goeasy Ltd. (GSY) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the goeasy's first quarter 2022 financial results. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Farhan Ali Khan. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. My name is Farhan Ali Khan, the company's Senior Vice President and Chief Corporate Development Officer, and thank you for joining us to discuss goeasy Limited's results for the first quarter ended March 31, 2022. The news release, which was issued yesterday after the close of market, is available on Globe Newswire and on the goeasy website. Today, Jason Mullins, goeasy's President and Chief Executive Officer, will review the results for the first quarter and provide an outlook for the business. Hal Khouri, the company's Chief Financial Officer, will also provide an overview of our capital and liquidity position. Jason Appel, the company's Chief Risk Officer, is also on the call. After the prepared remarks, we will then open the lines for questions from investors. Before we begin, I'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 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 their 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 and 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 However, we would ask that they do not quote callers unless that individual has granted their consent.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 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.

Thanks, Farhan, and welcome to the call, everyone. Today, I will recap the highlights from the quarter and the progress we have made on our strategic initiatives and then pass it over to Hal to provide an update on our capital position and funding capacity. I will then spend some time talking about why we are confident our business is well positioned to perform through the current and projected economic conditions before wrapping up with an update on our outlook. The first quarter continued to highlight the growth potential of our business model, as all products and channels experienced a lift in origination volume, leading to a material increase in loan growth during a typically seasonally slower period. During the quarter, we continued to experience healthy consumer demand as Canadians have largely adjusted to life with COVID-19 and borrowing and payment behavior has returned to more normal levels. Combined across all channels, we received a record number of applications for credit at over $330,000, a 62% increase year-over-year. The increase in application volume led to loan originations in the quarter of $476 million, an increase of 75% over the first quarter of 2021. With elevated lending activity, the consumer loan portfolio grew $124 million during the quarter, a record level of first quarter loan growth and a 300% increase over the $30.5 million of net growth in the first quarter of last year, a strong signal that our business strategy is proving effective. The growth in the quarter resulted in an ending consumer loan portfolio of $2.15 billion, up 65% from the prior year. Of note, we experienced performance that exceeded our expectations in several key areas. Auto lending activity in the quarter continued to scale up as we increased our automotive business development team to 17 reps who have done a remarkable job increasing our active dealer network from 1,400 to over 1,700 today. In total, 7% of all the customers we acquired in the quarter were issued an auto loan. We also experienced strong performance in our home equity loan product, producing $50 million in loan originations, nearly double the volume from the prior year. This product has an excellent credit profile with the customers typically living in suburban and rural communities at an average home value of under $500,000. Inclusive of our home equity loan, the average loan-to-value ratios on this portfolio are approximately 65%. This product has always carried the lowest level of credit risk in our portfolio. Lastly, we continue to see strong cross-selling activity across our customer base, a key synergy identified in the acquisition of LendCare. While our cross-selling activity remains only a fraction of the future potential, our data continues to show that when we make offers to active customers, between 10% and 30% of them will convert into a subsequent loan product after 12 months depending on the initial loan product they took. This performance is proving that our strategy to become the one-stop provider of all forms of credit for the nonprime consumer is beginning to prove out. By graduating our borrowers to lower-priced products, we continue to bring down the weighted average interest rate for our customers. During the quarter, the weighted average interest rate on the portfolio declined to 33.3%, down from 37.8% last year. Combined with ancillary revenue sources, the total portfolio yield finished within our forecasted range at 38.7%. Total revenue in the quarter was a record $234 million, up 35% over the same period in 2020. We also continued to experience stable credit performance with the annualized net charge-off rate finishing at 8.8% in the quarter within our target range of 8.5% to 10.5% in 2022. With credit performance performing well, our loan loss provision rate was broadly flat at 7.78%, down 9 basis points from 7.87% in the fourth quarter of 2021. We believe this level of provisioning reflects the new structural credit risk of the portfolio and sufficiently contemplates potential deterioration in the overall economic environment based on probability-weighted economic scenarios. Operating income for the first quarter of 2022 was $80 million, up 25% from $63.9 million in the first quarter of 2021. Operating margin for the first quarter was 34.4%, down from 37.6% in the prior year. After adjustments, including items related to the acquisition of LendCare, an unrealized fair value loss on investments and corporate development costs recorded in the quarter, we reported adjusted operating income of $86.1 million, up $21.5 million or an increase of 33% compared to $64.6 million in the first quarter of 2021. Adjusted operating margin for the first quarter was 37.1%, down slightly from 38% in the prior year. Net income in the first quarter was $26.1 million, which resulted in diluted earnings per share of $1.55 compared to 7.14% in the first quarter of 2021. However, in the first quarter of the prior year, we recorded an unrealized gain on investments of approximately $75 million, while in the current period we recorded an unrealized loss on investments of approximately $15 million related to the mark-to-market of our remaining unhedged shares at a firm. Notwithstanding the mark-to-market adjustments, this has been an excellent investment, including the cash received on the initial sale of PayBright to a firm. The total realized and unrealized gains amounts to nearly $120 million relative to the initial investment of $34 million made in 2019 or approximately 3.5x our initial investments. After adjusting for these non-recurring and unusual items on an after-tax basis, adjusted net income was $45.8 million, up 25% from $36.7 million in 2021. Adjusted diluted earnings per share, was $2.72, up 16% from 2.34% in the first quarter of 2021. As previously noted, we experienced accelerated growth in the quarter of $124 million or $34 million above the midpoint of our original expectations. As a result, we incurred the additional loan loss provision expense that is required to be taken on the growth in our receivables. This additional expense ultimately reduced our earnings by an estimate of approximately $0.12 in earnings per share during the quarter. However, as we have said in the past, allocating capital to organic growth generates the strongest long-term return for shareholders. Carrying an additional $34 million in additional receivables produces approximately $0.21 in earnings per share in future years. Before passing it back to Hal, I also want to thank and acknowledge all our incredible women across goeasy. This past quarter, we were proud to have been recognized on the [ Globen Males Women Lead Hearlist ], an editorial benchmark to identify best-in-class executive gender diversity in corporate Canada, which includes some of Canada's largest and best-performing organizations. We have worked hard to create a culture of diversity and inclusion that sets the tone from the top with a highly diverse Board and executive team. Waiting on the list is a testament to the steps we have taken to level the playing field, such as achieving gender pay equity in 2019 and increasing the female representation in our C-suite to nearly 30%. Although we are proud of the progress, we remain committed to challenging biases and creating a culture that advances gender equality at all levels of the organization. With that, I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our outlook.

