provision rate was broadly flat at 7.78% down 9 basis points from 7.87% in the fourth quarter of 2021. We believe this level of provisioning reflects the new structural credit risk of the portfolio and sufficiently contemplates potential deterioration in the overall economic environment based on probability weighted economic scenarios. Operating income for the first quarter of 2022 was $80 million, up 25% from $63.9 million in the first quarter of 2021. Operating margin for the first quarter was 34.4% down from 37.6% in the prior year. After adjustments, including items related to the acquisition of LendCare and unrealized fair value loss on investments and corporate development costs recorded in the quarter.

We reported adjusted operating income of $86.1 million, up $21.5 million or an increase of 33% compared to $64.6 million in the first quarter of 2021. Adjusted operating margin for the first quarter was 37.1% down slightly from 38% in the prior year. Net income in the first quarter was $26.1 million, which resulted in diluted earnings per share of $1.55 compared to $7.14 in the first quarter of 2021. However, in the first quarter of the prior year, we recorded an unrealized gain on investments of approximately $75 million. While in the current period, we recorded an unrealized loss on investments of approximately $15 million related to the mark-to-market of our remaining unhedged shares and affirmed.

Notwithstanding the mark-to-market adjustments, this has been an excellent investment, including the cash received on the initial sale of pay right to affirm, the total realized and unrealized gains amount to nearly $120 million relative to the initial investment of $34 million made in 2019 or approximately 3.5 times our initial investments. After adjusting for these non-recurring and unusual items on an after-tax basis, adjusted net income was $45.8 million, up 25% from $36.7 million in 2021. Adjusted diluted earnings per share was $2.72, up 16% from $2.34 in the first quarter of 2021. As previously noted, we experienced accelerated growth in the quarter of $124 million or $34 million above the midpoint of our original expectations. As a result, we incurred the additional loan loss provision expense that is required to be taken on the growth in our receivables.

This additional expense ultimately reduced our earnings by an estimate of approximately $0.12 and earnings per share during the quarter. However, as we have said in the past, allocating capital to organic growth generates the strongest long-term return for shareholders. Carrying an additional $34 million in additional receivables produces approximately $0.21 in earnings per share in future years. Before passing it back to Hal, I also want to thank and acknowledge all our incredible women across goeasy. This past quarter, we were proud to have been recognized on the Globe and Mail’s Women Lead Here list, an editorial benchmark to identify best-in-class executive gender diversity in corporate Canada, which includes some of Canada’s largest and best performing organizations.

We have worked hard to create a culture of diversity and inclusion that sets the tone from the top with a highly diverse Board and executive team. Ranking on the list is the testament to the steps we have taken to level the playing field such as achieving gender pay equity in 2019 and increasing the female representation in our C-suite to nearly 30%. Although, we are proud of the progress, we remain committed to challenging biases and creating a culture that advances gender equality at all levels of the organization. With that, I’ll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook.

Hal Khouri: Thanks, Jason.

During the quarter, we closed on the balance sheet enhancements previously discussed on our securitization warehouse, where we increased the total capacity from $600 million to $900 million, while syndicating the facility and adding several marquee banks. On the revolving credit facility, we extended the term, reduced the limit slightly, improved the flexibility and reduced the interest rate by 75 basis points when taking drop tight the Canadian bankers’ acceptance rate, and a 125 basis points when taking drop type of the bank prime rate. Between the two facilities, we are fortunate to have participation from five of the six major Canadian banks, and total capacity of nearly $1.2 billion, a testament to their confidence in our business. Given the conditions in the market, we elected to use $41 million of our available capital to opportunistically repurchase our shares at a level we feel is below their intrinsic value buying approximately 280,000 shares during the quarter. Subsequent quarter end, we have since purchased an additional approximate 168,500 shares for $20 million, bringing our year-to-date purchases to approximately 448,000 shares and $61 million of repurchase volume.

While share repurchases served to temporarily increase our leverage position, they are highly accretive to the future earnings per share of the company at these price levels. Despite the strong growth and share repurchase volumes at quarter end, our net debt to net capitalization was 68% below our targeted level of 70%. Based on the cash at hand at the end of the quarter in the borrowing capacity under our recently amended revolving credit facilities at quarter end, we had approximately $801 million in total funding capacity, which we estimate is sufficient to fund our organic growth through the second quarter of 2024. Inclusive of these amendments are fully drawn weighted average cost of borrowing reduced to 4.3%, with incremental draws on our senior secured revolving credit facility bearing a rate of approximately 4% and incremental draws on the amended securitization facility bearing a rate of approximately 3.3% prior to interest rate swaps. Most important, we have incredibly strong relationships with the banks providing us funding, and we are in regular dialogue about additional capital to ensure we maintain sufficient liquidity to fund our ambitious plans.

In an environment like the one we are in is important for investors to understand the cash producing capability of the business. We estimate that once our existing and available sources of capital are fully utilized, we could continue to grow the loan portfolio by approximately $200 million per year, solely from internal cash flows without the need for any additional capital. Furthermore, if we were to run off our consumer loan and consumer leasing portfolios, the gross value of the total cash repayments paid to the company over the remaining life of its contracts would be approximately $3.1 billion. If, during such a run-off scenario with reasonable cost reductions and all excess cash flows were applied directly to debt, we estimated, we could extinguish all external debt within 15 months. Last quarter, I highlighted some key reasons why goeasy was well positioned to manage through a rising risk – rising rate environment and why we have a partial sheltered from rising rates, which I would like to recap.

