Operator: Good day and thank you for standing by. Welcome to the Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to your host, Farhan Ali Khan. 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 of Corporate Development and Investor Relations and thank you for joining us to discuss goeasy Ltd. results for the third quarter ended September 30, 2021. 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 third 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 line for questions from investors. Before we begin, I will remind you that this conference call is open to all investors and is being webcast to 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 in any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent. Today’s discussion may contain forward-looking statements. I am not going to read the full statement, but I will direct you to the caution regarding forward-looking statements included in the MD&A.

I will now turn the call over to Jason Mullins.

Jason Mullins: Thanks, Farhan and welcome to today’s call, everyone. During the third quarter, we continued to execute on our strategy to become Canada’s leading non-prime consumer lender by developing a range of products and channels that positioned us to become the single trusted source of credit for those unable to borrow from traditional banks. Our integration with LendCare is going well and we are on track to produce the synergies and accretion forecast during our acquisition. As consumer demand began to gradually improve with the reduction of economic lockdowns throughout the summer months, we began to ramp up marketing efforts, investing $7.7 million in an integrated media campaign, including TV, radio, digital and out of home.

The improved demand and increase marketing spend led to a lift in direct lending activity through our retail branch network and digital platforms, with a corresponding reduction in the cost per direct new customer acquisition by over 35% compared to the same quarter last year. In August, we also launched the next generation of our easyfinancial website, which will experience further enhancements over the coming months. The new site has helped to reduce bounce rates, increase the average time where consumers have been navigating and educating themselves on our site and lifting traffic conversion rates. With the increased ad spend aided by these digital improvements, we saw a record level of web traffic in the quarter translating into record application volume. Our branch network also expanded to 285 locations, with 10 new branches opened in the quarter.

We also continued to experience continued growth in indirect lending led by the expansion of our fastest growing channel, our point-of-sale financing network. During the quarter, 25% of all new loans we issued were to finance the purchase of goods and services, such as retail items, power sports equipment, healthcare procedures for home renovations, under either the easyfinancial or LendCare brand, up from 18% in the same quarter the prior year. As of this week, we also completed the integration of our easyfinancial credit models into the LendCare point-of-sale platform frontline. By building a credit waterfall and merging into one platform, we can now offer our merchant network a higher approval rate, while providing consumers with a wider range of rates and terms to match their credit profile. Lastly, we were pleased to complete partnerships with HISUN Motors and GVA Brands, providers of power sports products and e-bikes.

We also made great progress building our position in the non-prime automotive lending market. Through our investment in LendCare, we acquired a platform upon which we could grow the auto finance program through the dealer channel aided by our logistics and business development capability that did not previously exist. With a growing network of over 1,500 dealers, combined with the recently launched direct-to-consumer offering, we are confident we can be a leading provider of non-prime auto financing in Canada. Together, auto financing represented over 4% of the new loans we issued in the quarter, an entirely new category for the company. All combined, total loan originations during the quarter were a record $436 million, up 52% over the $286 million produced in the third quarter of 2020 and a sequential increase of over 15% from the $379 million in total loan originations in the second quarter of this year.

The lift in originations led to record organic loan growth of $101 million during the quarter, resulting in the consumer loan portfolio finishing up $1.9 billion, up 60% from $1.18 billion at the end of the third quarter in 2020. Through the use of graduating consumers to lower tier pricing and the continuing shift in product mix, we continue to bring down the weighted average interest rate in our portfolio, albeit the rate of decline has begun to slow as we inch closer toward the optimal portfolio yields. During the quarter, the weighted average interest rate on the portfolio declined slightly from 33.7% to 33.6%. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 40.8%. Total revenue in the quarter was a record $220 million, up 36% over the same period in 2020.

We also continued to experience stable credit performance within the portfolio. While the economic reopening that is now driving demand in growth will result in credit performance normalizing to within our guided and optimal range. During the quarter, the annualized net charge-off rate was 8.3%, slightly below our target, not from the pandemic related low point experienced in the third quarter of 2020. During the quarter, we also decreased our loan loss provision slightly from 7.9% to 7.83%, reflecting the new structural credit risk of the portfolio and the overall economic environment. We believe our provision rate now fairly accounts for how we expect our credit to perform over the coming year.

After adjusting for non-recurring and unusual items, adjusted operating income was a record $85.8 million, an increase of 51% over the third quarter of 2020. While we continue to invest in the business, specifically our technology platforms, data infrastructure, new product research and tools that improved the productivity and performance of our teams, we also continue to experience the operating leverage from scale. Adjusted operating margin for the second quarter was 39.1%, up from 35.2% in the prior year. During the quarter, we also recorded another $23.2 million before tax fair value gain on our investments, primarily due to the increase in the value of common shares as a firm and our expectation investing. Finally, net income in the third quarter was $63.5 million compared to $33.1 million in the same period of 2020, which resulted in diluted earnings per share of $3.66, up 75% compared to $2.09 in the third quarter of 2020.

After adjusting for non-recurring and unusual items on an after-tax basis, including the fair value gain on those investments, adjusted net income was a record $46.7 million, up 48% from $31.6 million in 2020, while adjusted diluted earnings per share was a record $2.70, up 35% from $2 in the third quarter of 2020. Return on assets was a healthy 7.6% on an adjusted basis, producing an adjusted return on equity of 24% above our targeted level of 22% plus, while return on tangible common equity lifted to 42.9% in the quarter. I will 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 third quarter, we continue to strengthen our balance sheet and capital position due to the strong free cash flow generation of the business and the return on our investments.

