Executives: David Yeilding - SVP of Finance David Ingram - President and CEO Steve Goertz - CFO Jason Mullins - COO Jason Appel - Chief Risk

Officer
Analysts: Gary Ho - Desjardins Stephen MacLeod - BMO Capital Markets Brenna Phelan - Raymond James Roland Keiper - Clearwater Capital Marc Charbin - Laurentian

Bank
Operator: Good morning ladies and gentlemen, and welcome to the goeasy Third Quarter 2017 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr.

David Yeilding, Senior Vice President of Finance. Please go ahead.

David Yeilding: Thank you, operator, and good morning everyone. Thank you for joining us to discuss goeasy's results for the third quarter ended September 30. The news release which was issued yesterday, after the close of market is available on our website and Marketwired.

Today, David Ingram, goeasy's President and Chief Executive Officer, will talk about the highlights of the third quarter. Following his remarks, Steve Goertz, the company's CFO, will discuss goeasy's financial results in greater detail. David Ingram will then provide some insights into our strategic initiatives and outlook before we open the lines for questions from investors. Jason Mullins, the company's Chief Operating Officer; and Jason Appel, the company's Chief Risk Officer, are also on the call. Before we begin, I'll 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 will provide instructions at the appropriate time. Business media are welcome to listen to this call and use management's comments in responses to questions and the coverage. However, we would ask that they not quote callers unless that individual has granted the 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 our MD&A. Now I'll turn the call over to David Ingram.

David Ingram: Thank you. Good morning, everyone, and thank you for our participation on our call today. The last several months represent a transformational time in our company's history with the recently announced debt financing record growth in customer acquisitions and loan originations and the continued strong credit performance of our consumer loans portfolio.

In the quarter, we continue to set new records for most of our financial metrics, while expanding our product offering to include secured loans. In addition, we provided an updated and more ambitious three-year outlook that illustrates the significant growth opportunities that lie ahead, and our plan to capture a greater share of the $165 billion non-prime consumer credit market. Originations reached an all-time record of $158 million, an increase of 56% compared to the third quarter of 2016. The strong originations resulted in loan book growth of $48 million during the quarter, another record and an improvement of 173% compared to the third quarter of 2016. The strong growth was fueled by the continued maturation of the company's retail branch network, the increased penetration of risk-adjusted rate loans to more creditworthy borrowers, the company's expansion into Québec and the ongoing enhancements to the company's digital properties.

Additionally, growth in the quarter was supported by an increased investment in advertising, which led to record new customer additions. During the quarter, we added more new customers than ever before at just over 9,000 against our best quarter of 8,000, which we achieved in the second quarter of 2017. The growth in Québec business has continued to accelerate and has outpaced our expectations for this market. It has become very clear that there is a strong consumer demand for our product because of the limited options that have existed for Québecers with credit challenges. Our first Québec branch in Laval was by far the fastest growing easyfinancial branch ever.

And subsequent branch openings in Québec have experienced the same demand, which has outpaced the regular growth profile of our branches throughout the rest of Canada. During the quarter, we continued to open branches in Québec, reaching six branches by quarter-end. Québec represents 22% of the Canadian population. So, we feel comfortable opening between 40 and 50 branches in Québec over the next few years. While growth is obviously important to us, so is prudent risk management and sustainability.

We have seen a significant improvement in the delinquencies, reduction to bankruptcies and a positive trend in charge-off rates over the past year. These improvements were driven by continued investment in proprietary credit and underwriting models, more advanced and scientific collection strategies and the continued offering of risk-adjusted loans for better credit quality customer. Ultimately, these investments and changes in our business resulted in a marked improvement in our charge-off rates, which dropped to 13.1% in the quarter against 15.4% in the third quarter of 2016. The growth of the loan book and the improvement in charge-off rates resulted in strong operating margin for easyfinancial, which climbed to over 40% for the quarter. Our easyhome business also performed well in the quarter.

Same-store sales growth was positive at 3%, and we achieved improvements in both operating income and operating margin. As we have previously stated, our objective with this mature business is to optimize profitability. To this end, we have maintained tight cost controls over labor and store level costs. We've also closed a number of underperforming stores over the past year, merging their portfolios to a nearby easyhome store, and thereby retaining much of the revenue without the store operating expense. Ultimately, easyhome's operating income increased by 10% in the current quarter.