Thanks, Jason. During the quarter, we closed on the balance sheet enhancements previously discussed on our securitization warehouse where we increased the total capacity from $600 million to $900 million, while syndicating the facility and adding several marquee banks. On the revolving credit facility, we extended the term, reduced the limit slightly, improved the flexibility and reduced the interest rate by 75 basis points when taking draws tied to Canadian bankers' acceptance rate and 125 basis points when taking draws tied to the bank prime rate. Between the 2 facilities, we are fortunate to have participation from 5 of the 6 major Canadian banks and total capacity of nearly $1.2 billion, a testament to their confidence in our business. Given the conditions in the market, we elected to use $41 million of our available capital to opportunistically repurchase our shares at a level we feel is below their intrinsic value, buying approximately 280,000 shares during the quarter. Subsequent to quarter end, we have since purchased an additional approximate 168,500 shares for $20 million bringing our year-to-date purchases to approximately 448,000 shares and $61 million of repurchase volume. While share repurchases serve to temporarily increase our leverage position, they are highly accretive to the future earnings per share of the company at these price levels. Despite the strong growth in share repurchase volumes at quarter end, our net debt to net capitalization was 68% below our targeted level of 70%. Based on the cash at hand at the end of the quarter and the borrowing capacity under our recently amended revolving credit facility at quarter end, we had approximately $801 million in total funding capacity, which we estimate is sufficient to fund our organic growth through the second quarter of 2024. Inclusive of these amendments, our fully drawn weighted average cost of borrowing reduced to 4.3%, with incremental draws on our senior secured revolving credit facility, bearing a rate of approximately 4% and incremental draws on the amended securitization facility bearing a rate of approximately 3.3% prior to interest rate swaps. Most important, we have incredibly strong relationships with the banks, providing us funding and we are in regular dialogue about additional capital to ensure we maintain sufficient liquidity to fund our ambitious plans. An environment like the one we are in is important for investors to understand the cash producing capability of the business. We estimate that once our existing and available sources of capital are fully utilized. We could continue to grow the loan portfolio by approximately $200 million per year solely from internal cash flows without the need for any additional capital. Furthermore, if we were to run off our consumer loan and consumer leasing portfolios, the gross value of the total cash repayments paid to the company over the remaining life of its contract would be approximately $3.1 billion. If during such a runoff scenario with reasonable cost reductions and all excess cash flows were applied directly to debt, we estimated we could extinguish all external debt within 15 months. Last quarter, I highlighted some key reasons why goeasy was well positioned to manage through a rising rate environment and why we have a partial shelter from rising rates, which I would like to recap. First and most significant is the effective mix shift much like our consumer loan portfolio shifting towards lower-priced consumer loans, so too is our debt stack. We expect that nearly all the funding to support our 3-year organic growth plan going forward will be from lower-cost secured funding facilities. As a result of the shift in mix, even if rates on those facilities were to rise, they are still projected to remain below our current weighted average drawn cost of debt of 4.75% in the quarter for a period of time. As noted earlier, incremental draws on the securitization warehouse today are approximately 3.3%. Secondly, all the draws we have made to-date on the securitization warehouse and those we will make in the future have interest rate swap agreements put in place to hedge the interest rate risk and fix the rate going forward. As a result, the impact on rising rates only affects incremental securitization draws resulting in a much slower and gradual impact on the overall cost of borrowing. Today, approximately 95% of our drawn debt is already at fixed rates. Combined, we expect our actual cost of debt on drawn balances to remain fairly stable for the next year despite the rise rates. Turning briefly to our investments, during the quarter, we recognized a $17.5 million pretax net unrealized fair value loss on, investments, which, was mainly related to the unhedged contingent shares of our investment in a firm. The write-down was partially offset, thanks to the pretax unrealized fair value gain in the related total return swaps. Since the initial shares of a firm were obtained on January 1, 2021, we have recognized a realized gain on the non-contingent portion of the investment at firm and its related total return swaps of over $66 million and a cumulative unrealized fair value gain on the contingent portion of the investment at firm and a total return swap of $31.4 million. Including the cash we received on the initial sale of PayBright to firm, the total realized and unrealized gains amounts inclusive of this quarter's adjustment amount to nearly $120 million. Relative to our initial investment of $34 million made in 2019, this is an approximately 3.5x return on our investment. Furthermore, we reserve the right to hold our unhedged shares upon vesting for a period of our choosing, providing the opportunity for additional gains in the future as markets adjust. All said, with $800 million of funding capacity, several tactics saw on the impact of rising rates on our cost of borrowing and a disciplined capital allocation strategy that has us funding organic growth first, followed by opportunistic share repurchases, we are in excellent position to continue our ambitious growth plans. I will now pass the call back to Jason for an update on our outlook.