During the quarter, the cash provided by operating activities before the net gross and gross consumer loans was a record $89.2 million. In July, we also unwound the previously implemented total return swap, which was used to hedge our exposure and secure our capital gains on the non-condition portion of our shares in Affirm related to the prior sale of our equity in PayBright. As such, total proceeds from the sale of shares on settlement of the swap, was $87.8 million of cash flow during the quarter. Net inbound cash flows enabled us to fully self fund the $101 million of net growth in the consumer loan portfolio during the quarter, while using the excess cash to fund our dividend to shareholders and pay down approximately $74.5 million of debt. During the quarter, we also officially closed on the amended securitization warehouse facility provided by national bank capital markets, with a new 3-year term and an increase in capacity from $200 million to $600 million, while concurrently improving the eligibility criteria in advance rates.

The amended facility is now priced at a Canadian dollar offer rate plus 185 basis points. Based on the current 1 month CDOR of 0.43% as of November 3, 2021, the interest rate on our incremental draws would be 2.28%. We also continue to utilize an interest rate swap agreement to generate fixed rate payments on the amounts drawn, which mitigates against the impact of any increases to interest rates. Given the strength in cash flows and enhanced funding facilities, we have reduced our leverage and increased our liquidity. Based on the cash at hand at the end of the quarter in the current borrowing capacity, we now have approximately $980 million in total funding capacity, which we estimate is sufficient to fund our organic growth plans beyond 2023.

We also estimate that once our currently 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. In addition to the increased liquidity, the strong cash flows led to a reduction on our leverage level, which reduced to a net debt to net capitalization ratio of 62%, well below our target of 70%. The lower level of leverage means we are carrying approximately $180 million of excess capital capacity on our balance sheet that we can use for opportunistic or strategic investments, such as share repurchases and acquisitions. Lastly, as our capital stack has evolved towards a higher proportion of secured funding, we have been able to realize meaningful reductions in our cost of debt. During the quarter, our fully drawn weighted average cost of borrowing reduced to 4.3%, down from 5% in the prior year, with incremental draws on our new securitization facility now bearing a rate of approximately 2.3% prior to the cost of any interest rate hedge.

With such a strong capital position, we can continue to fund our organic growth plans, while also investing in the business and pursuing new expansion opportunities. I will now pass the call back over to Jason to update you on our outlook.

Jason Mullins: Thanks, Hal. With the final months of the year in front of us, we are pleased that the rate of vaccination in Canada has led to a gradual reopening of the economy, the reduction of government stimulus and a return to more typical economic and consumer trends. This results in more normalized credit performance, but more importantly, a robust and meaningful rate of growth in our consumer loan portfolio, which leads to stronger long-term profitability and shareholder returns.

We remain focused on our strategy to develop a full suite of lending products offered through a wide range of distribution channels, while helping everyday Canadians improve their financial health. We are on track to finish the year within or better than the ranges for all of our forecasted metrics published for 2021 with confidence in our outlook to grow the portfolio close to $3 billion in 2023. In the upcoming fourth quarter, we continue to ramp up our investments in marketing, with approximately $9 million in spend to continue our media campaign with TV, digital and radio running through the balance of year. As such, we expect to grow the consumer loan portfolio between $100 million and $110 million during the quarter. On the revenue side, we expect the total yield generated on the consumer loan portfolio to lift slightly to between 40.5% and 41.5%.

While the economic environment and consumer spending levels driving our loan growth results in the net charge-off rate returning to within our guided range, which we forecast to finish between 9.5% and 10.5% in the quarter. As we closed in the prepared remarks, I want to thank our team once again for the work they have put in to take great care of our customers and advance our vision. Collectively, the team is not only producing record results, but they are making significant advances in the development of our lending platform, including increasing our use of alternative data, enhancing our analytics to optimize portfolio performance, improving our digital capabilities and developing new distribution and growth channels. As evidence of their great work, we are privileged to have been included in the TSX 30 this past quarter for the second time as one of the top performing stocks for total cumulative shareholder return. In addition, we became certified by the Great Place to Work Institute of Canada for our team’s culture and the pride they put into their work and I could not be prouder of them.

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

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

Etienne Ricard: Thank you and good morning.

Jason Mullins: Good morning, Etienne.

Etienne Ricard: Jason last quarter, we talked about the initial integration of LendCare as it relates to revenue synergies, could you provide an update on this front? And specifically, I know LendCare was in the process of providing pre-approval financing on merchant’s websites, how is this progressing?

Jason Mullins: Yes, great questions. So in the first revenue synergy, which I highlighted in my comments, we were looking to integrate the easyfinancial non-prime credit models into the LendCare point-of-sale platform. So, creating a credit waterfall that would allow us to capture incremental originations from the merchant base that they have developed and the additional merchants they are adding. That integration actually just went live this week. So, as of this week, we are slowly turning on merchants, whereby the customers that LendCare would have previously declined are now able to get qualified for financing through the easyfinancial credit models, which we expect will generate incremental originations and revenue.