The growth in revenue at easyfinancial and improved operating profits at both of our business units contributed to a sharp increase in earnings. Diluted earnings per share for the quarter increased to $0.81 compared to $0.64 on a normalized basis in the third quarter of 2016. Overall, we're very pleased with the results for the quarter. So now, I'll turn the call over to Steve to review our financial results for the quarter in greater detail, and review the recapitalization of our balance sheet that was just completed yesterday.

Steve Goertz: Thank you, David.

The growth of easyfinancial contributed to improved financial results for the quarter. Total revenue was 103.7 million, an increase of 15.9 million or 18.1% compared with 87.8 million in the third quarter of 2016. Same-store sales growth was 21.3%. As David indicated, the gross consumer loans receivable portfolio grew by 47.7 million in the quarter reaching 473.1 million by quarter's end. Revenue generated by easyfinancial was 69.7 million, up 32.4% against the third quarter of 2016.

The revenue increase was driven by the growth of the loan book for the reasons that David just detailed and were offset by a 120 basis point decline in total yield due to the further penetration of risk-adjusted rate loans and the higher proportion of larger dollar loans. We are confident that this decreased yield will be offset by lower charge-off rates and lower relative cost to originate and manage the portfolio in the future. Easyfinancial's operating expenses before depreciation and amortization were 39.8 million for the third quarter of 2017, an increase of 9.8 million or 32.7% from the third quarter of 2016. Although, bad debt expense increased by 3.7 million when compared to the third quarter of 2016, due to an increased provision for future charge-offs, we did achieve a significant reduction in actual charge-offs during the quarter. Charge-offs as a percentage of the average consumer loans receivable, declined from 15.4% in the third quarter of 2016 to 13.1% in the current quarter.

The growth of the loan book and improvement in charge-off rates contributed to the strong operating margin recorded for easyfinancial this quarter. The operating margin in the quarter was 40.4% compared with 39.9% in the third quarter of 2016. Turning to easyhome. Total revenue declined by 3.3% to 34 million, primarily due to store sales to franchisees or the closure of underperforming stores over the past year. The operating income at easyhome, however, increased by 500,000 in the current quarter compared to the third quarter of 2016.

Overall operating income was 23.9 million in the third quarter of 2017, which was up 34.8% against the normalized operating income in the third quarter of 2016. Operating margin was 23.1% for the third quarter of 2017, up from the 20.2% normalized operating margin reported in the third quarter of 2016. The improved operating income translated into higher net income and earnings per share for the quarter. Net income for the quarter was $11.6 million or $0.81 per share on a diluted basis. This compares with normalized net income of $8.8 million or $0.64 per share in the third quarter of 2016.

On this normalized basis, net income and EPS increased by 31.4% and 26.6%, respectively. Yesterday, we completed the recapitalization of our balance sheet, an exercise that began earlier this year with over 53 million subordinated convertible debt offering. On November 1, we completed an offering of US denominated senior unsecured notes, due November 2022, with the US dollar coupon rate of 7.875%. The size of this offering was increased from US$300 million to US$325 million due to the very strong market demand. Concurrent with this offering, we also entered into a currency swap agreement to fix the foreign currency exchange rate for the proceeds from this offering, and for all required payments of principal and interest under these senior notes.

Effectively hedging the obligation under these to a principal amount of CAD418.9 million at a Canadian dollar interest rate of 7.84%. Additionally, and at the same time, we entered into a new CAD110 million senior secured revolving operating facility with a syndicate of banks that matures in 2020. Borrowings under this facility will bear interest at either the Canadian Bankers' Acceptance rate plus 450 basis points or the lender's prime rate plus 350 basis points. We used the net proceeds from the sale of the notes to repay the existing term loan and to pay fees and expenses related to the offering. We will use the remainder of the proceeds from the offering and the funds available under the senior secured revolving credit facility to expand our consumer loan portfolio.