First and most significant is the effective mix shift, much like our consumer loan portfolio shifting towards lower price consumer loans, so too is our debt stack. We expect that nearly all the funding to support our three year organic growth plan going forward will be from lower cost secured funding facilities. As a result of the shift in mix, even if rates on those facilities were to rise, they are still projected to remain below our current weighted average drawn cost of debt of 4.75% in the quarter for a period of time. As noted earlier, incremental draws on the securitization warehouse today are approximately 3.3%. Secondly, all the draws we have made to-date on the securitization warehouse and those we will make in the future have interest rate swap agreements put in place to hedge the interest rate risk and fix the rate going forward.

As a result, the impact on rising rates only affects incremental securitization draws, resulting in a much slower and gradual impact on the overall cost of borrowing. Today, approximately 95% of our drawn debt is already at fixed rates. Combined, we expect our actual cost of debt on drawn balances to remain fairly stable for the next year despite the rising rates. Turning briefly to our investments, during the quarter, we recognized a $17.5 million pre-tax net unrealized fair value loss on investments, which was mainly related to the unhedged contingent shares of our investment in Affirm. The write-down was partially offset, thanks to the pre-tax unrealized fair value gain in the related total return swaps.

Since the initial shares of Affirm were obtained on January 1, 2021, we have recognized a realized gain on the non-contingent portion of the investment in Affirm and its related total return swaps of over $66 million and accumulative unrealized fair value gain on the contingent portion of the investment in Affirm and its total return swap of $31.4 million. Including the cash we received on the initial sale of PayBright to Affirm, the total realized and unrealized gains amounts inclusive of this quarter’s adjustment amounted nearly $120 million relative to our initial investment of $34 million made in 2019. This is an approximately 3.5 times return on our investment. Furthermore, we reserve the right to hold our unhedged shares upon investing for a period of our choosing providing the opportunity for additional gains in the future as markets adjust. Offset with $800 million of funding capacity, several tactics, soften the impact of rising rates on our cost of borrowing and a discipline capital allocation strategy that has us funding organic growth first followed by opportunistic share repurchases, we are an excellent position to continue our ambitious growth plans.

I will now pass the call back to Jason for an update on our outlook.

Jason Appel: Thanks, Hal. It has clearly been a great start to the year with strong loan growth and stable credit performance. Thanks to the work of our remarkable team. We continue to make great progress on our strategic initiatives.

During the quarter, we began the design of our new digital lending ecosystem, which will connect our product and channels through a mobile app and enable customers to obtain access to pre-approved loan offers. We are continuing to scale up our auto financing program as we track toward this year’s goal of 2,200 active dealer partners and ramp up our direct-to-consumer offering. Lastly, we are well down the path of integrating a prime lender into our POS financing platform, so we can begin offering a truly full spectrum solution to our merchant partners. Notwithstanding the success and growth momentum, we appreciate there may be questions about how the business will navigate through economic weakness and what impact that has on our long-term guidance. For nearly 10 years, we have published three-year commercial forecast for investors.

These projections are built with the same consistent philosophy each year. Based on the products and initiatives in market, we develop a bottom up projection of originations that our data and research suggest is reasonable and achievable. We then stress the model with more ambitious and more conservative cases, which in effect account for a variety of potential tailwinds and headwinds, including the potential for a degree of economic turbulence. In our modeling, we anticipate a downside case, in which more challenging conditions, influence lending activity and credit performance. As such, we only adjust the ranges provided in our forecast, if we experience extreme economic conditions or the product and credit mix evolves materially different than anticipated.

This approach has served us well and we have consistently achieved or exceeded our forecasts. In examining the current economic backdrop, there are both a series of tailwinds and headwinds facing the consumer. On one hand, we are experiencing strong economic growth in tandem with a general labor shortage, resulting in extremely low unemployment. Unemployment is at an all time low of 5.2% and wage growth has been between 3% and 4%. This bodes well for our customers as obtaining employment, pursuing a new career or increasing their wages is perhaps easier now than in generations.

Furthermore, consumers appear ready, willing and able to return to their typical borrowing and spending behaviors as COVID restrictions of all but vanished and most people are anxious to live their lives again. On the other hand, excess money supply from government stimulus, strong consumer demand and severe supply chain challenges have resulted in higher levels of inflation, which had exceeded the level of wage growth for several months running, which in the long-term can put pressure on consumer cash flows. To carefully navigate economic conditions, we utilize a series of credit risk management tools. First, we employ several custom proprietary credit models that allow us to increase or decrease the level of credit risk we accept by lowering or increasing our credit tolerance. Our models, which have been developed and refined over 10 years, using thousands of data variables are statistically two times more predictive at projecting loss risk than a generic credit score.

Secondly, our underwriting process includes an affordability component driven by either a debt to income or payment to income ratio varying by product. Through adjusting these ratios and the size of loan we are willing to issue a customer, we can effectively ensure that a borrower is left with additional discretionary income to absorb higher everyday living expenses. Given that our portfolio liquidate at a rate of approximately 45% per annum, we can affect the underlying composition quickly with credit or underwriting related modifications impacting nearly 50% of our portfolio within just 12 months of lending activity. By carefully monitoring the economic outlook, we can make proactive credit adjustments in advance of economic expansions or contractions. While growth remains strong, we have in fact already embedded a number of credit optimizations into our models and will make additional incremental improvements in the coming months.