Obviously, we will be slow and steady with expanding that program. So, although it will start this week, the contribution in Q4 will be more minimal that will frankly be one of the major drivers for growth next year. Second revenue synergy was to cross-sell customers within both bases, each other’s products. We have just started doing the analytics to overlay the customer base from each group and figure out which other products each consumer set would qualify for. And we anticipate we will be in a position to start making pre-approved loan offers of other products later this month and begin to scale that up again contributing to growth next year.

And then as it relates to your last question about the ability of pre-approved customers directly on merchant websites, we are also very close to completing that as well. We are talking with the number of merchants right now about putting the pre-approval capability on their site, so customers can get financing before they actually go shopping. I suspect we will be up and running with at least a couple of merchant websites within the next couple of months, again, all contributing to growth for next year and beyond.

Etienne Ricard: Understood. And on auto lending, I think you mentioned it’s about 4% of the originations in Q3, could you share details as to the mix between your new direct-to-consumer product relative to LendCare’s point-of-sale auto product and trying to look into next year, what are your growth expectations for both products?

Jason Mullins: Yes, sure.

So, majority of the auto lending so far is actually through the dealer channel. LendCare had been building a dealer network and the capabilities to do lending through the dealer network for a number of years prior to our investment so that product was positioned really well to get investment and scale pretty quickly. And given that the business was integrated with Dealertrack, which is the platform that dealers used to produce financing, turning it on and ramping it up quickly has been fairly straightforward, and the team has done a great job there. On the direct-to-consumer side, we started – we launched the product and started advertising over the course of the quarter. We have seen great traffic.

So far the volumes have been okay, more volume we are seeing through the dealer channel. I suspect that the shift to consumer buying behaviors toward getting pre-approved for financing for vehicles is a new ship for Canadians. That’s a different way of going about financing vehicles. So, I think we expect that will be a slower build probably contributing more next year and then beyond. So we are really looking at the auto program as a combined offering being able to allow consumers to either go to the dealer or come and get pre-approved from us.

And we are somewhat indifferent about which channel that they choose, because we can get the same returns either way.

Etienne Ricard: Okay, great. And on Buy Now, Pay Later, Affirm announced meaningful partnerships in the U.S. with Amazon for example. The extent this partnership moves north of the U.S.

border, how do you think goeasy is positioned to partner with Affirm? Should non-prime consumers be offered financing?

Jason Mullins: Yes. So, we continue to build a great partnership with Affirm. They are, as you noted, continuing to add some really great, big brand partnerships, many of them launching initially in the U.S., as you noted and have the potential to come to Canada. All of the partnerships that they launched, we believe there is some level of opportunity for us to be collaborative and constructive. So, it really just depends on the particular merchants, the type of customer base that they have the type of product size in some cases, the products are really small ticket or the consumers skew very heavily towards prime.

And it doesn’t always make sense further to be a second look, non-prime offering, but there is quite a number that I think as they add those merchants in Canada could provide opportunity for us as well. So we are actively keeping that dialogue open. And well, we don’t have any major commitments at the moment. We feel pretty optimistic about some of the new things that could emerge through the Affirm relationship.

Etienne Ricard: Great.

Thank you for your comments.

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

Gary Ho: Great. Thanks and good morning.

Just wanted to go back to the net charge-off guidance for the Q4, I guess more of a two-part question, can you help bridge the step up from 8.3% in Q3 to maybe 10% when you take the midpoint of that guidance. That’s a decent sized gap there. And then just second, maybe walk us through on a monthly basis in 3Q and if you have the October number handy, are you seeing that gradually kind up to that middle of that range there?

Jason Mullins: Yes, sure. So answer the second part of the question, so yes, we have started to see the normalization of credit throughout the third quarter and into the fourth quarter. As we expected, it’s corresponding pretty proportionately with what we anticipated the correlation would be to demand and growth.

So, if we look back over the entire pandemic period, when the growth and the demand was softer that tended to be the quarter or the following quarter where losses were lower. And then as demand and growth began to accelerate, losses began to normalize. So, we are quite pleased with the situation given that it now looks like as we go into Q4, the broader economic environment is pretty close to being out of the pandemic and at we believe normal steady state. This will be two consecutive quarters now of driving loan growth in excess of $100 million a quarter. Losses look like they will now come in right in line with our targeted and expected range.

So, that step up would be what we were previously planning expected. And we expect that now new level of growth rate and losses to be what we will see continue into 2022 based on the guidance we provided.

Gary Ho: Okay. And was part of it due to the mix as well, I noticed your revenue guidance a little bit higher for the quarter, can we talk about maybe – is there a shift there versus what you expected before?

Jason Mullins: Yes, that’s exactly right. So, if you think about the range that we have provided for both yield and losses and the fact we provide 2 points of range in both of those metrics.

The reason for that is that we predict a certain product mix between the range of products and a certain credit mix. And depending on how the mix of the products shift, you could have a scenario where the losses are in the higher end of the range, but typically, that would mean yield will be in the higher end of the range as well and vice-versa. So, we think about the customer journey that we are building. When a customer applies for credit, we are trying to approve and screen them for all of our products and then give them the choice. Then what that means is if you give a customer an approval for an unsecured loan and a home equity loan, for example, in that case example would be the difference between losses that are in the low double-digits or the low single-digits.