As a result of repaying the existing term loans, we will incur an early repayment penalty and write off the remaining unamortized deferred financing costs. This will result in a onetime before tax charge of 8.2 million in the fourth quarter of 2017. The refinancing that we just completed is a significant achievement for goeasy. The funding obtained through this offering together with the additional funding available through the new revolving credit facility and the cash generated by our strong net income, provides us with sufficient capital to fund our growth and establishes a structure for securing additional debt capital in the future. Finally, as you know, we will be adopting IFRS 9 starting in the first quarter of 2018.

IFRS 9 changes the methodology for calculating the provision for future loan losses and will result in a larger provision on our balance sheet. Our current allowance for loan losses, as a percentage of the ending gross consumer loans receivable, equals approximately 6.1%. Based on the analysis performed to date, we estimate that implementing the requirements of IFRS 9 would result in an increase to this percentage of between 250 and 350 basis points. Assuming the composition of the credit performance, the composition and credit performance of the consumer loan receivable portfolio, as of September 30, 2017, continues. It is important to note that the adoption of IFRS 9 in 2018 has no impact on the net charge-off rate, which is driven by our customer's credit profile and repayment behavior.

In adopting IFRS 9, we will continue our policy of charging off loan balances that are delinquent greater than 90 days. Ultimately, the cash flows used in and generated by the business through the company's loan book will not be impacted by the adoption of IFRS 9. The analytical work required to support the transition to IFRS 9 remains on track and is in the process of being finalized and approved. Once IFRS 9 is implemented, beginning with the first quarter of 2018, we expect that this implementation will have a modestly adverse impact on retained earnings and the carrying value of net consumer loans receivable recorded on our balance sheet, and a modestly adverse noncash impact on net income. Now I'll turn the call back to David.

David Ingram: Thanks, Steve. The completion of our recapitalization was a major milestone for our company. We secured the capital we needed to continue to grow our business on the heels of having delivered strong growth and financial results throughout 2017. We believe strongly in improving the lives of everyday Canadians by helping them return to prime financing options. The key element of this vision is a laddered suite of loan products, which allows our customers to reduce their overall cost of borrowing and improve their credit profile.

Our risk-adjusted rate loans, which feature interest rates from 29.99% is a key component of this commitment. In October of this year, we extended our product suite to include a secured loan product, which represents the next logical extension of that customer offering. Secured lending will allow qualifying customers to gain access to greater amounts of financing, while reducing their cost of borrowing, ultimately propelling them on a path to a better financial future. The strategy is the right thing for the consumer, but it is also the right thing for our company. Our secured lending product will be offered to qualifying borrowers, who own and reside within their home and are looking for a lower cost form of financing.

Loan sizes will range from 15,000 to 25,000 with rates starting at 19.9% and terms of up to ten years. All loans will require periodic installment payments of both principal and interest and will have real estate pledged as a security for the loan. Eligibility for the secured lending product will be consistent with our existing methodology that incorporates a custom credit score using our proprietary scoring algorithms as well as an assessment of the customer's ability to afford and repay the loan. Lending decisions will therefore be made based on the creditworthiness and ability to repay of the borrower, while the secured nature of the product will result in lower loss rates and servicing costs, which helps us to reduce the interest rate charged to the customer. We will, of course, assess the borrower's level of equity and their residence, essentially, establishing a ceiling on the amount the customer is able to borrow.

However, in this atmosphere of rising interest rates and moderating growth in property values, the borrowers cash flow and ability to repay will be the first and most important underwriting criteria. As we've stated, we are taking a mindful approach to the rollout secured lending consistent with our history of balancing growth through the prudent management of the risk. We will monitor and evaluate customer demand and behavior and increase the penetration of our offering in early 2018 with a robust marketing investment. We believe that this product will attract a much larger pool of potential borrowers and marketing message and media buy will be adapted in 2018 to reach this boarder customer segment. This is the effective and measured approach we've employed with risk-adjusted rate lending, which is proven to be successful.