Thanks, Hal. It has clearly been a great start to the year with strong loan growth and stable credit performance, thanks to the work of our remarkable team. We continue to make great progress on our strategic initiatives. During the quarter, we began the design of our new digital lending ecosystem, which will connect our product and channels through a mobile app and enable customers to obtain access to preapproved loan offers. We are continuing to scale up our auto financing program as we track toward this year's goal of 2,200 active dealer partners and ramp up our direct-to-consumer offering. Lastly, we are well down the path of integrating a prime lender into our POS financing platform so we can begin offering a truly full-spectrum solution to our merchant partners. Notwithstanding the success and growth momentum, we appreciate there may be questions about how the business will navigate through economic weakness and what impact that has on our long-term guidance. For nearly 10 years, we have published 3-year commercial forecasts for investors. These projections are built with the same consistent philosophy each year. Based on the products and initiatives in market, we developed a bottom-up projection of originations that our data and research suggest is reasonable and achievable. We then stress the model with more ambitious and more conservative cases, which, in effect, account for a variety of potential tailwinds and headwinds, including the potential for a degree of economic turbulence. In our modeling, we anticipate a downside case in which more challenging conditions influence lending activity and credit performance. As such, we only adjust the ranges provided in our forecast if we experience extreme economic conditions or the product and credit mix evolved materially different than anticipated. This approach has served us well, and we have consistently achieved or exceeded our forecast. In examining the current economic backdrop, there are both a series of tailwinds and headwinds facing the consumer. On one hand, we are experiencing strong economic growth in tandem with a general labor shortage, resulting in extremely low unemployment. Unemployment is at an all-time low of 5.2% and wage growth has been between 3% and 4%. This bodes well for our customers as obtaining employment, pursuing a new career or increasing their wages is perhaps easier now than in generation. Furthermore, consumers appear ready, willing and able to return to their typical borrowing and spending behaviors as cover restrictions have all but vanished. -- and most people are anxious to live their lives again. On the other hand, excess money supply from government stimulus, strong consumer demand and severe supply chain challenges have resulted in higher levels of inflation, which have exceeded the level of wage growth for several months running, which in the long term can put pressure on consumer cash flows. To carefully navigate economic conditions, we utilize a series of credit risk management tools. First, we employ several custom proprietary credit models that allow us to increase or decrease the level of credit risk we accept by lowering or increasing our credit tolerance. Our models, which have been developed and refined over 10 years using thousands of data variables are statistically 2x more predictive at projecting loss risk than a generic credit score. Secondly, our underwriting process includes an affordability component driven by either a debt-to-income or payment-to-income ratio varying by product. Through adjusting these ratios and the size of loan we are willing to issue a customer, we can effectively ensure that a borrower is left with additional discretionary income to absorb higher everyday living expenses. Given that our portfolio liquidates at a rate of approximately 45% per annum, we can affect the underlying composition quickly with credit or underwriting related modifications impacting nearly 50% of our portfolio within just 12 months of lending activity. By carefully monitoring the economic outlook, we can make proactive credit adjustments in advance of economic expansions or contractions. While growth remains strong, we have, in fact, already embedded a number of credit optimizations into our models, and we'll make additional incremental improvements in the coming months. As we have communicated in the past, nonprime consumers and the company's lending to this category of borrowers are also incredibly resilient. There are critical points of consideration that explain why nonprime consumers experience a more moderate degree of change in default rates during an economic downturn than prime borrowers and why nonprime consumer lending businesses are well equipped to navigate through these downturns. These include: #1, our customers have lower levels of total debt. In fact, Canadians with nonprime scores have 55% less debt than Canadians with prime credit scores. Prior to the pandemic, non-prime Canadians held balances of approximately $230 billion in credit, excluding primary residential mortgages, and the market was growing at a CAGR of approximately 4%. By the end of 2021, the total debt balances fell by 20% to $184 billion. Meanwhile, in the prime lending market, total balances actually continued to grow, topping $661 million in 2021, growth of nearly 5%. The slower balance growth in nonprime is clear evidence that the average nonprime Canadian experienced an improvement in their finances throughout the pandemic, highlighting the significant growth opportunity available as the market corrects and the ability of these consumers to weather economic pressure. #2, our customers have less exposure to rising interest rates due to lower homeownership as only 20% of Goeasy borrowers on their homes compared to over 65% of the overall population. #3, non-prime consumers have a higher propensity to purchase credit insurance. Approximately 50% of our portfolio today carries incremental insurance for unemployment risk with a third-party provider of credit insurance. #4, our secured loan levels have increased with a portion of our portfolio secured by hard assets, such as real estate or automotive and recreational vehicles, increasing to over 33% of the portfolio. #5, our customers work in a wide and diverse variety of industry sectors, including manufacturing, retail, financial services, health care, technology and public sector jobs with no significant industry-specific concentration risks. #6, there is regular government support. Canada's standard unemployment insurance program covers approximately 2/3 of an average consumers after-tax income. #7, our business model is inherently designed to accommodate a large level of stress. In fact, due to the risk-adjusted margins and variable nature of many operating expenses, net charge-offs can more than double before compromising profitability, an increase that is well beyond what we or any of our peers in the nonprime space have experienced during economic shocks in the past. #8, the business can produce very strong free cash flow. If new lending activity was slowed and we were to hold the portfolio flat, the business generated nearly $300 million of free cash. While as Hal said, in a run-off scenario with reasonable cost reductions, the business produces over $3.1 billion of gross cash and our free net cash flow to extinguish all debt in approximately 15 months. #9 and lastly, the data from research analysis done by TransUnion on several past recessionary periods, combined with our own experience in Alberta in 2015 when the unemployment rate doubled proves that the degree of increase in credit losses is more moderate for the nonprime segment than it is for prime borrowers. Furthermore, as a company, we have a long track record of navigating through market corrections and economic cycles. Over the last 15 years, we have experienced 4 other instances of significant market correction due to various economic challenges. In each instance, the business performed well and over the following years, experienced strong growth in the recovery. For all of these reasons, we remain confident in the outlook for our business and are well prepared to navigate through any economic turbulence that may lie ahead. Now turning to our outlook, during the second quarter, we are investing over $9 million in our nationally fully integrated media campaign, including digital TV and radio to continue driving awareness for our brands, which combined with the momentum in our automotive financing program and POS channels will help produce the largest quarter of loan growth in our history between $160 million and $180 million, approximately 25% higher than our previous record quarter in Q4. On the revenue side, we expect the total yield generated on the consumer loan portfolio to remain broadly flat between 38.5% and 39.5%.While the net charge-off rate continues to remain stable and is projected to be in the midpoint of our range, finishing between 9% and 10% in the quarter. For the full year, we now project to achieve the high end of our loan book growth range at $2.6 billion, which implies we will produce more than double the average loan book growth that we experienced over the last 3 years. With this, our minimum loan book expectation now lifts to our previous midpoint of $2.5 billion. In lockstep, we expect revenue to also finish at the high end of our range. While the incremental growth is accompanied by the extra expense necessary to provide for future loan losses and origination expenses, thereby moderating the in-year earnings benefit, it contributes to a lift in future earnings that produces long-term return for shareholders. Altogether, while we are operating in a rising rate environment, which inevitably impacts the cost of capital for all lending institutions, the benefit of our share repurchases and strong loan growth will serve to offset these impacts and still drive meaningful earnings growth in future years. In closing, I want to again thank our entire goeasy team for their passion and commitment to our company and our customers. They make a meaningful difference in the lives of Canadians and deserve all the credit for our performance and progress. With those comments complete, we will now open the call for questions.

