goeasy Ltd. (GSY) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Third Quarter 2021 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Farhan Ali Khan. Please go ahead.

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 lines for questions from investors. 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 and supplemented by 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. This is 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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'm not going to read the full statement, but 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.

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 nonprime consumer lender by developing a range of products and channels that position 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 increased 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 or consumers spend 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 in 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, health care procedures or 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 1 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 heights and motors and GBA 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 a 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 at $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 enter closer toward the optimal portfolio yield. 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 continue to experience stable credit performance within the portfolio. While the economic reopening that is now driving demand and 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 and up 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 improve 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 of vesting. 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 209% in the third quarter of 2020. After adjusting for nonrecurring 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 up 24%, above our targeted level of 22% plus, while return on tangible common equity lifted to 42.9% in the quarter. I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook.

Thanks, Jason. During the third quarter, we continued 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 growth in 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 con digit portion of our shares in a firm related to the prior sale of our equity and PayBright. As such, total proceeds from the sale of shares and 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 offered rate plus 185 basis points. Based on the current 1-month CDOR rate 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 increase in 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 and the current oral ING capacity, we now have approximately $908 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 can continue to grow the loan portfolio by approximately $200 million per year solely from internal cash flows. In addition to the increased liquidity, strong cash flows led to a reduction in our leverage level, which reduced to a net debt to net capitalization ratio of 62% and 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'll now pass the call back over to Jason to update you on our outlook.

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 the 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 close 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 Instructions] First question comes from the line of Etienne Ricard from BMO Capital Markets.

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 merchants' websites. How is this progressing?

Yes, great questions. So in the first revenue synergy, which I highlighted in my comments, we were looking to integrate the easy financial 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've developed and the additional merchants they're 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 easy financial credit models, which we expect will generate incremental originations of revenue. Obviously, we'll be slow and steady with expanding that program. So although it will start this week, its 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 basis, each other's products. We've 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'll 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 as it relates to your last question about the ability to preapprove customers directly on merchant websites we're also very close to completing that as well. We're talking with a number of merchants right now about putting the preapproval capability on their site, so customers can get financing before they actually go shopping. I suspect we'll 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.

Understood. And on auto lending, I think you mentioned it's about 4% of 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, other product? And trying to look into next year, what are your growth expectations for both products?

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 use 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've seen great traffic. So far, the volumes have been okay. More volume we're seeing through the dealer channel. I suspect that the shift to consumer buying behaviors toward getting preapproved 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're 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 preapproved from us. And we're somewhat indifferent about which channel that they choose because we can get the same returns either way.

Okay. Great. And on binocular, a firm announced meaningful partnerships in the U.S. with Amazon, for example, to the extent this partnership moves north of the U.S. border, how do you think OECs is positioned to partner with a firm should non-prime consumers be offered financing?

Yes. So we continue to build a great partnership with the firm. They are, as you know, the 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 launch, we believe there's some level of opportunity for us to be collaborative and constructive. So it really just depends on the particular merchant, 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 nonprime offering. But there's quite a number that, I think as they add those merchants in Canada could provide opportunity for us as well. So we're actively keeping that dialogue open. And then 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.

Your next question comes from the line of Gary Ho from Desjardins Capital Market.

Great. And I just wanted to go back to the net charge-off guidance for the Q4. I guess more of a 2-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 trend up to that middle of that range there?

Yes. Sure. So I'll answer the second part of the question. So yes, we 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 falling quarter where losses were lower. And then as demand and growth begin to accelerate, losses began to normalize. So we're 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 2 consecutive quarters now of driving loan growth in excess of $100 million a quarter. Losses look like they'll now come in right in line with our target 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'll see continue into 2022 based on the guidance we provided.

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?

Yes. That's exactly right. So if you think about the range that we've 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 product 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 if you think about the customer journey that we're building, when a customer applies for credit, we're trying to approve and screen them for all of our products and then give them the choice. And 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, the 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 evolves slightly different, then you might have a case where, similar to what we're 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 how the products are going to evolve, but we feel like we've got a pretty good handle on the range they're likely to fall in.

Makes sense. And then my next question, maybe for Jason Appel here. Can you kind of talk me through the change in the FLI methodology, I think you moved from 3 scenarios to a 5 scenario and moving to Moody's analytics as well, obviously, the inflation and oil price forecast has been volatile post Q3. How May this impact the allowance rate for Q4, if any?

Yes, sure, Gary. Let's take the first question first. You'll 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 in a series of 3 scenarios, optimistic, pessimistic and neutral and effectively build those scenarios ourselves. What we've now done in making the shift with Moody's is we've now pulled that data directly from Moody's and are now relying on Moody's independent forecast that contemplate how all 4 of those variables will perform under a 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 a more of an enhanced view by having 2 more scenarios added in. We have a broad range of 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 I mean I'd love to say that we're prognosticators of where the economy is going. Suffice it to say that we're not expecting to see significant shifts in those variables, partly because each of those variables exert a different type of influence on how the portfolio works. It's not unrealistic to see shifts in FLIs. We've seen those in the past historically. But I wouldn't expect there to be a material movements in the provision overall based on the macroeconomic shifts that we FLI'ed, unless those FLI [ resells ] 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.