Given the strong growth of our core lending product coupled with risk-adjusted rate loans, our continued expansion into the Québec market and our optimism for the growth of our secured lending product, we have therefore increased the expected growth trajectory of our loan book. We expect to reach a loan book of 700 million to 750 million in 2018, 875 million to 950 million in 2019, and ultimately reaching an excess of 1 billion to 1.1 billion by the end of 2020. Given the evolving mix of our loan book towards risk-adjusted rate and secured loans made to more creditworthy borrower, we expect to see a moderation in yield over the next three years from 60% to 62% for 2017, 54% to 56% in 2018, and ultimately trending down to around 46% to 48% in 2020. The loan book growth offset by the moderation in yields translates to expected revenue growth of 16% to 18% in 2018, 14% to 16% in 2019 and 10% to 12% in 2020. The change in mix of our loan book will also continue to have a positive impact on charge-offs.

We have already realized some of this benefit in 2017, and believe this trend will continue with the net charge-off rate declining to between 12% and 14% in 2018, further reducing to 11% to 13% in 2019 and trending down to 10% to 12% in 2020. Easyfinancial's operating margin will continue to be very strong with long-term target of 40% plus. The benefits of a larger loan book and associated scale, reduced charge-off rates and lower cost to originate and service loans to a more creditworthy borrower will be moderated by lower yields and our continued investment in new branches products and distribution channels. We are confidence that we'll continue to finance this growth through debt and with a buildup of retained earnings. Over this three-year time horizon, we believe that a 20% plus return on equity is very achievable.

We have never shied away from ambitions or lofty goals, but we have also never set targets that we could not achieve. We have a team that believes strongly in our business and our goals, and we have the capabilities, market positioning and now the capital structure to make these goals a reality. I'm very proud of what our team has achieved in 2017 and our success at delivering sustained profits every year since 2001. We have expanded our product offering, we have evolved our distribution channels, and we have delivered record growth in earnings. While our history has been impressive, our future holds far bigger possibilities.

With our formal comments complete, we'll now open it up for questions.

Operator: [Operator Instructions] Your first question comes from the line of Gary Ho from Desjardins.

Gary Ho: First question, just on your targets. You upped your 2017, 2019 targets and released your new 2020 goals. So, if you can point to maybe one or two things that gives you confidence to increase your guidance and project out a doubling of your loan book out to 2020? Is it launching of a secured product, is it the risk-adjusted loans like, what would that be?

David Ingram: Yes, I mean, it's going to be a contribution of all of the things that we have just said in prepared comments, but also in the press release.

So certainly, risk-adjusted lending has really helped carry us this year in 2017. Québec has been quite significant, as you can see the loan book grew to approximately 15 million at this point. And as I said in the comments, we're looking to open an additional 20 to 30 branches over the next couple of years. So those will contribute, but secured lending is really where we think that's going to be a massive increase as part of the mix starting in the - towards the end of this year, but really quite impactful for 2018. So, when you put those together, you then see the impact that the improvements to the online application flow and I have reach to new customers and driving brand-new customers to the business, all of those things are additive that give us the doubling of the loan book over the next couple of years.

So, I can't tell you one thing. What I can tell you in the mix, the secured lending, the absolute dollars of secured lending is going to carry most of the work in the next couple of years. It's enabled by attracting customers through the online investments, and it's certainly enabled by the investment we're doing in new stores for Québec.

Gary Ho: And then maybe for Steve, just appreciate the update on the IFRS 9. I know this is a forward-looking methodology in calculating the allowance, but what are the variables we should monitor that would swing this amount from one quarter to the next? I imagine, you have to look at some consensus economics forecast perhaps and this unemployment rate? Or kind of what other metrics should we focus on?

Steve Goertz: Yes, the mechanics of the transaction under IFRS, we'll use a look back for our own statistics.

So, our historical loss rates for our different types of loans and the different credit bucketing, the migration of customers as they see their credit profiles increase or decrease will also help us modify our numbers. Obviously, that will be based on our own internal analysis from the numbers that we have. IFRS 9, though, also requires you to modify your provision based on your expectation of future economic indicators. And our analysis says that the price of oil, inflation and employment levels are the biggest drivers for volatility within our portfolio. So as those measures move up or down they will create movements in the provision, which will actually put in a little bit more volatility then we've probably seen in the past.

Gary Ho: And maybe just lastly, just on the dividend. I know you typically revisit your dividend levels with Q4 results. Is there anything that would suggest a change in terms of how you view your dividend policy? Or should I think about similar payout as prior years?