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

The new metric you raised in your comments is that 45% of the loan portfolio experienced a turnover over a 12-month period. Now as it relates to nonperforming loans, what flexibility do you have to negotiate in terms of the loan without charging us?

Yes, so I'll maybe make a comment and then Jason of course can add. So we've had a basket of collection tools that we've used for many years and have always served us well in helping our customers through a difficult period. We offer the opportunity for a customer to temporarily defer a payment, but we limit and cap the number of times that, that can be done over the loan to ensure that it's being used properly. And then we will also offer certain consumers the opportunity to extend the term of their loan and if they're in a more hardship position, lower their interest rate. And then the combined effect of those 2 things can actually bring down the structural payment level for that customer. Keep in mind, the proportion of loans will we use those types of support mechanisms is very low. It averages less than 10% even in extreme scenarios. So the majority of the time the consumer is still have to meet their payment obligations. But we do know we need to always have a tool set that can be available to help a customer if they do run into a difficult time. Last point would just be that when a consumer experiences difficulty. One of the reasons that, that is often the case is unemployment. And then as I said earlier, because so many customers have that employment coverage, a lot of times, the primary tool that's used is simply to make insurance going to cover the payment.

The only other comment I would add, Etienne is in those tools that Jason identified, we dynamically rescore the portfolio every 2 weeks for the purposes of identifying accounts that may be at that risk of charge-offs, and that would include accounts that aren't in the current state of delinquency because in some cases, you will find customers that suddenly will experience an event and then have no choice to have trouble in making their payments. So we use a centralized algorithm to identify those customers upfront, and that then dictates what type of enhanced collection tool, we will offer them. which falls within the suite of what Jason elaborated on earlier. So it's a combination of both a series of tools as well as a fairly complex algorithm to identify at-risk customers before, in many cases, they're at risk of charge-off.

Understood. You also flagged strong home equity loan originations over the past few quarters. How sensitive do you expect origination volumes for this product to be in housing market slowdown? In other words, -- how sensitive are home equity loan originations to housing market transactional activities?