And so we make a prediction about what we think that product mix is going to be, but if that product mix evolved slightly different, then you might have a case where similar to what we are seeing in this coming quarter yield actually ticks up a little bit in correspondence with losses and that preserves largely the risk adjusted margin. So, although we feel pretty comfortable that the range accounts for the variations of product mix, it is likely to fluctuate within that range given that we can’t precisely predict the exact mix of the – how the products are going to evolve, but we feel like we have got a pretty good handle on the range that are likely to fall in.

Gary Ho: Okay. Makes sense. And then my next question maybe for Jason or Hal here, can you kind of talk me through the change in the FLI methodology? I think you moved from three scenarios, your five scenarios and moving to Moody’s analytics as well.

Obviously, there is – the inflation in all price forecasts have been volatile post Q3. How may this impact the allowance rate for Q4 if any?

Jason Appel: Yes, sure, Gary. Let’s take the first question first. You will recall that up until this past quarter, we used to take the 4

macroeconomic variables: oil, inflation, GDP and unemployment. We used to pull those metrics from the averages of the Canadian banks and essentially put them together a series of

three scenarios: optimistic, pessimistic and mutual and effectively build those scenarios ourselves.

What we have now done is making the shift with Moody’s as we have now pulled that data directly from Moody’s and are now relying on Moody’s independent forecast that contemplate how all four of those variables will perform under series of different scenarios and weighting those scenarios accordingly based on management’s view. So really, what’s changed quarter-over-quarter is we now have more of an enhanced view by having two more scenarios added in. We have a broad range view of both pessimistic, optimistic, and neutral views of those variables and are waiting and based on management’s guidance on how we think things will unfold. So overall, we would view that as an improvement. As for how that’s likely to impact the provision in Q4, I mean, look, I’d love to say that we are prognosticators of where the economy is going, suffice it to say that we are not expecting to see significant shifts in those variables partly because each of those variables exerts a different type of influence on how the portfolio works.

It’s not unrealistic to see shifts in FLIs. We have seen those in the past historically, but I wouldn’t expect there to be material movements in the provision overall based on the macroeconomic shifts of the FLIs, unless those FLIs themselves happen to undergo a major change. And at this point, we don’t anticipate that based on the data coming out of Moody’s at this stage.

Jason Mullins: Gary, I would just add to that. One of the advantages of moving to Moody’s model that, as Jason said, actually predicts realistic economic scenarios is rather than taking each variable independently and taking the worst case scenario of each independent variable, this model uses actual real likely economic scenarios.

And so what that means is sometimes those variables don’t all move in the same direction. For example, in Moody’s example of a more opportunistic economic outlook, if the economy is performing well, they have got inflation rising, because the production of the economy is very strong. That combined with the fact there is five scenarios means we actually think there will be less volatility, i.e., the overlay of the FLIs will be more realistic and stretch out more waiting across multiple scenarios therefore resulting in more stability. So, as Jason said, unless there is a dramatic swing in the outlook and the economy that we are not anticipating or not seeing, we feel like this loss rate provision today is fairly accounting for the loss risk in the book and should remain fairly stable.

Gary Ho: Perfect, okay.

And then just my last question here, launch is going well, the reopening driving growth in the LendCare platform, you are signing on new partners. The net organic loan book grew $101 million in the quarter, which was at the lower end of your $100 million to $120 million guidance. Maybe can you walk me through the disconnect here? What were some variables that offset the growth versus your expectation that the – in the last call? And more importantly, how do you think about these variables might play out in Q4 and into 2022?

Jason Mullins: Yes, sure. So I mean, thoroughly, Q3 was probably a little bit more difficult to predict as precisely as I think Q4 and beyond will be just given. As we entered the early summer months of Q3, there is still some moving variables with regards to COVID, various province hadn’t fully reopened yet.

And so, just a few variables that made it hard to predict the exact number. We felt like the range that we provided was properly accounting for with the different scenarios. And I think that’s how it played out. We came in within the range in terms of growth. Probably the one other variable that we have seen is in some cases, the strength of the consumer on certain product categories like power sports and home equity lending has actually resulted in really healthy repayment trends, where they have prepaid some of those loans early.

And as a result that can also contribute to the dynamics between originations and loan growth. We did see a little bit more of that in the summer than we have normally seen. So net-net, that’s fairly positive behavior. So, it doesn’t really bother us. But those would be just some of the considerations, I guess, in terms of where things shook out in terms of growth in the third quarter at just over $100 million.

In terms of the outlook for Q4, feeling pretty confident in that range in that outlook based on where we sit today, based on what we have seen in the last 4 or 5 weeks. It feels like, again, being that we are back to a slightly more state of normalcy in terms of consumer trends and behavior. Our confidence level of being able to predict and forecast the outcome of the business just continues to get stronger. And that’s also why we tried to tighten up the range of our expected growth for this quarter as well.

Gary Ho: Okay, great.

Thanks for the color. That’s it for me. Thank you.

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

Stephen Boland: Good morning, everyone. Two questions. The first is you mentioned your partnership with Affirm and you are developing that partnership. I guess I am curious then why the sell the shares at this point or is that partnership and the sale of those shares kind of independent of each other? Like, in terms of – are you sending a signal to Affirm that you are not supportive of the stock I guess, is the question?