As we have communicated in the past, non-prime consumers and the companies lending to this category of forwarders are also incredibly resilient. There are critical points of consideration that explain why non-prime consumers experience a more moderate degree of change and default rates during an economic downturn than prime borrowers. And why non-prime consumer lending businesses are well equipped to navigate through these downturns. These include, number one, our customers have lower levels of total debt. In fact, Canadians with non-prime scores have 55% less debt than Canadians with prime credit scores.

Prior to the pandemic, non-prime Canadians held balances of approximately $230 billion in credit, excluding primary residential mortgages and the market was growing at a CAGR of approximately 4%. By the end of 2021, the total debt balance is stalled by 20% to $184 billion. Meanwhile, in the prime lending market, total balance is actually continued to grow, topping $661 billion in 2021 growth of nearly 5%. The slower balance growth in non-prime is clear evidence that the average non-prime Canadian experienced an improvement in their finances throughout the pandemic, highlighting the significant growth opportunity available as the market corrects and the ability of these consumers to weather economic pressure. Number two, our customers have less exposure to rising interest rates due to lower home ownership, as only 20% of goeasy borrowers own their homes compared to over 65% of the overall population.

Number three non-prime consumers have a higher propensity to purchase credit insurance. Approximately 50% of our portfolio today carries incremental insurance for unemployment risks with a third party provider of credit insurance. Number four, our secured loan levels have increased with the portion of our portfolio secured by hard assets, such as real estate or automotive and recreational vehicles increasing to over 33% of the portfolio. Number five, our customers work in a wide and diverse variety of industry sectors, including manufacturing, retail, financial services, healthcare technology, and public sector jobs with no significant industry specific concentration risk. Number six, there is regular government support.

Canada’s standard unemployment insurance program covers approximately two-thirds of an average consumer’s after tax income. Number seven, our business model is inherently design to accommodate a large level of stress. In fact, due to the risk adjusted margins and variable nature of many operating expenses, net charge offs can more than double before compromising profitability, an increase that is well beyond what we or any of our peers in the non-prime space have experience during economic shocks in the past. Number eight, the business can produce very strong, free cash flow. If new lending activity was slowed and we were to hold the portfolio flat, the business generates nearly $300 million of free cash.

While as Hal said, in a runoff scenario with reasonable cost reductions, the business produces over $3.1 billion of growth cash and enough free net cash flow to extinguish all debt in approximately 15 months. Number nine, and lastly, the data from research analysis done by TransUnion on several past recessionary periods combined with our own experience in Alberta in 2015, when the unemployment rate doubled proves that the degree of increase in credit losses is more moderate for the non-prime segment than it is for prime borrowers. Furthermore, as a company, we have a long track record of navigating through market corrections and economic cycles. Over the last 15 years, we have experienced four other instances of significant market correction due to various economic challenges. In each instance, the business performed well and over the following years experienced strong growth in the recovery.

For all of these reasons, we remain confident in the outlook for our business and are well prepared to navigate through any economic turbulence that may lie ahead. Now turning to our outlook. During the second quarter, we are investing over $9 million in our nationally fully integrated media campaign, including digital TV and radio to continue driving awareness for our brands, which combined with the momentum in our automotive financing program and POS channels will help produce the largest quarter of loan growth in our history between $160 million and $180 million, approximately 25% higher than our previous record quarter in Q4. On the revenue side, we expect the total yield generated on the consumer loan portfolio to remain broadly flat between 38.5% and 39.5%. While the net charge off rate continues to remain stable and is projected to be in the midpoint of our range, finishing between 9% and 10% in the quarter.

For the full year, we now project to achieve the high end of our loan book growth range at $2.6 billion, which implies we’ll produce more than double the average loan book growth than we experienced over the last three years. With this our minimum loan book expectation now lifts to our previous midpoint of $2.5 billion. In lockstep, we expect revenue to also finish at the high end of our range. While the incremental growth is accompanied by the extra expense necessary to provide for future loan losses and origination expenses, thereby moderating the in year earnings benefit, it contributes to a list in future earnings that produces long-term return for shareholders. Altogether, while we are operating in a rising rate environment, which inevitably impacts the cost of capital for all lending institutions, the benefit of our share repurchases and strong-loan growth will serve to offset these impacts and still drive meaningful earnings growth in future years.

In closing, I want to, again, thank our entire goeasy team for their passion and commitment to our company and our customers. They make a meaningful difference in the lives of Canadians and deserve all the credit for our performance and progress. With those comments complete, we will now open the call for questions.

Operator: [Operator Instructions] Your first question comes from the line of Etienne Ricard from BMO Capital Markets. Your line is now open.

Etienne Ricard: Thank you, and good morning,

Jason Mullins: Good morning, Etienne.

Etienne Ricard: The new metric you raised in your comments, is that 45% of the loan portfolio experience is turned over 12 months period. Now, as it relates to non-performing loans, what flexibility do you have to renegotiate in terms of the loan without charging it off?