Yes so I mean I think the first point I would say is that the relative impact of any volatility in the sales performance of that product on our business is quite moderate. As I highlighted, while that was a product success in the quarter at $50 million of originations, that only represents just barely 10% of the originations for the company. So if that product fluctuates in terms of its performance and sales volume, it's not going to move the needle materially. Having said that, with respect to your specific question, the fluctuations in the real estate market, we think, are going to have a benign impact on the performance of that product. And that's largely because these consumers are living in predominantly rural markets home values, as I mentioned, are less than $500,000. So they're not high-priced homes that are going to be far more sensitive to swings in real estate prices. And again, the total loan-to-value ratio with our products included is only 55%. So the consumers that are borrowing this type of product from us have plenty of room in equity, whether that's to qualify for another loan or whether that's if they've already got a loan and the real estate price was to decline, there's plenty of room there. I would add that the history of that product has been very consistent -- approximately 2 to 3 years after someone borrows that loan. They tend to refinance their original primary residential mortgage and the vast majority of the time, they then are able to refinance that loan product into their primary residential mortgage and our loan gets paid out early. And we've had the customer for several years, and it's been a great way to help bridge them during that period.

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

Yes, great question so first of all, on the M&A point, so we're always keeping our eyes and ears open for opportunities. We've highlighted and flagged that, that was part of our strategy for a long time. And so just generally speaking, we keep our eyes and ears open and various opportunities come our way. quite a number of months ago now, actually, all the way back to late last year, an opportunity came our way that we got quite interested in and thought was an excellent strategic fit. So much so that we went very, very deep on looking at and exploring the opportunity clearly to the point in which we incurred some costs to do the due diligence and financial analysis. In the end, you can imagine that in this kind of market that has been under pressure now for quite some time. As we got closer to the end of the process, we essentially realized that the opportunity was just not going to financially work to produce the level of accretion that's needed to exceed the organic hurdle rates that any type of investment has to have. Because our organic growth is so strong and our outlook is so positive, that hurdle rate is very high. Anything we're investing in has to have a very strong outlook and the value of our equity, if we need to issue equity to fund the purchase, obviously has to be in a good position to be able to make the transaction accretive. So one of those situations where it was a very good strategic fit, but as you get close to the finish line, you look at the prospects and the financial projections and you look at your equity price, this doesn't make sense. And down the road, we think there'll be opportunities that will reemerge and we'll be there to consider them as always. Now to your second point, clearly, in the current market conditions, M&A is not a current priority. At the moment, we are following our capital allocation framework that Hal and I have mentioned in the past, which is, first and foremost, fund organic loan growth. Our organic loan growth generates the highest return on our capital the most accretive to shareholders in the long run. So we want to make sure we have the capital capacity to fund the great organic growth that we're producing. And then when the share price is at these levels, we would then prioritize share buybacks over M&A because at this point, at these levels, the accretion on buying back our own shares is going to be likely better than any type of investment we could find out there. And so at this point, that will be the way we'll manage capital fund organic growth and then opportunistically buy shares when they make sense. We'll just want to make sure that we don't overbid because we want to make sure we can preserve capital for organic growth.

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

There's just a lot of focus on credit and net charge-offs, just given the macro uncertainty, inflation, et cetera. So you delivered pretty solid 8.8% in 1Q and unchanged range. I think an by 9% to 10% for Q2. A couple of things I imagine your customers would have felt some of the inflation pain in Q1 in April? Any commentary you can provide in terms of kind of their ability to service the loans, any cracks and delinquencies that you're seeing payments, et cetera just wondering if you can share any real-time color?

Yes so, I'll make some comments, and as Jason has anything to add. So at the moment, boots on the ground, we see no sign of deterioration and no sign of degradation on payment or credit performance -- and that's sort of even considering the most recent data and you could possibly have available, which is if we look at customer payments that were due just this past Friday, most customers make their payments up by weekly on a Friday. If we look at just the recent weeks payments that were due and what proportion were made on time versus default that ratio, again, very, very consistent and stable. And so, I know there's probably a sense of disconnect between why the environment is what it is, and yet, we're seeing this type of stable credit performance. I think you have to consider a couple of things amongst the list that I've highlighted. Our business just gradually and inherently over time is gradually improving based on credit and product mix. You think about the areas that I highlighted earlier that had the strength in the quarter, auto lending, home equity lending. These are secured products, the loss rates on these programs have a weighted average loss profile below our portfolio average. So inherently, that's going to mean that we can withstand some of the pressure that's in the economy right now. And then going to the actual consumer, I think if you look at some of the research on wage growth, it appears that the wage growth is most robust in the lower-paying jobs, the entry-level jobs. So that means the average Canadian, the average consumer is the one that is experiencing the strongest wage growth. So we can tell from just having our own frontline workforce and knowing who's coming and who's going and where they're working and stuff. And it's very evident to see that in some of those average Canadian frontline jobs that their wage growth can perhaps be far beyond the Canadian average of 3% to 4%, in many cases, may actually be at or above inflation. So I think that with the fact the nonprime customer came into this with a lower level of debt, as I mentioned earlier, maybe a bit more, well prepared to navigate through these times. The fact, that wage growth, although the national average has been below inflation in the entry-level positions has been quite robust and that our portfolio has been improving credit mix. Those conspire to suggest that at the moment, we're seeing no deterioration and we're seeing excellent performance, and we expect it to be that way going forward.