Jason Mullins: Yes, no, good question. So, now the partnership and the equity holdings are very independent.

Affirm looks at our commercial partnership specifically and independently. We have a very, very good working relationship, feels very confident in our ability to continue to build on that partnership. They understand that we make these investments, hold these investments and sell these investments based on what makes sense for us, our balance sheet, our risk tolerance, our capital allocation strategy. The Affirm investments and the partnership itself are not commingled. They fully understand that we are not in the business of investing and holding in public securities long-term.

And therefore, the decision to put the prior hedge in to then sell the non-contingent shares when they fully matured in order to be able to strengthen our balance sheet and improve our liquidity position, they would fully understand and that would be consistent with our management of our capital. So, they don’t see that as a signal from us that we don’t have confidence in their business. We think they have a fantastic business. And frankly, that’s why if you look at the quantum of the remaining shares that we have and the fact that many of them remain on hedge because of our confidence in the outlook is that’s just the signal that we still feel very good about that business and where it’s headed.

Stephen Boland: Okay.

And I guess the second question is when you first started talking about lending into the auto space and going direct-to-consumer, I mean, you did a big evaluation on the industry going through the dealers. And I think you kind of said you didn’t want to do that go to the dealers and do something different. What was the – what is LendCare doing that makes this product, I guess suitable for you to go into the dealers? Is there something that they did different that you didn’t evaluate or something at the time that you decided not to do it?

Jason Mullins: It’s a great question. So, obviously, up and until when we made the investment in LendCare, our whole business was predominantly direct-to-consumer in nature. So the expertise in marketing and advertising, bringing customers directly to us and our digital platform and our branch network, evaluating them for credit.

So for us, the strategy to focus on direct-to-consumer as the right strategic move was for us a no-brainer. That was the expertise we had. Through the investment in LendCare, we now acquired a business that had really its entire operating platform was predicated on business development capabilities. So, going out and acquiring, signing up and supporting merchants and dealers, the back-end infrastructure to support registering liens on secured assets and recovering on those assets if they were ever to default, the underwriting practices that go into not just underwriting a loan, but assessing a dealer or a merchant and whether or not they are a good partner to do business with. We acquired all of that skill and expertise in that logistics platform overnight.

Now, while we didn’t intentionally do so for specifically auto lending it was much more about the other broad range of point-of-sale verticals. As we got in there and looked at what they built and what they had and where the opportunities were for growth, it became very clear, it was a great opportunity, where the degree of complexity and investment needed to try and capture growth in that channel was much, much smaller, given it’s already been developed. In the end, we conclude that, whether it’s auto or any other point of sale vertical, we want to be offering the products both to the consumer directly, and allow them to obtain them from a merchant or a retailer directly themselves as well, that true omnichannel model. So, that’s how we end up concluding it made sense to build up both channels. In terms of what’s helping make them successful.

Look, I think our experience has now been in the dealer network. You really have to have a fulsome combination of a really great products for the customer, a great relationship with the dealer, where you provide them excellent support, a good economic arrangement that the customer is going to be interested in, you really have to have kind of a sum of the parts of good service and good products. And LendCare brings that, so we have been able to generate some great success. The other thing I would note is when we look at the dealer, or any other point of sales channel, one of the things that is a distinct competitive point of advantage for us is that we have a full suite of other lending products. So, we don’t have to look at the business solely from the unit economics of just that first loan transaction, we can look at the lifetime value of the customer, based on their propensity to be cross sold into other products.

So, what we anticipate is that customers we acquire on an auto loan through the dealer channel will have a high propensity to then borrow other products from us; unsecured loans, home equity loans, products we build in the future. And that means that if we provide a good competitive solution within the dealer network, we can actually also have a competitive point of differentiation that will help on pricing and credit approval rates when we go to cross-sell those customers into the rest of our ecosystem. So, all of that is kind of the background as to how we get to the point that we now think it makes sense to be able to offer the consumers this product through both channels.

Stephen Boland: Okay, that’s very helpful. Thanks, Jason.

Operator: Your next question comes from the line of Jeff Fenwick from Cormark Securities. Your line is open.

Jeff Fenwick: Hi, good morning, everyone. So Jason, I just wanted to circle back on the growth guidance for the loan book through the last quarter of the year here. And just kind of reconcile it against, all we have been seeing in terms of the growth metrics in terms of same store sales growth being very high.

LendCare had been growing its loan books sort of 40%, 50% annualized over the last couple of years. And now we are sort of looking at a quarter where the incremental add is going to be effectively flat, I guess with what we saw in the third quarter. So, can you just maybe walk through what the moving parts are there, is it a bit of seasonality or prepayments, or some other factor there that might account for that?

Jason Mullins: Yes, sure. So, if you actually look back at pre-pandemic periods there, for example, the 3 years prior to 2020, 2017, 2018 and 2019 in 2 years of those 3 years, the net loan growth in the third and fourth quarters were identical. In fact, if you look at 2019, the growth in the third quarter and fourth quarter was $75 million in each quarter individually, so very consistent.