Gary, I would just add to that. What are 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 Rudy's example of a more opportunistic economic outlook. If the economy is performing well, they've got inflation rising because the production of the economy is very strong. That combined with the fact there's 5 scenarios means we actually think there'll be less volatility, i.e., the overlay of the FLIs will be more realistic and stretch out more weighting across multiple scenarios, therefore, resulting in more stability. So as Jason said, unless there's a dramatic swing in the outlook in the economy that we're 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.

Perfect. Okay. And then just my last question here. It sounds like the auto launch is going well, reopening, driving growth in the LendCare platform you're 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 expectations at the -- in the last call? And more importantly, how do you think about these euros might play out in Q4 and into 2022?

Yes, sure. So I mean, clearly, Q3 was probably a little bit more difficult to predict as precisely as I think Q4 and beyond will be just given -- as we enter the early summer months of Q3, there's still some moving variables with regards to COVID. Various provinces 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've 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've 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've 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've seen in the last 4 or 5 weeks. It feels like, again, being that we're 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.

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

2 questions. The first is, you mentioned your partnership with the firm and you're developing that partnership. I guess I'm curious then why the sell the shares at this point? Is that partnership and the sale of those shares kind of independent of each other? Like in terms of -- are you setting a signal to a firm that you're not supportive of the stock, I guess, is the question?

Yes. No, good question. So no, the partnership and the equity holdings are very independent. Firm looks at our commercial partnership, specifically and independently. We have a very, very good working relationship. I feel 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 firm investments and the partnership itself are not comingled. They fully understand that we're not in the business of investing and holding in public securities long term. And therefore, the decisions 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 hedged because of our confidence in the outlook, is that's just a signal that we still feel very good about that business and where it's headed.

Okay. And I guess the second question is when you first started talking about lending into the auto space, 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 decide not to do it?

Yes. No, 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 leans 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're 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 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 out 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 product for the customer, a great relationship with the dealer where you provide the excellent support, a good economic arrangement that the customer is going to be interested in. You really have to have kind of some of the parts of good service and good product. And LendCare brings that. So we've 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-sale 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 could 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 consumers this product through both channels.

Your next question comes from the line of Jeffrey Fenwick from Cormark Securities.

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've been seeing in terms of the growth metrics in terms of same-store sales growth being very high. LendCare had been growing its loan book sort of 40%, 50% annualized over the last couple of years. And now we're 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?

Yes, sure. So if you actually look back at pre pandemic periods, say, for example, the 3 years prior to 2020, 2017, 2018 and 2019, in 2 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 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 lull 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-to-month, you get these different seasonality points such that the growth in net growth in the third 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 that say LendCare does. Think about, for example, financing power sports equipment, the time in which you go to apply for financing for powersports equipment is 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 have normalized, we will actually see a pretty healthy step-up in loan originations. But given then the higher payment drag, you will end up with similar net growth quarter-on-quarter. So those are some of the dynamics and why, from our perspective, it looks to us like we're sort of back to a pretty close to very normal state when we consider what we're seeing in the Q3 versus Q4 trends around loan originations and growth.

Okay. That's helpful color. 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're suggesting incremental draws are coming at much lower than that. Is there something in there that we need to be mindful of when remodeling the actual reported interest cost of the securitization facility that might be a bit higher versus the real rate that you're paying in the business?

Yes, Jeff. So it's Hal here. So as a reminder, we actually hedge those securitization draws. So the coupon rate that we're quoting at 2.3%. And we then enter into a fixed rate hedge on those draws, and that naturally is going to increase the effective rate.

Okay. And -- but still now as you're moving forward and begin to load more loan assets or fund them with that facility, we should see that sort of effective rate effectively beginning the fall for you guys over the next quarters?

Yes, that's exactly it. And if you look at our overall debt stack currently in terms of our drawn facilities are roughly about 2/3 of the overall debt stack. So we do expect that with the incremental draws that we're taking on the 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.

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're taking on the facility being hedged in order to fix the interest expense on each draw going forward because the incremental debt that we're 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're paying on the balance sheet because, as Hal said, 2/3 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're 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.

Okay. Yes. That'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 onetime in the quarter. But even adjusting for those, I mean they've 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 are going to keep those costs growing?

Yes. Generally speaking, I think we'll probably start to continue to see scale. Obviously, there's a step-up there as we go through some of the investments we are making in this year, a major new product launch, a major new technology platform, the integration of lending care 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're still going to continue to make healthy investments in the business because we feel we're at the early stages of our growth trajectory, and there's 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.

Your next question comes from the line of Marcel Mclean from TD Securities.