Gary, I'd just add to that, that we've said this before, we just quite a substantial sum of data on our customers, and we do it regularly, application data, credit bureau data, banking data. And if you look at that data long enough, you can begin to detect patterns. And when you encounter these periods of economic uncertainty, which you're most worried about are customers that live on what we call the margin, right? They're just on the precipice of being able to maintain their ability to keep themselves in good standing and that period where they're not able to do so. And we look at that data on a regular basis. And because we're looking at it and updating it very frequently, we're constantly tweaking and updating our models and our underwriting protocols. We certainly did that throughout the pandemic, as we mentioned in previous calls. And we continue to do that as we come out of that pandemic because we don't tend to believe that economic certainty is certainty. And as a result, as Jason highlighted in the script that came out from today's call, we've already made a series of credit adjustments, and we have more actually planned for this quarter. They're not massive adjustments, but they're tweaking around the edges. Because we want to make sure that those customers who are most at risk at a time of economic weakness has some degree of protection for those that were going to subsequently underwrite as well as those that we're currently dealing with on the book. So the ability to have that data regularly updated to be able to build and refresh our algorithms on a regular basis is probably one of the key things that allow us to have that degree of confidence in thinking about the next couple of quarters looking out going forward.

Okay great. And then maybe just as a follow-on, I guess, despite those credit risk adjustments that you're putting on last quarter and going into Q2, you're still projecting a very, very healthy growth -- loan book growth number for Q2. Just curious like what's the disconnect there? And how sustainable is that growth for the remainder of '22?

Yes so right now, I think the way to think about it is when we publish our commercial forecast, you'll recall the philosophy we've shared in the past has been that the midpoint of our range is that sort of some things go well, some things don't go according to plan. The low end of the range is if we hit a few speed bumps and more things don't go quite according to plan. And the high end of the range is if all the kind of tactics that we have and all the strategy we've built are going according to plan, then we would be at the high end of that range. That's where we are right now. This is not a function of loosening credit to drive growth. In fact, as you noted, we're going the other way. We're tightening up around the edges. This is really just a case of good, solid, healthy consumer demand. Consumers are borrowing and using credit at very appropriate levels. And all of our initiatives that are currently working in lockstep, whether that's automotive finance program, home equity lending, digital and online marketing and acquisition, point-of-sale finance. We're coming into a great seasonal period for certain categories like power sports as people start to go out and purchase summer recreational vehicles and water sports vehicles. So it's just a good time right now in the business is performing well, and all of our initiatives are working in our favor. So at this point, as long as the credit that we're writing, we continue to see -- meet the credit profile we think it needs to in terms of the credit mix and the product mix, even considering the credit adjustments that we're making, then that means we're putting good healthy loans on the book that are actually over time going to help prepare the business to weather any economic turbulence. So for us, this is actually good growth. You take the growth in home equity lending, for example, that will decrease the credit risk of the portfolio and provide us even further weatherproofing against the future. So that's how the growth is looking right now.

Okay. And then my last question. I noted last month, one of your larger competitor acquired Eton Park. Just wondering in the auto loan space, is that do you compete with those guys in terms of your auto loan product? I just wanted to update on that front?

Yes so the way to think about the automotive market is you have 4, what I'd call large scaled-up nonprime lenders. 2 of them are banks, both TD and Scotiabank have nonprime lending portfolios, albeit they're clearly focused on more near prime. And then you have IA Financial Group and Santander vehicle, previous [ car finco ] business. Those would be the 4 that have large and at scale. You then have our sales in Fairstone that are clearly large organizations pursuing that category. And then after that, you have a cadre of smaller independent firms that for the most part, we've been able to demonstrate we can compete with and we can beat in the market. All of that being said, it's important to consider that in the $200 billion-ish marketplace we operate, automotive financing is the largest single product category represents $58 billion of that marketplace. So by itself, it's a very significant financing market. So for us, we believe that we can be the #1 nonprime nonbank. So behind Scotia and TV, we can be the #1 player in that space. It will take us time to get there. But given that market is so large, even with a number of competitors, even with Fairstone buying Eden Park and looking to compete in that market, there is still significant runway and opportunity for growth for us.

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

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

Sure yes. So this obviously is an area for us that is core to our strategy long term. We're looking to build a full suite financial services institution where a non-prime Canadian can come to us for any form of borrowing needs that they might have. And then obviously, over time, as those needs change and evolve, that we would be their go-to solution for other credit products as we capture a larger share of the wallet. To-date, the cross-selling activity that we began late last year and is the focus point at the moment is when a customer is acquired on an initial loan of either home equity, power sports, retail point of sale or automotive, offering them an incremental loan as an unsecured cash loan. That's been the primary focus thus far. So far that has performed very well. As I said in the prepared remarks, the propensity for them to add an additional product at some point, appears to be tracking to between 10% and 30% of them after about a year. we are getting ready over the next coming quarters to start to then market other products in the reverse direction, which there's actually much greater opportunity for taking our power sports products, home improvement lending, health care financing, automotive finance and pre-approving existing unsecured loan customers, of which that's the lion's share for those products. That's the greatest opportunity. You've got a wider range of products you're actually cross-selling into a bigger customer base and the products that they might convert into are some of our best performing. So again, it's quite early days in this regard, but early signs suggest that the concept is resonating very well.