Jason Mullins: Yes. So I’ll maybe make a comment and then Jason Appel can add. So we – we’ve had a basket of collection tools that we’ve used for many years and have always served us well in helping our customer through a difficult period.

We offer the opportunity for our customer to temporarily defer a payment, but we limit and cap the number of times that that can be done over the loan to ensure that it’s being used properly. And then we will also offer certain consumers the opportunity to extend the term of their loan. And if they’re in a more hardship position, lower their interest rate. And then the combined effect of those two things can actually bring down the structural payment level for that customer. Keep in mind that the proportion of loans will use those types of support mechanisms is very low.

It averages less than 10% even in extreme scenarios. So the majority of the time, the consumers still able to meet their payment obligations, but we do know we need to always have a tool set that can be available to help a customer if they do run into a difficult time. Last point would just be that, when a consumer experience is difficulty, one of the reasons that is often the case is unemployment. And then as I said earlier, because so many customers have that unemployment coverage, a lot of times the primary tool that’s used is simply to make insurance claim to cover the payment.

Jason Appel: The other comment I would add Etienne is in those tools that Jason identified, we dynamically rescore the portfolio every two weeks for the purposes of identifying accounts that may be at that risk of charge off.

And that would include accounts that aren’t in a current state of delinquency, because in some cases you will find customers that suddenly will experience an event and then have no choice, but to have trouble in making their payment. So we use a centralized algorithm to identify those customers up front and that then dictates what type of enhanced collection tool we will offer them, which falls within the suite of which Jason elaborated on earlier. So it’s a combination of both the series of tools, as well as a fairly complex algorithm to identify at risk customers before in many cases, they’re at risk of charge off.

Etienne Ricard: Understood. You also flagged strong home equity loan originations for the past two quarters.

How sensitive do you expect origination volumes for this product to be in a housing market slow down? In other words, how sensitive our home equity loan originations to housing market transactional activities?

Jason Mullins: Yes, so, I mean, I think, the first point I would say is that the relative impact of any volatility in the sales performance of that product on our business is quite moderate. As I highlighted while that was a product success in the quarter at $50 million of originations, that only represents just barely 10% of the originations for the company. So if that product fluctuates in terms of its performance in sales volume, it’s not going to move the needle materially. Having said that, with respect to your specific question, the fluctuations in the real estate market, we think are going to have a benign impact on the performance of that product. And that’s largely because, these consumers are living in predominantly rural markets, home values as mentioned are less than 500,000.

So they’re not high priced homes that are going to be far more sensitive to swings in real estate prices. And again, the total loan to value ratio with our product included is only 65%. So the consumers that are borrowing this type of product from us have plenty of room in equity, whether that’s to qualify for another loan or whether that’s – if they’ve already got a loan and the real estate price was to decline, there’s plenty of room there. I would add, the history of that product has been very consistent, approximately two to three years after someone borrows that loan, they tend to refinance their original primary residential mortgage and the vast majority of the time they then are able to refinance that loan product into their primary residential mortgage. And our loan gets paid out early, and we’ve had the customer for several years and it’s been a great way to help bridge them during that period.

Etienne Ricard: And lastly three-year adjusted results disclosure, it seems that you were contemplating an acquisition in Q1, which ultimately did not work out. So I guess first part to my question is, could you comment on how active your M&A pipeline is? And the second part, considering evaluation on your stock and leverage getting closer to target, how do you think about balancing buybacks and deploying capital for acquisitions?

Jason Mullins: Yes. Great question. So first of all, on the M&A points, so we’re always keeping your eyes and ears open for opportunities. We’ve highlighted and flagged that was part of our strategy for a long time.

And so just generally speaking, we keep our eyes and ears open and various opportunities come our way. Quite a number of months ago now, actually all the way back to late last year an opportunity came our way that we got quite interested in and thought was an excellent strategic fit. So much so that we went very, very deep on looking at and exploring the opportunity to clearly to the point in which we incurred some cost to do the due diligence and financial analysis. In the end, you can imagine that in this kind of market that’s has been under pressure now for quite some time. As we got closer to the end of the process, we essentially realized that the opportunity was just not going to financially work to produce the level of accretion that’s needed to exceed the organic hurdle rates that any type of investment has to have, because our organic growth is so strong and our outlook is so positive.

That hurdle rate is very high. Anything we’re investing in has to have a very strong outlook and the value of our equity, if we need to issue equity to fund a purchase, obviously has to be in a good position to be able to make the transaction accretive. So one of those situations where it’s a very good strategic fit, but as you get close to the finish line, you look at the prospects and the financial projections, you look at your equity price just doesn’t make sense. And down the road, we think there’ll be opportunities that will reemerge and we’ll be there to consider them as always. Now to your second point, clearly in the current market conditions M&A is not a current priority.

At the moment, we are following our capital allocation framework that Hal and I have mentioned the past, which is first and foremost fund organic loan growth. Organic loan growth generates the highest return on our capital, the most accretive to shareholders in the long run. So we want to make sure we have the capital capacity to fund the great organic growth that we’re producing. And then when the share prices at these levels, we would then prioritize share buybacks over M&A because at this point at these levels, the accretion on buying back our own shares is going to be likely better than any type of investment we could find out there. And so at this point, that’ll be the way we’ll manage capital fund, organic growth and then opportunistically buy shares when they make sense.