David Ingram: You should expect it to be consistent with our past behavior. We'll review it in February with Q4 and year-end results. And we would expect to continue to pay at the same ratio to trailing EPS as we have in the past.

It is still subject to the board discussion, and therefore I can't be conclusive, but I don't think you should expect a surprise.

Operator: Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.

Stephen MacLeod: Just two questions here. I'm just curious, was there anything unique in the quarter that drove net charge-offs down so dramatically to lead to such great easyfinancial margin? Just as we see the trending over the last few quarters, it's been positive, but there really was a material step down, I thought, in Q3. And I'm just curious if there's anything unique happening in the quarter to drive that?

Jason Appel: Steve, it's Jason Appel here.

As you mentioned, we've seen a nice consistent downward trajectory in the loss rates really that began in Q1 2017, really is a result of two things. A number of the amendments and changes we've made on the credit underwriting and collections practices that we've been doing over the course of the year, obviously, in the continued expansion and targeting of risk-adjusted loans to more creditworthy borrowers. What you really see now and why there are the somewhat larger precipitous drop in Q3, is more a function of simply timing. As you can appreciate, it takes time for these changes to work their way through the portfolio, so there is very much a consistent lag. And we're now moving into sort of the second year following when we began this journey of underwriting and adjustments on credit as well as the introduction and expansion of reduced interest rate of loans to our creditworthy borrowers.

So, what you're really effectively seeing now is simply just the advent of time catching up with the portfolio as we continue to progress a larger and larger percentage of our book being originated under these new regimes. We feel increasingly confident that the performance of those customers will improve their historical counterparts, and we're seeing that reflected in our vintage loss rates, which we look at on a quarterly basis.

David Ingram: The only thing I would add, Stephen, is you could see it in the trend as we reported over the last several quarters on delinquency levels. So as Jason said, there's a lag, but the trend was there. We had updated every quarter this year that the delinquency rates were below 5% compared to just under 7% a year ago.

So, the benefit of the losses is coming from a trend that has been building for the last two quarters to three quarters.

David Ingram: Okay, that's great. And then just with you revised recapitalized balance sheet and this - the note now having been secured, can you provide a little bit of insight as to how far you think that capital gets you as you approach your 2020 loan book goals?

Jason Appel: We haven't said how far, but we have said our target is to fund our balance sheet on an on balance sheet basis at a maximum 70% debt, 30% equity. So as an example, if you take an $800 million loan book, we've got about $100 million of other net assets. So that gives us about $900 million total assets, that call an average of 65% funded by debt, gives you a total debt of about $580 million, which is roughly where we are today in total capacity.

If you add up the high yielding Canadian dollars, the bank revolver that's been secured and the convertible debt that was done in June.

David Ingram: Okay, okay. So, in other words, to paraphrase, what you have currently, based on your targeted debt to equity leverage ratio should allow you to fund your growth for 2020 to get close to that $1 billion range?

Steve Goertz: I wouldn't say to 2020. The math I just said about $800 million, we said we're finished next year at $700 million to $750 million. So, we have enough capital today secured to get us to somewhere in 2019.

David Ingram: Okay. No, sorry, I was running up. And then, just finally, I just wanted to ask one more question on the - your long-term outlook. It sounds like secured lending as you were explaining earlier, very impactful part of that. What are the risks - or what's the level of confidence you have that the secured lending product will be as successful as you project it to be?

Jason Mullins: Yes, it's Jason Mullins.

So, we've done a lot of marketing research over the last couple of years looking at that $165 billion non-prime market that we're competing in, that David referenced earlier. So, we think we have a very really good handle on what the demand is for consumer credit within our target market. And then in terms of confidence of execution of the performance of that product, as David highlighted, really the way we're looking at is an extension of our current product. So, where we go up to 15,000 today, and we underwrite customers on credit and affordability, this product is really now an extension of that installment loan of up to 25,000, where we'll also make the decision on credit affordability. So, we're able to look at our past application volume, our past lending portfolio and be able to make a really good assessment of we think as to what the volume of business is that we can generate from consumers that are coming through our pipeline today.