Okay great. So it sounds one directional at this point, released in Q1. And then in terms of the go-to-market strategy here, is it primarily inbound e-mails, -- is it phone calls? What is the go-to-market strategy on that cross-sell?

Yes so great question. So our strategy to-date has been a little bit rudimentary. We've primarily been reaching out to customers to let them know they're prequalified by e-mail and calls and some direct mail, but primarily digital e-mail and cold. The primary strategic initiative for this year that I highlighted earlier, the lending ecosystem project is the one that will ultimately provide the most efficient way for us to offer all our customers our full suite of products. So we are down the path to beginning to build a digital mobile app. So it will be an ecosystem where when a customer gets a loan under any brand and any product, they'll get access to a set of credentials, those credentials allow them to log into the goes portal. And in there, they can not only do basic things like either balance in their next payment date, but it will show them all the products available -- some of those products they'll just be invited to apply and some of those products they'll be preapproved for if we have enough data and they're eligible. That, I think, becomes the most efficient way. So it allows the customer to basically wake up every morning, open their mobile phone, open their goeasy app and instantly see all the products and which things that they're eligible for. And then for us to be able to use that digital portal to be able to do push notifications and alerts and things of that nature when they become eligible. So this is a very long-term multiyear strategy for us that we're very keen on, and we think we'll really monetize this platform that we've built multiproduct multichannel.

Okay great. In terms of applications, I noticed that online applications were down to 39% from 49%. Is that reflective of reopening? Or is it more reflective of maybe some changes in the underwriting that you implemented during the quarter to sort of diminished exposure to online applications?

So no, well, to 3 things. One, the last point you just mentioned is true -- hopefully that -- that's very minor. When we make credit model adjustments to tighten up either credit tolerance or affordability, typically, the consumers that are applying digitally online are the group of consumers so that will most impact because they tend to have a lower credit quality than walking in a branch or point of sale, but that would be very, very minor. The primary reason you'll see that is just simply mix shift as our other channels and products, which are newer and younger are growing like automotive finance and the like point-of-sale, their percentage of our total application pool is going to rise. And even if online traffic and volume were to stay flat, absolute, the percentage would decline. Now we did also see a slight decline in the absolute amount of business originated through online. But in that direct-to-consumer channel, there is typically a seasonally slower period Q1 versus Q4 hence, why total originations in Q1 were still down a little bit from Q4 as they seasonally always are. So think about it as a little bit of seasonality, primarily a mix shift effect because the other verticals and products are growing more quickly in their earlier stage and then a touch of the effects of credit adjustments that are going to over index there impacted online.

Okay got it. 2 more, first, just on the capital allocation obviously, the NCIB has been very active. Curious to get your thoughts on a substantial issuer bid, something to move a little bit more larger scale than just topping the NCIB. What have you considered that or any other comments on that strategy?

So we -- look, we talk about share repurchases regularly, and we've obviously been very active, bought back over 800,000 shares since November since the market correction began $130 million, $140 million or so total repurchases. All that entire time, we've been able to leverage the NCIB. Our current NCIB, which doesn't expire at all this December allowed us to repurchase during the period of that NCIB about 1.1 million, 1.2 million shares. And we're only about 400 and some thousand through that NCIB in which case, -- we've got plenty of room to still use that as the primary tool. But more importantly, right now, with the strong organic growth, that is our primary capital allocation place to invest. So that means that our buybacks are going to be managed and constrained to a certain level that allows us to fund all that organic growth, keep the leverage at a level that we're comfortable with. And we think our stakeholders are comfortable with. And so therefore, it's really just that excess capacity of capital that then gets allocated to buybacks. So we'll continue to be active, but we'll just have to feather and manage the volume of buybacks so we make sure we don't take away from this great organic growth, which generates the highest return.

Okay great. And my last question is just on the experience of the Alberta portfolio and its applicability or reasonability for today's portfolio. So if we're looking at delinquency rates and loss rates in Alberta, back in '15, they were running at 14% loss rates peaking up to 16.5% loss rate. So you're right, not a huge increase, but it's a higher starting point than where we are today. So my question is really like, can we look at Alberta and that type of borrower and gain comfort with the overall portfolio as it sits today, where loss rates are starting at 9% that all?

Yes I think you absolutely can and for a couple of reasons. One, the segment of borrowers in our portfolio today is still a non-prime consumer. And if you break nonprime into near prime and subprime, the lion's share is still subprime. And so when you think about 14 to 9, that's not a function of a dramatic shift in the customer segment that we worked with. We do have more near prime customers and the average credit scores have improved a little bit. But much more of the change in the losses has been over that period of time, we've developed far more sophisticated credit decisioning and science and models in the last 7 years since that it's been significant. The mix of the product at that time, we had just the unsecured loan. Now that same borrower that's borrowing an auto loan, a home equity loan, a power sports loan, the same customer with the same propensity to change their probability of default exists. It's just the products that we now have are by nature, starting from a lower overall base in terms of credit risk, particularly because so much of that volume is secured. Last thing I would say is, unlike Alberta, in this case, more in our favor, we've just come off of 2 years of declining total debt levels for the nonprime customer. That was not the case going into the 2015 Alberta oil crash scenario. Debt levels were still rising for those borrowers at the time. So yes, we still believe that, that period of experience for us is highly relevant, and our data would suggest that the portfolio, by and large, is a very similar customer set that should react similarly under stress.