We’ll just want to make sure that we don’t over buy because we want to make sure we can preserve capital for organic growth.

Etienne Ricard: Thank you for your comments.

Jason Mullins: Thank you.

Operator: Your next question comes from the line of Gary Ho from Desjardins Capital Markets. Sir, your line is now open.

Gary Ho: Thanks. Good morning. There’s obviously a lot of focus on credit and net charge-offs, just given the macro uncertainty, inflation, et cetera. So you deliver – we’re pretty solid 8.8% in 1Q and unchanged range, I think in 9% to 10% for Q2. A couple of things, I imagine your customers would have felt some of the inflation pain in Q1 and April.

Any commentary you can provide in terms of kind of their ability to service the loans, any crafts and delinquencies that you’re seeing to make payments, et cetera. Just wondering if you can share any real time color.

Jason Mullins: Yes. So again, I’ll make some comment and it’s Jason, as I add. So at the moment boots on the ground, we see no sign of deterioration and no sign of degradation and payment or credit performance.

And that’s sort of, even considering the most recent data you could possibly have available, which is if we look at customer payments that were due just this past Friday, most customers make their payments biweekly on a Friday, we look at just this recent week’s payments that were due and what proportion were made on time versus default, that ratio again, very, very consistent and stable. And so I know there’s probably a sense of disconnect between why the environment is what it is, and yet we’re seeing this type of stable credit performance. I think you have to consider a couple things amongst the list that I’ve highlighted. Our business just gradually and inherently over time is gradually improving based on credit and product mix. You think about the areas that I highlighted earlier that had the strength in the quarter auto lending, home equity lending.

These are secured products. The loss rates on these programs have a weighted average loss profile below our portfolio average. So inherently, that’s going to mean that that we can withstand some of the pressure that’s in the economy right now. And then going to the actual consumer, I think if you look at some of the research on wage growth, it appears that the wage growth is most robust in the lower paying jobs, the entry level jobs. So that means the average Canadian, the average consumer is the one that that is experiencing the strongest wage growth.

So we can sell from just having our own frontline workforce and knowing, who’s coming and who’s going and where they’re working and stuff. And it’s very evident to see that in some of those average Canadian frontline jobs that their wage growth can perhaps be far beyond the Canadian average of 3% to 4%. In many cases may actually be at or above inflation. So I think that with the fact that non-prime customer came into this with a lower level of debt, as I mentioned earlier, maybe a bit more well prepared to navigate through these times the fact that wage growth, although on the national average has been below inflation and the entry level positions has been quite robust. And that our portfolio has been improving credit mix, those conspire to suggest at the moment we’re seeing no deterioration and we’re seeing excellent performance and we expect it to be that way going forward.

Hal Khouri: Gary, I just add to that, we said this before. We ingest quite a substantial sum of data on our customers, and we do it regularly, application data, credit bureau data, banking data. And if you look at that data long enough, you can begin to detect patterns. And when you encounter these periods of economic uncertainty, which you’re most worried about are customers that live on what we call the margin, right. They’re just on the precipice of being able to maintain their ability to keep themselves in good standing and that period where they’re not able to do so.

And we look at that data on a regular basis. And because we’re looking at it and updating it very frequently, we’re constantly tweaking and updating our models and our underwriting protocols. We certainly did that throughout the pandemic, as we’ve mentioned in previous calls. And we continued to do that as we’ve come out of that pandemic because we don’t tend to believe that economic certainty is certainty. And as a result, as Jason highlighted in the script that came out from today’s call, we’ve already made a series of credit adjustments, and we have more actually planned for this quarter.

They’re not massive adjustments, but they’re tweaking around the edges because we want to make sure that those customers who are most at risk at a time of economic weakness has some degree of protection for those that we’re going to subsequently underwrite, as well as those that we’re currently dealing with on the book. So the ability to have that data regularly updated to be able to build and refresh our algorithms on a regular basis is probably one of the key things that allow us to have that degree of confidence in thinking about the next couple of quarters looking out going forward.

Gary Ho: Okay, great. And then maybe just as a follow on. I guess, despite those credit risk adjustments that you’re putting on last quarter and going into Q2, you’re still projecting a very, very healthy growth – loan book growth number for Q2.

Just curious, like what’s a disconnect there and how sustainable is that growth for the remainder of 2022?

Jason Mullins: Yes. So right now, I think the way to think about it is when we publish our commercial forecast, you’ll recall the philosophy we’ve shared in the past has been that the midpoint of our range as if sort of some things go well, some things go – don’t go according to plan. The low end of the range is if we hit a few speed bumps and more things don’t go quite according to plan. And the high end of the range is if all this kind of tactics that we have and all the strategy we’ve built are going according to plan then we would be at the high end of that range. That’s where we are right now.

This is not a function of loosening credit to drive growth. In fact, as you noted, we’re going the other way, we’re tightening up around the edges. This is really just a case of good, solid, healthy consumer demand. Consumers are borrowing and using credit at a very appropriate level. And all of our initiatives that are currently working in lockstep whether that’s automotive finance program, home equity lending, digital and online marketing and acquisition, point of sale finance, we’re coming into a great seasonal period for certain categories, like power sports, as people start to go out and purchase summer recreational vehicles and water sports vehicles.