And then lastly, just as another point of reference in context, when we look at what the market looks like pre-2008, the three major incumbent banks that were operating in this space, Wells, HSBC and Citi, they collectively all had north of $12 billion in consumer loans, which this product represented also a fairly significant portion of their balance sheet. So, we know even from looking in the past at the history of our market that, that product is a key part of the overall product mix. So that all combined gives us some pretty good confidence about how things will go forward.

Operator: Your next question comes from the line of Brenna Phelan from Raymond James.

Brenna Phelan: Just a few questions to start on the secured lending product.

So, if you could - could you just paint like what's the typical picture of the borrower that you envisioned for this product?

Jason Mullins: Yes, sure. So first of all, they're going to fall within the CAD7 million that fall into the non-prime markets. So, they're still within the segment we've always built the business to service. Those are the consumers that are just under 30 million Canadian borrowers have credit scores - traditional credit scores that fall just below 700 and therefore would generally not qualify for more credits at a bank. So, it will be in that population, likely, more near-prime, so they'd be at the higher end of that range relative to where our traditional target unsecured lending customer is.

The other key difference, of course, is that they obviously have to be a homeowner, and they have to have equity in their property. So, they're going to be within the sub-segment of customers we serve today, the better-quality segment within our population. They're going to usually have equity in the home, and where their current mortgages might be somewhere between kind of 50% and 80%, loan to value. But because of their credit quality, they're not able to get traditional bank-like products that they can use that equity as a source of borrowing. So, they'll come to us, they'll apply for unsecured credit.

We'll then let them know if they're homeowner based on their credit and affordability, whether or not they can qualify for that larger secured loan at the lower rate and then if they choose to use that home equity as a security, they can then get access to the larger loan in the lower rate.

Brenna Phelan: Okay, that's helpful. So predominantly, urban, suburban or well, I know some of the non-prime lenders, they say they like to focus on the more cookie-cutter properties just for better evaluation of the equity in the home. Is that going to be a focus? Or will you kind of go anywhere?

Jason Mullins: Yes. So, the distribution of our consumers is going to be similar to what we see in our unsecured book, which is mostly suburban and rural.

We do have customers in the major market centers, but it's really quite small as a portion of our book. The average customer's home values for the segment that we service is only $200,000 or $300,000, so they're much lower average property values because of their more suburban nature. As for our approach, in terms of the way we look at the asset as securities, we are taking a more conservative approach, initially for sure, that's just inherently part of our methodology for how we test for [indiscernible]. So, we are going to look at purely only first or second liens, where they have to be the customer's primary principal residence. We won't be doing anything exotic in terms of the type of properties.

So, we've really built the whole underwriting protocol to be conservative and fairly [indiscernible] beginning, especially, as we get comfort with the risk profile of the consumer.

Brenna Phelan: Okay. So then how does this fit with the online strategy? Will you - is it more critical to refer these borrowers to a branch and build that relationship? Or will you be comfortable doing this online?

Jason Mullins: Yes. So, I mean, it will really mirror our current strategy, which is, we use online as a way of market to the target audience and a way to acquire credit applications. And that will be true for this product as well, but ultimately, we will, like our unsecured product, end up channeling 90% of all the loans we originate to a local retail branch where the customers can come and meet one of our staff.

We can walk them through how to understand their credit profile, how this product works and how it differs from our traditional unsecured loan. So, we'll continue to use online as a critical vehicle for acquiring customers and promoting the brand. But yes, the brand - or the relationship at the local branch is a key and pivotal part of the way we manage the portfolio.

Brenna Phelan: Okay. And then on the laddered suite of loan products.

So, the risk-adjusted that you're offering to your better-quality customers. Are you seeing - now these have been in place for a little while now, are you seeing customers graduate from your lower rate product to a credit union or a bank? Is that starting to happen?

Jason Mullins: So, we don't have perfect visibility into exactly where the customers are graduating today. But yes, we are seeing and tracking customers that are graduating up the credit spectrum. Their credit profiles are improving, and they are making their way and paying out their unsecured higher rate loans with us and presumably moving on to better credit. So, we still think that long term, the strategy of acquiring customers that have credit challenges are helping them throughout their multiyear journey with us graduate progressively the larger loans and lower rates.