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

Okay. First one on the interest rates last quarter, you guys had commented -- sorry, I dropped off the call earlier. So this is something that's been discussed. Just let me know, I'll go back and see the transcripts. But you said that you're basically hedged for up to 200 basis points of interest rate increases? The market is starting to predict that, that could happen or see interest rates in excess of that. Can you just maybe describe what would happen in that scenario if we do reach if we do get all these interest rate increases that they're forecasting?

It's Hal here, so effectively, kind of going back to our overall strategy around borrowing. So as it stands today, roughly 95% of our debt stock is fixed rate. So that would be our notes that we have in place, roughly the CAD 1.1 billion. Those are all fixed rates. Every securitization draw that we take while the initial cost of borrowing is in fact going up, as you'd indicated, we actually swap out and hedge those incremental draws. So today, effectively, we're roughly around 4.75% our total cost of borrowing on a weighted average on our drawn debt. And so as we continue to draw on prominently our securitization warehouse to fund the organic growth of the portfolio, notwithstanding that those rates are going to go up. The overall weighted average cost of borrowing over time. should stay relatively flat, at least for the course of the next 9 to 12 months.

And Marcel, that's as Hal pointed out earlier, because that securitization facility today, incremental draws are about 3.3%. And so as we factor in a rate curve where rates are rising, we can see that each incremental draw will still be progressively below the current weighted average cost of drawn balances for quite some time, at least until such time as those rates rise pretty material. And as help said, that's probably well beyond a year from now. And then as to what the rate environment looks like then, it's hard to say.

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

Yes, sure. So yes, look, risk-adjusted margin is a relevant KPI, the KPI that we measure and track and all lenders that do and should. However, our risk-adjusted margin, the delta between our gross yield and our loss rate has been declining by design for more than 5 years and will continue to gradually decline, meaning that the decline in the gross yield will outrun the decline in the loss rate such as the risk-adjusted yield will drop. However, each loan that we write, albeit as progressively at a lower risk-adjusted margin is actually more profitable and each customer that we're acquiring and serving is more profitable. And that's because as that risk-adjusted margin is coming down, you're ultimately writing larger and longer-term loans and the consumers' propensity to stay with us and graduate through other products is increasing. And so think of it as that if you write a larger loan, your effective operating costs for that loan drop. And so your OpEx ratio drops. And that's why, at the same time, our risk-adjusted margin is dropping, we're still seeing over those period of years expanding operating margin from the scale leverage of serving more customers that are staying with us longer and have higher average loan sizes. So -- we do watch risk-adjusted margin, very mindful of the compression in that ratio. But the strategy that we've built and have been executing for the last 5 years and going forward is that, that risk-adjusted margin will slowly continue to compress. But we will acquire more customers and ultimately stay with us longer because of our product strategy.

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

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

Yes so you're right. At the time that COVID hit, we said it was the majority, so it was more than half versus today, it's approximately half. The difference is not a function of demand for the product or retention of the product. That's simply the effect of the merge of the portfolio with the LendCare acquisition. The LendCare portfolio, which is also today where we put automotive financing and all the point-of-sale financing, that category point-of-sale financing and particularly those secured loans tend to have a lower average propensity to purchase that product, especially because they're secured by a hard asset and so therefore, our blended now new weighted average is around half of the portfolio. But the good news is that the protection exists and over-indexes significantly in the product categories like unsecured loans, where it's much, much higher than that, and that's where you want the most protection, whereas in the secured product, you have the asset, the consumer can always surrender and create value to cover any loss. So that's simply the mix shift effect of the acquisition and the fact that, that coverage is sitting in the hands of the right customers on the rate products.

Okay that makes sense. And maybe just kind of a macro question. We've seen some reviews in the U.S. about point-of-sale concerns about that it is ramping up people's debt. Has there been anything in Canada that gives you concern about reviews of point of sale, that are being predatory, such or like that?

No, I think a couple of comments there. One, I think the point-of-sale buy now pay later concerns that exist in the U.S. are largely related to the small dollar kind of paying for by a pair of genes for $80 and make it in $20 payments type products. Those are a bit far more prolific in the U.S. market than they are here. PayBright in the firm do offer that kind of product here, but much less volume than it has been in the U.S. Because of that high volume in the U.S. of those small ticket buy now pay later financings that don't always report to the credit file, that's where the concern has been from in that market. We have not seen that type of proliferation of product here in Canada. PayBright firm's focus has generally been a little bit more on more traditional retail products and retail financing. And certainly, for us, that's not a category we're in. We're not doing very small dollar retail financing like that. We're doing much more traditional larger ticket installment lending, full credit evaluations, full affordability valuations, full credit assessment, et cetera, et cetera. So aware of the kind of reference point you're making, but not something we think is relevant in Canada or to us specifically.

There are no further questions at this time. I'll turn the call over to the speakers.

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

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