So it’s a good time right now in the business it’s performing well. And all of our initiatives are working in our favor. So at this point, as long as the credit that we’re writing, we continue to see meets the credit profile. We think it needs to, in terms of the credit mix and the product mix, even considering the credit adjustments that we’re making then that means we’re putting good healthy loans on the book that are actually over time going to help prepare the business to whether any economic turbulence. So for us, this is actually good growth.

You take the growth in home equity lending, for example, that will decrease the credit risk of the portfolio and provide us even further weatherproofing against the future. So that’s how the growth is looking right now.

Gary Ho: Okay. And then my last question. I noted last month, one of your larger competitor acquired EdenPark.

Just wondering in the auto loan space, is that a threat? Do you compete with those guys in terms of your auto loan product? Just wanted an update on that front.

Jason Mullins: Yes. So the way to think about the automotive market is you have four, what I’ll call large scaled up non-prime lenders, two of them are banks, both TD and Scotiabank have non-prime lending portfolios, albeit they’re clearly focused on more near-prime. And then you have IA Financial Group and Santander, the equal previous [indiscernible] business. Those would be the four that have large enough scale.

You then have ourselves and Fairstone that are clearly large organizations pursuing that category. And then after that, you have a cadre of smaller independent firms that for the most part, we’ve been able to demonstrate we can compete with and we can beat in the market. All of that being said, it’s important to consider that in the $200 billion-ish marketplace, we operate automotive financing is the largest single product category represents $58 billion of that marketplace. So by itself, it’s a very significant financing market. So for us, we believe that we can be the number one non-prime non-bank.

So behind Scotia and TD, we can be the number one player in that space. It will take us time to get there. But given that market is so large, even with a number of competitors, even with Fairstone buying EdenPark and looking to compete in that market there is still significant runway and opportunity for growth for us.

Gary Ho: Okay, great. Thanks for the color.

That’s it for me.

Operator: Your next question comes from the line of Jaeme Gloyn from National Bank Financial. Your line is now open.

Jaeme Gloyn: Yes. Thanks.

Good morning. My first question was just going to be on the cross-selling, which seemed to have more success this quarter than in previous quarters. Can you give us a bit more sense as to direction of that cross-selling? Is it point of sale clients coming into the unsecured product or unsecured products going into point of sale or otherwise, and then maybe just a bit more on that first.

Jason Mullins: Sure. Yes.

So this obviously is an area for us that is core to our strategy long-term. We’re looking to build a full suite financial services institution where a non-prime Canadian can come to us for any form of borrowing needs that they might have. And then obviously over time as those needs change and evolve that we would be their go-to solution for other credit products, as we capture a larger share of their wallet. To-date, the cross-selling activity that we’ve began late last year and is the focus point at the moment is when a customer is acquired on an initial loan of either home equity, powersports, retail point of sale or automotive offering them an incremental loan as an unsecured cash loan. That’s been the primary focus thus far, so far that has performed very well.

As I said, in the prepared remarks, the propensity for them to add an additional product at some point appears to be tracking to between 10% and 30% of them after about a year. We are getting ready over the next coming quarters to start to then market other products in the reverse direction, which there’s actually much greater opportunity for. Taking our powersports products, home improvement lending, healthcare financing, automotive finance, and pre-approving existing unsecured loan customers of which that’s the lion share for those products. That’s the greatest opportunity. You’ve got a wider range of products.

You’re actually cross-selling into a bigger customer base and the products that they might convert into are some of our best performing. So again, it’s quite early days in this regard, but early signs suggest the concepts is resonating very well.

Jaeme Gloyn: Okay, great. So it sounds one directional at this point or at least in Q1, and then in terms of the – like the go-to-market strategy here, is it primarily inbound e-mails? Is it phone calls? What is the go-to-market strategy on that cross sell?

Jason Mullins: Yes, so great question. So our strategy to-date has been a little bit rudimentary.

We’ve primarily been reaching out to customers to let them know they’re pre-qualified by e-mail and calls and some direct mail, but primarily digital e-mail and calls. The primary strategic initiative for this year that I highlighted earlier, the lending ecosystem project is the one that will ultimately provide the most efficient way for us to offer all our customers, our full suite of products. So we are down the path to beginning to build a digital mobile app. So it’ll be an ecosystem where when a customer gets a loan under any brand and any product, they’ll get access to set of credentials, those credentials will allow them to log into the goeasy portal. And in there, they can not only do basic things like see their balance in their next payment date, but it’ll show them all the products available.

Some of those products they’ll just be invited to apply. And some of those products they’ll be pre-approved for if we have enough data and they’re eligible. That I think becomes the most efficient way. So it allows a customer to basically wake up every morning, open their mobile phone, open their goeasy app, and instantly see all the products and which things that they’re eligible for and then for us to be able to use that digital portal to be able to do push notifications and alerts and things of that nature when they become eligible. So this is a very long-term multi-year strategy for us that that we’re very keen on.

And we think we’ll really monetize this platform that we’ve built of multi-product multi-channel.

Jaeme Gloyn: Okay, great. On in terms of applications notice that online applications were down to 39% from 49%. Is that reflective of reopening or is it more reflective of maybe some changes in the underwriting that you implemented during the quarter to sort of diminish exposure to online applications?