And then one day, ideally seeing them graduate back to prime is the ideal customer strategy for us, build great brand loyalty reputation. And we think it is the best way for customers to want to share their experience with other customers in their demographic segment who want to do business with us. So that's what we're starting to see, but we're still early in that journey, and we have a long way to go.

Brenna Phelan: So, do you think there's maybe an opportunity to partner with a credit union or another sort of steppingstone lending institution to work for those customers?

Jason Mullins: Absolutely, yes. So definitely part of our strategy is that as we now have a broader range of products and we have now products that go as low as 19.9% for interest rates.

The next step for us will be to start to look at who could we partner with an alignment that is a prime lender, that we can help facilitate that graduation and make it more seamless for the customer.

Brenna Phelan: Okay. And just on the dividend policy. I know, it was asked, no major changes, but does the adoption of IFRS 9 and its impact on IFRS EPS have any potential impact on sort of your - where you end up on an IFRS EPS payout?

Steve Goertz: Dividend policy has always been based on the audit results of the preceding year. So, this for - it will be based on 2017, and obviously, that's prior to IFRS 9.

As we move to future years, we've got to have that discussion on the board and whether the policy will be adjusted for IFRS 9 or how we will contemplate that.

David Ingram: Just to comment on that. That's a really thoughtful question for us because as we've said throughout the documentation, it's a non-cash accounting change, and obviously, the dividend is the cash payout. So that's a really good question for the board to consider for when they are making the payout decision in 2019 on 2018 results.

Brenna Phelan: Okay.

And then the last one from me, just on the regulatory environment. Has there been any development on Ontario's proposals regarding sub-prime regulation?

David Ingram: No. We have had meetings with the ministry team that's representing this paper, and we've had a very good discussion. And I think the dialog now is open for us to be influential and have a rational and intelligent discussion around what's right for consumers, what's right for lenders, and how do we create a market place that works best for everyone. So, nothing's changed.

The paper is still in draft form. And I suspect, as they work their way through payday lending as their priority in 2018, we'll get more discussions going with the team in 2018 ready for 2019. So, no change at this point, but good dialog now has been developed between us and the team that's working on this at the ministry.

Brenna Phelan: Okay, that's really helpful. Sorry, I'm actually going to sneak in one more.

Just on the secured lending product. Will they - will there also be ancillary fees, insurance - the creditor insurance similar to what's on your unsecured product?

Jason Mullins: Yes, they will be based on the same basket of offerings for optional services. Obviously, the price points of those products get adjusted to reflect the size of the loans, the term of the loans and the credit quality of the customer. But otherwise, the same basket of products will be available for them to purchase optionally as well.

Operator: Your next question comes from the line of Filomena Liggio from Clearwater Capital.

Roland Keiper: It's actually Roland Keiper. Steve, I see that on a pro forma basis, your provisions as of September 30 are just swapping from IAS 39 to IFRS 9, which go to - preliminarily, which go to 8.6% to 9.6% of gross consumer loans receivable. I was using a different number, and I did some calculations on what the pro forma effect is on bad debt expense using your June numbers, and I was using 12% at the time. And we modeled that bad debt expense would be something like 14% to 16% higher pro forma due to the accounting practice change. It's going to be something less.

I'm just wondering if you've done some pro forma work that you can share with us on the last 12-month basis for bad debt expense. And if not, if you could when you get to your final number at year-end, if you could provide us with a pro forma work from the accounting change so we could just better model your numbers?

Steve Goertz: Yes, we said it would be a 250 to 350 basis point increase to that provision rate. It was 6.1% at the end of the quarter, I think at the start of the year, it was 6.3%. So, if you apply to the same delta or same increment, you could come up with the opening provision for the year compared to where it is now, and that would allow you to derive the impact to expenses for the year, assuming all other things are equal. As I said earlier, the forward-looking indicators, the unemployment levels, the CPI level's price of oil, will create some volatility in those numbers.

We're still working through what that will be, and so we haven't yet quantified what the full impact will be on the P&L for 2017. Our intention, as we go through this process, that will be released potentially at the end of the year, but definitely for the first quarter disclosure that happens in March when it's required. Your increase was based on the 12% - the provision moving to 12%, so almost doubling. Obviously, we've announced that it's far lower than that. So, the impact on expenses will be much more muted.