So, what we tend to see is that the third quarter is strengthened by July and specifically September. We get a bit of a low in August. The fourth quarter, October, and specifically December, especially the back part of December is quite slow, but we get a really big November. And the net effect of that is when you look at it by month, month-to-month, you get these different seasonality points such that the growth in – net growth in the third quarter and fourth quarter end up being pretty comparable. The other thing that’s still evolving is that when we look at the seasonality of direct-to-consumer lending, particularly cash lending, it doesn’t have the same seasonal trends as the point of sale lending let’s say a LendCare does.

I think about for example, financing power sports equipment, the time in which you go apply for financing for power sports equipments going to correspond with when you want to get that equipment in preparation for the upcoming season. And that doesn’t necessarily correspond when consumers are looking for cash flow. So, I think our seasonal trends are evolving a little bit. Lastly, in terms of the book growth, we will see a step up in originations in the fourth quarter. Obviously, because the loan book is going to be larger and charge-off rates are normalized, we will actually see a pretty healthy step up in loan originations.

But given them the higher payment drag, you will end up with similar net growth quarter-on-quarter. So, those are some of the dynamics in light from our perspective, it looks to us like, we are sort of back to a pretty close to very normal state when we consider what we are seeing in the Q3 versus Q4 trends around loan originations and growth.

Jeff Fenwick: Okay, that’s helpful color. And thank you. And I guess my second question here is about the falling cost of funds here.

And it’s a bit of a modeling question around the securitization facility, and that balance moved around, certainly sequentially in the quarter. So, it’s not easy to see. But in terms of the reported interest, relative to the balance, it looks like the effective rate there, something more like 3.75% or 4%, you are suggesting incremental draws are coming at much lower than that. Is there something in there that we need to be mindful of when we are modeling the actual reported interest costs of the securitization facility that might be a bit higher versus the real rate that you are paying in the business?

Hal Khouri: Yes. Jeff, so it’s Hal here.

So, as a reminder, we actually hedge those securitization draws. So, the coupon rate that we are quoting at 2.3%, we then enter into a fixed rate hedge on those draws. And that naturally is going to increase the effective rate.

Jeff Fenwick: Okay. And but still now as you are moving forward and begin to load more loan assets, or fund them with that facility, we should see that sort of effective rates, effectively begin to fall for you guys over the next…?

Hal Khouri: Yes, that’s exactly it.

And if you look at our overall debt stack, currently in terms of our drawn facilities are roughly about two-thirds of the overall debt stack. So, we do expect that with the incremental draws that we are taking on securitization, which are at great rates and below sort of the other balances in terms of the high yield notes, we should continue to expect that effective rates come down quite nicely.

Jason Mullins: Jeff, it’s actually one of the reasons that when we get inquiries about the broader rising rate environment. For us, one of the advantages is not only as Hal said, the draws that we are taking on the facility being hedged in order to fix the interest expense on each draw going forward. Because the incremental debt that we are going to be drawing to fund the growth for the next while now is coming from that lower cost secured funding, which sits well below the weighted average rate that we are paying on the balance sheet, because as Hal said two-thirds of the debt stack is still the higher priced, high yield notes.

Even if it’s a rising interest rate environment, because of that shift to secured funding, that might slow the rate of decline. But it leaves us less exposed to the risk of actually any increases in the effective rate we are paying, it’s more likely, we will still see a decrease even in a slight rising rate environment, just because of that shift towards secured funding at the lower cost.

Jeff Fenwick: Okay. Yes. Thanks.

It’s an important point to make there. And then I just had one other question here on corporate costs. I know there were a couple of items there that were one-time in the quarter. But even adjusting for those, I mean they have been progressively growing alongside the growth of the organization. Is there a point here where that rate of growth begins to taper? In terms of percent of revenue, does it fall below 7% at some point or do you still have a pretty big set of initiatives there at the corporate level that you need to keep investing in that and you are going to keep those costs growing?

Jason Mullins: Yes.

Generally speaking, I think we will probably start to continue to see scale. Obviously, there is a step up there as we go through some of the investments we are making and this year, a major new product launch, a major new technology platform, the integration of LendCare and the additional merge of that corporate expense. So, all of that results in a bit of a more wonky year in terms of the corporate cost line. As we look at kind of the next several years going out, obviously, we are still going to continue to make healthy investments in the business, because we feel we are at the early stages of our growth trajectory. And there is a lot of things for us still to get done.

But you will continue to see net-net scale leverage flowing through where the effective corporate costs relative to revenues will just keep slowly inching down every year as we drive more scale into the business.

Jeff Fenwick: Okay. That’s helpful color. Thank you. I will re-queue.

Operator: Your next question comes from the line of Marcel Mclean from TD Securities. Your line is open.

Marcel Mclean: Thanks for taking my question today. I wanted to talk about credit, particularly the Stage 3 loans. They have been the – highest have been, I guess since pre-pandemic as a percentage of total loans anyways.

Just curious I guess as a precursor for your guidance for the step up in charge-offs next quarter. But how is this evolving kind of relative to your own internal expectations and overall market dynamics? And are there any concerns within this piece? Whether that’s geographic or it’s a specific contract borrower, anything that we should be aware of?

Jason Appel: So, it’s Jason Appel, I will answer that. I would say the distribution of the portfolio as it relates to the staging under IFRS 9 is where we expected it to be for the quarter. We now guided it for the last couple of quarters that we are steadily rising up from the pre-pandemic lows that were brought on by tremendous government stimulus and there is a significant reduction in consumer discretionary spending. So, as far as where the Stage 3 bucketing is concerned, part of that is just the day when you have the quarter ended.