Jason Mullins: So no, so well, so three things, one, the last point you just mentioned is true, hopefully that that’s very minor when we make credit model adjustments to tighten up either credit tolerance or affordability. Typically, the consumers that are applying digitally online are the group of consumers who that will most impact because they tend to have a lower credit quality than walking in a branch or point of sale.

But that would be very, very minor. The primary reason you would see that is just simply mix shift. As our other channels and products, which are newer and younger are growing like automotive financing like point of sale. Their percentage of our total application pool is going to rise and even if online traffic and volume were to stay flat, absolute the percentage would decline. Now, we did also see a slight decline in the absolute amount of business originated through online, but in that direct-to-consumer channel, there is typically a seasonally slower period Q1 versus Q4.

Hence why total originations in Q1 were still down a little bit from Q4 as they seasonally always are. So think about it as a little bit of seasonality, primarily a mix shift effect because the other verticals and products are growing more quickly in their earlier stage and then a touch of the effects of credit adjustments that are going to over index or impacted online.

Jaeme Gloyn: Okay, got it. Two more, first just on the capital allocation, obviously the NCIB has been very active. Curious to get your thoughts on a substantial issuer bid something a little bit more larger scale than just tapping the NCIB.

What have you considered that or any other comments on that strategy?

Jason Mullins: So we – look, we talk about share repurchases regularly, and we’ve obviously been very active bought back over a 100,000 shares since November, since the market correction began $130 million, $140 million or so total repurchases. That entire time, we’ve been able to leverage the NCIB, our current NCIB, which doesn’t expire until this December allowed us to repurchase during the period of that NCIB about 1.1 million, 1.2 million shares. And we’re only about 400 and some thousand through that NCIB, in which case we’ve got plenty of room to still use that as the primary tool. But more importantly right now with the strong organic growth, that is our primary capital allocation place to invest. So that means that our buybacks are going to be managed and constrained to a certain level that allows us to fund all that organic growth, keep the leverage at a level that we’re comfortable with and we think our stakeholders are comfortable with.

And so therefore, it’s really just that excess capacity of capital that then gets allocated to buybacks. So we’ll continue to be active, but we’ll just have to feather and manage the volume of buybacks. So we make sure we don’t take away from this great organic growth, which generates the highest return.

Jaeme Gloyn: Okay, great. And my last question is just on the experience of the Alberta portfolio and it’s applicability or reasonability for today’s portfolio.

So if we’re looking at delinquency rates in loss rates in Alberta back in 2015, they were running at 14% loss rates peaking up to 16.5% loss rates. So you’re right. Not a huge increase, but it’s a higher starting point so than where we are today. So my question is really like can we look at Alberta and that type of borrower and gain comfort with the overall portfolio as it sits today where loss rates are starting at 9%, let’s say?

Jason Mullins: Yes. I think you absolutely can.

And for a couple reasons, one, the segment of borrowers in our portfolio today is still a non-prime consumer. And if you break non-prime into near prime and subprime, the lion share is still subprime. And so when you think about 14% to 9%, that’s not a function of a dramatic shift in the customer segment that we worked with. We do have more near prime customers, and the average credit scores have improved a little bit, but much more of the change in the losses has been. Over that period of time, we’ve developed far more sophisticated credit decisioning and science and models in the last seven years, since then it’s been significant.

The mix of the product at that time we had just the unsecured loan. Now that same borrower that’s borrowing an auto loan, home equity loan, a powersports loan, the same customer with the same propensity to change their probability of default exists is just the products that we now have are by date, by nature, starting from a lower overall base in terms of credit risk, particularly because so much is of that volume is secured. Last thing I would say is unlike Alberta in this case in more in our favor, we’ve just come off of two years of declining total debt levels for the non-prime customer. That was not the case going into the 2015 Alberta oil crash scenario. Debt levels were still rising for those borrowers at the time.

So yes, we still believe that that period of experience for us is highly relevant and our data would suggest that the portfolio by and large is a very similar customer set that should react similarly under – just under stress.

Jaeme Gloyn: Thank you very much.

Jason Mullins: No problem. Thanks, Jaeme.

Operator: Your last question comes from the line of Marcel Mclean from TD Securities.

Your line is now open.

Marcel Mclean: Okay. Thanks for taking my questions. First one on the interest rates, last quarter you guys had commented – sorry, I dropped off the call earlier. So if this is something that’s been discussed, just let me know and I’ll go back and see the transcripts.

But you said that you’re basically hedged for up to 200 basis points of interest rate increases. The market is starting to predict that that could happen or see interest rates in excess of that. Can you just maybe describe what would happen in that scenario, if we do reach – if we do get all these interest rate increases at their forecasting?

Hal Khouri: Hey, it’s Hal here. So effectively kind of going back to our overall strategy around borrowing, so as it stands today roughly 95% of our debt stack is fixed rate. So that that’d be our notes that we have in place, roughly the CAD1.1 billion.

Those are all fixed rates. Every securitization draw that we take while the initial cost of borrowing is in fact going up as you indicated, we actually swap out and hedge those incremental draws. So today, effectively we’re roughly around 4.75% our total cost of borrowing on a weighted average on our drawn debt. And so, as we continue to draw on predominantly our securitization warehouse to fund the organic growth of portfolio, notwithstanding that those rates are going to go up, overall weighted average cost of borrowing over time should stay relatively flat at least say for the course of the next 9 months to 12 months.