I want to talk about credit, particularly the Stage 3 loans, they've been the highest they've been, I guess, pre pandemic as a percentage for loans anyway. Just curious, I guess, is 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 to a specific tranche or anything that we should be aware of?

So it's Jason Appel. I'll answer that. I would say the distribution of the portfolio as it relates to the staging under IFRS 9 is about where we expected it to be for the quarter. We've now guided 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 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 weighting how the quarter ended, but also part of it is sense 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 said before, that's very much accompanied by a continued upswing in the overall level of demand for credit that we're seeing, which we overall tend to view as a very positive thing. As far as the losses and where they're coming from, there isn't any 1 market that's causing us concern. Despite the fact that you've got certain areas of the country under more of COVID lockdown than others, Alberta being 1 example, we're not necessarily seeing our credit perform or underperform in those areas. Comparison by comparison in Quebec, we're seeing our credit perform as you would expect. So there's 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 how the quarter ends. But overall, I'd say there's really no unusual movements or surprises in how the actual distributions are structured.

I maybe just add more to it. The thing that I think is always important to note, and we've highlighted this over the years as well. We're running the business with the goal of trying to optimize the relationship between throughput, origination volume and the number of customers we can approve 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've 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're seeing, from our perspective, we actually gain great comfort because it says that we've 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're probably not generating good, healthy, profitable growth. So it's important to understand that dynamic and that relationship and how we're trying to engineer for this particular forecasted outcome. Yes. No, that makes sense.

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

Yes. So I'd say, given that the economy is generally moving back in step and that we've seen a decent strengthening in 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'd say, at this stage, we'd 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've 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'd say we're probably in a state where we're at the point we would expect to be. And we would expect maybe some gradual decline, but nothing significantly material from where we are today. And favorable gradual decline, yes.

Okay. Perfect. And one last one for me. Just on the tax rate. I'm not sure if you guys 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?

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

Your next question comes from the line of Jaeme Gloyn from National Bank.

First question is just on labor markets. And if you could talk about what you're seeing from that perspective as it relates to both the new store location opening -- like how is staffing going and 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?

Yes, sure. So it's definitely the last, I'd say, 6 months been tougher. We're 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 fared pretty well, notwithstanding the headwinds there. Summer months were a little bit tougher. We've actually seen in the last month or 2 as we've 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 runts. We're pretty much now fully staffed, and we've got several great large training classes, seeing similar things in the retail branch network. Summer months were really difficult. A number of markets, places like Quebec, where labor has been even tighter, was much more difficult to get the full complement. But the last couple of months, things have started to improve. And we've seen turnover begin to gradually reduce. We've seen ability to hire improve, seeing the same thing in the corporate roles, spring and summer, kind of higher chain turnovers in certain positions, particularly technical roles, but we've been able to now in the last couple of months, still many of those positions and looks like we're in much better shape now. So we've 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 fill most of our positions. So we're getting in better shape as we go here.

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's some shifting consumer behaviors on the existing go easy customers? What's going what's going on with the commissions uptake? And how do you expect that to evolve from the last couple of quarters?

Yes. So no real notable changes in trend. Probably the only couple of comments would be as our product 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 product for, say, a home equity loan, where you've got really great hard real estate asset security, much lower default losses. You're going to have a lower effective cost and therefore, less effective commission. And therefore, as that product mix shifts, you might see the commission line evolves. However, that's not necessarily an 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 centralized teams who follow-up with customers and offer them the ability to take other ancillary products or ensure their loan. It's really early days. I think, at developing that specific skill set and capabilities. So I think there's 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've 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.

Okay. Great. And last one from my end is, I guess, simply, are there any further updates on the Brim financial investment and what strategies you're employing through that investment?

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've 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 program. So I can't say anything about specific partners or the specific evolution of their revenue and economics other than the business has gone and done very well, and we're very pleased with the partnership and the investment there.

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

Just one follow-up, and it tags on to the answer you just gave on the commission revenue, Jason. The -- 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 the change meaningfully through the beginning of next year? Or is that sort of blended decline there, maybe a little less steep than I might have thought. And again, just sort of keeping in mind your full year targets that you've given us, but just trying to understand that movement there.

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 a 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've got a pretty good model now at trying to predict the evolution of the mix of those products that we've been able to provide a 2-point band for both yield and losses and consistently and most often fall within that band. In the last couple of months, we've actually seen pretty good growth in unsecured lending. That tends to come with a slightly higher yield, also comes to 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 toward 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've provided. So whether we're in the high end or the low end of the range is really the latitude that we've allowed 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're investing in, where we're investing our ad dollars and where we see the growth coming from under this new merge business with LendCare. So still remain confident in the numbers we've provided. And of course, as that product mix shifts, we'll provide updates if we see the mix shift going one way or the other.

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

Okay. Well, thanks, everyone, for joining today. If there's 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.

This concludes today's conference call. Thank you for participating. You may now disconnect.