But also part of it is simply because we would expect to see a slight uptick in the percentage of customers that roll through into that stage due to delinquency, which you can see in the MD&A for the quarter. But overall, as we have said before, that’s very much accompanied by a continued upswing in the overall level of demand for credit that we are seeing, which we overall tend to view as a very positive thing. As far as the losses and where they are coming from, there isn’t any one market that’s causing this concern, despite the fact that you have got certain areas of the country under more of a COVID, lockdown and others. Alberta being one example, we are not necessarily seeing our credit, perform or under-perform in those areas. Comparison – by comparison in Québec, we are seeing our credit performing as you would expect.

So, there is really no surprise in the quarter, as far as how the staging has come together. And I think as we look out into the next quarter, we would expect to see that Stage 3 bucket continue to stay on or roughly about where it is. It is subject to some seasonal ebbs and flows depending on again, how the quarter is weighted in terms of the number of days, now the quarter ends. But overall, I would say there is really no unusual movements or surprises in how the actual distributions are structured.

Jason Mullins: Maybe just to add, Marcel, the thing that I think is always important to note and we have highlighted this over the years as well, we are running the business with the goal of trying to optimize the relationship between throughput origination volume and the number of customers we can accrue, and what the net loss rate is then from that risk profile of consumer.

And so ultimately, we can shift the loss rates down further over time if we were to choose to do so. But it would come at the expense of very good profitable growth. Likewise, if we thought it made sense to increase the risk tolerance, you could reverse that and drive more growth. We think that the ranges that we have provided for both yield and losses optimize the performance of the business. They optimize the relationship between the velocity and the volume and the approval rates, and the net charge-off rates that then that portfolio would produce.

So, we don’t – when we see losses graduate to the ranges that we have engineered the portfolio to be, when it’s complemented by the proper velocity and origination volume that we are seeing, from our perspective, we actually gain great comfort, because it says that we have dialed the risk tolerance level correctly, for what we would expect to see in terms of the relationship between growth and losses. When losses are too low, you are probably not generating good, healthy, profitable growth. So, it’s important to understand that dynamic in that relationship and how we are trying to engineer for this particular forecasted outcome.

Marcel Mclean: Yes. That makes sense.

Okay. And then as a follow-up, your allowances, they ticked down slightly, just wondering how you guys think about allowances going forward? Is this a volatile level you want to run at, or is it going to sort of evolve, potentially lower with your improved quality of your loan book or how should we think about allowance balances?

Hal Khouri: Yes. So I would say given where the economy is generally moving back and stuff and that we have seen a decent strengthening of consumer demand in the last couple of quarters now. It would be our view that the provision is now accurately reflecting what we think the level of future loss risk is that is inherent in the portfolio. And I would say at this stage, we would expect some small movements in the provision from quarter-to-quarter, but that’s partially going to be driven by seasonality shifts in product mix that we have spoken about earlier, as well as changes in the forward looking indicators.

Those are pretty much going to drive I would say modest changes from quarter-to-quarter, but I think we are probably at a state where we are at the point, we would expect to be and we would expect maybe some gradual decline, but nothing is significantly material from where we are today. And favorable gradual decline. Yes.

Marcel Mclean: Okay, perfect. And one last one for me, just on the tax rate, I am not sure you have ever provided a range of what to expect, I know it bounces around a bit quarter- to-quarter, kind of have you ever gotten to what we should expect that to be sort of over time, what we can expect?

Hal Khouri: Yes.

So, Marcel, it’s Hal here. So, in a normal state, I would say we are probably somewhere in the range of 26% to 27%, our gains that we have been realizing those investment gains, obviously our capital gains that would be subject to more preferential tax treatment. But as you are kind of modeling out in terms of normal operating income, I would say somewhere in the range of between 26% to 27%.

Marcel Mclean: Okay, perfect. Alright, that’s it for me.

Thank you very much.

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

Jaeme Gloyn: Yes. Thanks.

Good morning. First question is just on labor market. And if you could talk about what you are seeing, from that perspective, as it relates to both the new store location opening or like how the staffing going and the staffing up those new store locations, as well as with the head office location and call centers, talk about how labor is shifting in this environment?

Jason Mullins: Yes, sure. So, it’s definitely the last I would say six months been tougher. We are not immune to the same labor market dynamics that I think every business is facing where turnover was a little bit higher and recruiting has been a little bit tougher.

But we have fared pretty well, notwithstanding those headwinds there. Summer months were a little bit tougher. We have actually seen in the last month or two months, as we have gotten into the post-school fall season. Hiring has gotten much, much better. I think in our call center, for example, where we ran with a bit of vacancy throughout the summer runs were pretty much now fully staffed.

And we have got several great large training classes, seeing similar things in the retail branch network, summer months were really difficult number of markets, places like Québec, where labor has been even tighter was more difficult to get the full complement. But in the last couple of months, things have started to improve. And we are seeing turnover begin to gradually reduce. We have seen the ability to hire improve, seen the same thing in the corporate roles, spring and summer kind of higher chain turnovers in certain positions, particularly technical roles. But we have been able to now in the last couple of months build many of those positions.