Jason Mullins: And Marcel that says, as Hal pointed out earlier, because that securitization facility today incremental draws are about 3.3%.

And so as we factor in a rate curve where rates are rising, we can see that each incremental draw will still be progressively below the current weighted average cost of drawn balances for quite some time at least until such time as those rates rise pretty material. And as Hal said that that’s probably well beyond a year from now. And then as to what the rate environment looks like then is hard to say.

Marcel Mclean: Okay. All right, thank you.

And secondly, I had a question on your revenue yields. So this has come down at, but that’s as expected as the loan mix shifts, but I take a look at something, what I call risk adjusted yield, which is basically taking your revenue yields and subtracting of the bad debt expense to find risk adjusted yield. So now that risk adjusted yield is something I thought you’d be able to sort of protect the margin on that basis as the loan book shifts, but it looks like that’s actually come down over time as well. Can you maybe just speak to that or maybe that’s not the right way to look at things and just let me know what you think?

Jason Mullins: Yes, sure. So, yes, look our risk adjusted margin is a relevant KPI.

The KPI that, that, that we might measure and track and all lenders that do and should. However, our risk adjusted margin, the Delta between our gross yield and our loss rate has been declining by design for more than five years and will continue to gradually decline meaning that the decline in the gross yield will outrun the decline in the loss rate such as the risk adjusted yield will drop. However, each loan that we write, albeit as progressively at a lower risk adjusted margin is actually more profitable and each customer that we’re acquiring and serving is more profitable. And that’s because as that risk adjusted margin is coming down, you’re ultimately writing larger and longer-term loans. And the consumer’s propensity to stay with us and graduate through other products is increasing.

And so think of it as that, if you write a larger loan, your effective operating costs for that loan drop. And so your OpEx ratio drops, and that’s why at the same time, our risk adjusted margin is dropping. We’re still seeing over those period of years, an expanding operating margin from the scale and leverage of serving more customers that are staying with us longer and have higher average loan sizes. So we do watch risk adjusted margin, very mindful of the compression in that ratio, but the strategy that we’ve built and have been executing for the last five years and going forward is that that risk adjusted margin will slowly continue to compress, but we will acquire more customers and ultimately they’ll stay with us longer because of our product strategy.

Marcel Mclean: Okay.

Got it. All right. That’s it for me. Thank you.

Operator: Your next question comes from the line of Stephen Boland from Raymond James.

Your line is now open.

Stephen Boland: Thanks. Jason, you made a comment on the insurance product that I believe you said it was around 50% of I guess your loans. I just want to make sure I’m using apples to apples here, but I think during COVID, you said a majority of the loans had the insurance as a backed product. Is that correct? And maybe is there a change or a shift in terms of borrowers wanting that product?

Jason Mullins: Yes.

So you’re right. At the time of COVID hit, we said it was the majority, so it was more than half versus today is approximately half. The difference is not a function of demand for the product or retention of the product. That’s simply the effect of the merge of the portfolio with the LendCare acquisition. The LendCare portfolio which is also today where we put automotive financing and all the point of sale financing, that category point of sale financing and particularly those secured loans tend to have a lower average propensity to purchase that product especially because they’re secured by a hard asset.

And so therefore, our blended now new weighted average is around half the portfolio, but the good news is that the protection exists and over indexes significantly in the product categories like unsecured loans, where it’s much, much higher than that. And that’s where you want the most protection whereas in the secured product, you have the asset, the consumer can always surrender a great value to cover any loss. So that’s simply the mix shift effect of the acquisition. And the fact that that coverage is sitting in the hands of the right customers on the right products.

Stephen Boland: Okay.

That makes sense. And maybe just a kind of a macro question, we’ve seen some reviews in the U.S. about point of sale concerns about that its – is ramping up people’s debt. Has there been anything in Canada that, that gives you concern about reviews of point of sale that it being predatory, et cetera like that?

Jason Mullins: No, I think so couple comments there. One, I think the point of sale by now pay later concerns that are exist in the U.S.

are largely related to the small dollar kind of pay in for buy a pair of jeans $80 and make it in four $20 payments type products. Those are have been far more prolific in the U.S. market than they are here paid right in the firm do offer that kind of product here, but much less volume than has been in the U.S. Because of that high volume in the U.S. of those small ticket buy now pay later financings that don’t always report to the credit file.

That’s what where the concern has been from in that market, we have not seen that type of proliferation of product here in Canada paid right in the firm’s focus has generally been a little bit more on more traditional retail products and retail financing. And certainly for us, that’s not a category. We’re in – we’re not doing very small dollar retail financing like that. We’re doing much more traditional, larger ticket, installment lending, full credit evaluations, full affordability valuations, full credit assessment, et cetera, etcetera. So aware of the kind of reference point you’re making, but not something we think is relevant in Canada or to us specifically.

Stephen Boland: Okay. All right. That’s great. Thank you, guys.

Jason Mullins: No problem.

Thanks.

Operator: There are no further question at this time. I’ll turn the call over to the speakers.

Jason Mullins: Great. Thank you, everyone.

Thanks for joining today’s call. We appreciate your participation. For those of you that are attending our formal AGM later this morning, we look forward to see you there. For everyone else, we look forward to updating you again at our next quarterly results in a few months. Have a fantastic day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.