Roland Keiper: And just to clarify, so the impact on the bad debt expense, whatever the percentage increase is on the provision, the same proportion could be applied to bad debt expense?

Steve Goertz: Bad debt expense, if you look at this way, it's two components. First is the actual charge-offs, the second is the increase in the provision. We stated in the financials what the increase in the provision is for the first nine months. If you were to recalculate that provision using the delta that we've given, the 2.5% - 3.5%, you can determine what the increases to the provision would be under IFRS 9, and that would give you expense for the year.

Roland Keiper: Right.

And can you share what your calculations are for that?

Steve Goertz: We haven't given them - we haven't given those, no.

Roland Keiper: Yes, that might be helpful at year-end when you finally sort that out. So just that's what I was coming to. When I said, I thought the bad debt expense net of charge-offs is up 15% of a much higher adjustment, so it's going to be something less than that. So, it would be just helpful to - because I've seen numbers all over the place, amongst the investment analysts on this particular issue.

Jason Mullins: Yes. Given the numbers that we just gave out and the methodology outlined, they can - everybody should be able to calculate what the provision or what the expense would be for 2017, apart from the impact of the forward-looking indicators.

Steve Goertz: Okay. One point of confirmation. The converts for this debt to equity ratio of 70/30, you're treating it as debt? Is that my understanding based on what you said?

Steve Goertz: Yes.

Roland Keiper: Okay, got it.

Steve Goertz: And the debt I'm treating on a net basis, so applying surplus cash is reduction of the debt.

Operator: [Operator Instructions] Your next question comes from the line of Marc Charbin from Laurentian Bank.

Marc Charbin: Excluding the gain on sale from the easyhome franchise in the quarter, I calculate your corporate operating expense to be running at $10.5 million a quarter. Is that a good run rate going forward?

Steve Goertz: No, a little bit high this quarter because of an increase to our variable compensation expense given the strong results.

Marc Charbin: Okay. And it seems to me in prior years, the corporate expense has been growing at 20% plus. Is that expected to level off? Or can we expect the same growth going forward?

Steve Goertz: Yes, if we were to normalize for it, at previous quarters, we announced some provisions related to receivables from US franchisees, and we've got periodic gains on sales, eliminating those two items, our corporate expenses are growing at about 7% to 8%.

Marc Charbin: Okay. Can you please give us a sense of the percentage of originations that you originate through third parties, such as the FinTech companies?

Jason Mullins: So, the best way to describe is about 25% to 30% of the online application starts that we get - or of the application starts that we get come from third-party referrals of some kind.

But again, we don't - most of the loans get originated in the call center or in a branch. So, we don't actually originate loans online. We simply originate loans in the call center of the branch even though the application may be referred to us or may start online.

Marc Charbin: Okay. And lastly, just on the regulatory review in Ontario, what do you think is their top priority? Is it rates? Is it quality of underwriting? What direction do you think they're heading in?

David Ingram: How to be precise, but based on the initial discussions and the paper, it would be biased towards more improved disclosure, making sure that the affordability for consumers and the calculations behind the affordability is more consistent and is being applied.

So, the customers are getting loans that they have a best chance of repaying. For us, as I think we've said before, that's being part of our adjudication in the model anyway. So, we have to make sure that the debt to income ratios are in place that allows the customer the best charge of success. And then finally, there is this rate that is being used at 35% as a kind of red line. But it's important to be clear to everyone, it's not changing or challenging the criminal code, so you can still charge up to 60%.

It's just reinforcing more disclosure if you're going to continue to lend above 35%. So, I would think that they want to do all of those things, but there is more of a bias towards the quality of disclosure, the fairness in how customers are treated and the affordability to ensure that these are loans that are appropriate for them.

Operator: I'm showing no further questions at this time. I would now like to turn the conference back to our presenters.

David Ingram: Thank you, operator, and to everyone participating on the call.

We appreciate your continued support and interest in our company. And as I've said in the prepared remarks, it was a great quarter for us with some major milestone achievements, particularly with the recapitalization. So, we leave the call very excited about the balance of the year and continued growth, and the great performance from all our staff in the stores. So, we wish you well, and we'll update you in the New Year with our Q4 and year-end. Thank you.

Operator: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.