And it looks like we are in a much better shape now. So, we have kind of gone through the same overall dynamic that the broader market has. But where we sit today, it looks like things are on an improving trend and we filled most of our positions. So, we are getting in better shape as we go here.

Jaeme Gloyn: Okay, great.

Second question is on commissions. And the commissions earned in Q3 relatively flat to Q2, are you learning anything new from the uptake on certain ancillary products from LendCare clients, or maybe there is some shift in consumer behaviors on the existing goeasy customers, what’s going on with the commissions uptake? And how do you expect that to evolve from the last couple of quarters?

Jason Mullins: Yes. So no real notable changes in trend, probably the only couple of comments would be as our products mix evolves, the take up rate on those products varies. But probably more relevant here is that the cost of those products vary. So, for example, the effective cost on a per dollar insured basis for the insurance products for say, a home equity loan, where you have gotten really great hard real estate assets, security, much lower default losses, you are going to have a lower effective costs and therefore less effective commission.

And therefore as that product mix shifts, you might see the commission line evolve. However, that’s not necessarily the indication of take up per se. On the LendCare business where most of their originations come from a dealer or a merchant or a retail partnership, in that channel point of sale finance in general, not specific to LendCare, but just that industry, in general, the take up rate of ancillary products has generally been much lower. They have started to see some improvement in that performance, particularly by employing a centralized team to follow-up with customers and offer them the ability to take other ancillary products or insure their loan. It’s really early days I think of developing that specific skill set and capability.

So, I think there is upside there for sure. But those would be some of the dynamics. When you look at our forward guidance on total portfolio yield, which as you know, as a gradual decline over the next couple of years albeit the rate of decline is slower, the effective commission rate, if you will, of ancillary products, the take up of ancillary products. That’s all part of what’s factored into that gradual yield decline, it’s not entirely all interest, it’s because of the factors I have noted, which is the effective rate on those products does shift as you move to some of these other product categories. So, that’s essentially all factored into our economic model.

Jaeme Gloyn: Okay, great. And last one, from my end, I guess simply, are there any further updates on the Brim Financial investment and what your – what strategies you are employing through that investment?

Jason Mullins: Yes. So, obviously Brim is a private company and so much like, during the period of time that we were investors in PayBright, as a private company, we can only share so much. But I would share that things are going very well with Brim. They have done a very, very good job at leveraging the capabilities of their platform.

They have signed on several major brand and major bank relationships, to use their platform for various capabilities from the actual card platform, to the digital platform, to the loyalty programs. So, we can’t say anything about specific partners or the specific evolution of their revenue and economics, other than that the business has gone – had done very well. And we are very pleased with the partnership and the investment there.

Jaeme Gloyn: Thanks very much.

Operator: Your last question comes from the line of Jeff Fenwick from Cormark Securities.

Your line is open.

Jeff Fenwick: Hi, there. Yes. Just one follow-up and it tags onto the answer you just gave on the commission revenue, Jason. You gave that guidance for a slight uptick in the aggregate gross yield for Q4.

I guess that’s a full quarter with LendCare and some of the movements in the portfolio. But how do we think about that tapering happening then, because this is a bit of a higher level than I would have maybe modeled through the end of the year? Does it change meaningfully through the beginning of next year, is that sort of blended decline there, maybe a little less deep than I might have thought. And again, just sort of keeping in mind your full year targets that you have given us, but just trying to understand that movement there?

Jason Mullins: Sure, yes. So again, in terms of the range that’s provided for both yield and losses, as I said earlier, it’s really predicated on an assumption around certain product mix. And given now that we have such a wide range of products, each of which is priced at a different point, ranging from as low as 9.9 to 46.9, a very wide range of pricing with a very wide range of losses.

We feel like we have got a pretty good model now. I am trying to predict the evolution of the mix of those products that we have been able to provide a two point band for both yield and losses, and consistently and most often fall within that band. In the last couple of months, we have actually seen pretty good growth in unsecured lending, that tends to come with a slightly higher yield, also comes with slightly higher losses, not surprising the yield and loss rate for the coming quarter is in the higher end. Perhaps over the fourth quarter, we see a greater uptick in demand for lower priced products like power sports equipment in the winter months. And then that will put pressure towards a shift in that trend.

So, it really does depend on the evolution of the product mix. However, we feel pretty confident, very confident in the ranges that we have provided. So, whether we are in the high end or the low end of the range is really the latitude that we have allowed for, for some shift in product mix that we can’t perfectly and precisely always predict. But – so the ranges allow for that. But the ranges themselves we think will be pretty accurate as to how we see this portfolio evolving, given the things that we are investing in.

Where we are investing our ad dollars and where we see the growth coming from under this new merch business with LendCare. So, still remain confident in the numbers we have provided and of course, as that product mix shifts will provide updates if we see the mix shift going one way or the other.

Jeff Fenwick: Okay. Thanks for that color. That’s all I had.

Operator: There are no further questions at this time. I would now like to turn the call back to our presenters for any closing remarks.

Jason Mullins: Okay. Well, thanks everyone for joining today. There is no more questions and have a fantastic rest of your week and we look forward to updating you next quarter when we close year end in February.

Thanks everyone. Bye now.

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