Good day, ladies and gentlemen, and Welcome to the goeasy Ltd. Fourth Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. And I would now like to turn the conference over to David Yeilding. Mr. Yeilding, you may begin.
Thank you, operator, and good morning, everyone. Thank you for joining us to discuss goeasy's results for the fourth quarter ending December 31st. 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 CEO, will talk about the highlights of the fourth quarter, a review of financial results and outlook before we open the line for questions from investors. David Ingram, the company's Executive Chairman, and Jason Appel, the company's Chief Risk Officer, are also on the call. Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website. All shareholders, analysts, and portfolio managers are welcome to ask questions over the phone after management is finished.
The operator will poll for questions and provide instructions at the appropriate time. Business media are welcome to listen to the call and use management comments and responses to questions in coverage. However, we would ask that you 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 safe harbor statement, but I will direct you to the caution regarding forward-looking statements included in our MD&A. Now, I'll turn the call over to Jason Mullins.
Good morning, everyone. Thanks for joining today's call. It was another strong quarter, rounding out what was truly a banner year for the company. I'll first review the results of the quarter before providing a brief summary of the full year, updates on a few select initiatives, and then the outlook for 2019 and beyond. For the quarter, we saw a healthy improvement to our aided brand awareness, which we are pleased to report has reached an all-time high of 84%. Our strategy is to consistently invest 4% of our revenue into fully integrated media campaigns, which leverage TV, digital marketing, social media, and radio. These advertising vehicles drive traffic to our retail and digital platforms, where we then guide 90% of originations to a local branch, where we can build and nurture the customer relationships.
This strategy has helped propel us to the number one recognized brand in Canada for non-prime lending. In the quarter, loan application volume was up 29% over 2017, aided by continued improvements in the performance of our new digital loan application platform, which has produced steady increases to our online conversion. When combined with the increase in average loan size, we produced a record CAD 265 million in loan originations, with 62% of the credit advanced in the quarter being funded to new customers, up from 59% in the fourth quarter of the prior year. All combined, the loan portfolio grew CAD 84 million in the quarter, with the loan book finishing at CAD 834 million, up 58% from 2017. Total company revenue was CAD 138 million in the quarter, up a record 29%.
The total yield on the consumer loan portfolio in the quarter was 52.7%, down from 58.4% in Q4 2017. The gradual decline in the yield is part of our long-term strategy to increase our use of risk-based pricing and expand our product suite, which increases the average loan size and extends the life of our customer relationships. This approach provides consumers with the opportunity to progressively access larger loans and lower interest rates on their journey back to prime credit, while also producing greater long-term profitability for the company. Credit performance remained stable in the quarter and produced healthy risk-adjusted margins. The net charge-off rate was in line with our previously communicated expectations and at the midpoint of our guided range at 13.1%, up thirty basis points from 12.8% in the prior year.
The overall delinquency as of the final week of the quarter closed at 5.3%, broadly flat against the 5.4% at the end of 2017. We believe we are striking an optimal balance between growth and disciplined credit risk management. We also continue to make solid progress on improving the performance in Quebec. In the fourth quarter, we implemented several modifications to our credit model, leading to the implementation of a customized credit and underwriting strategy specific to that province. We have already seen a gradual decline to the loss rate, and we are now generating profits in Quebec. With another round of credit model refinements coming in the next several weeks, we are confident we can begin to gradually scale up the growth beginning in the second quarter, while we see continued improvement in the credit performance.
We still view Quebec as a great market opportunity for future growth. In the quarter, our allowance for future credit losses increased by CAD 7.7 million. The loan growth in the portfolio resulted in an increase of CAD 8.2 million, which was slightly offset by a CAD 500,000 reduction related to a six basis points decline in the provision rate. Under the IFRS 9 accounting standard, the provision rate for future losses, much like the in-period net charge-off rate, is susceptible to some volatility from quarter to quarter, but is most influenced by the net change in the consumer loan portfolio. The revenue growth, healthy yields, and stable credit performance led to continued expansion of the operating margin. The easyfinancial operating margin of 40% in the fourth quarter was at the high end of our guided range, up from 39% in 2017.
Furthermore, the total company operating margin expanded to a record 25.4%, demonstrating the health of the business and the benefits of scale. We've also seen improved performance from our easyhome business, with an increase in both revenue and operating income. The benefits of adding consumer lending to easyhome stores has more than offset the modest declines experienced in the core leasing portfolio. Easyhome continues to remain a strong and stable generator of cash flow. Net income for the quarter was CAD 15.9 million, up 40% from adjusted CAD 11.4 million in 2017, resulting in diluted earnings per share of CAD 1.02, up CAD 0.29 from an adjusted CAD 0.79 in 2017.
The 2017 results are adjusted to remove the impact of a one-time CAD 8.2 million before-tax refinancing charge that occurred in the fourth quarter of 2017. Furthermore, in 2018, the company adopted IFRS 9, which served to increase the size of the provision for future credit losses. The company estimates that adjusted net income and adjusted diluted earnings per share for the fourth quarter of 2017 would have been CAD 9 million and CAD 0.64, respectively, if the allowance for credit losses was calculated on the same IFRS 9 basis as the current quarter. On that basis, adjusted net income for the fourth quarter of 2018 increased 76% and adjusted diluted earnings per share increased 59%.
We were also pleased to report return on equity of 23% for the quarter, up from an adjusted 20% in 2017 and well above our targeted level. Lastly, in November, we were honored to be named one of Canada's most admired corporate cultures for 2018. With hundreds of nominees each year, the award is presented to a select group of 40 organizations that have created an exemplary culture that clearly drives performance. This award is a true testament to the spirit and passion of our people. Moving to the financial results for the full year, we are pleased to report that we achieved all 7 of the revised commercial targets that we provided last June. Loan originations for 2018 reached CAD 923 million, up 59% from 2017.
The result of strong sales volume drove net loan book growth of CAD 307 million, nearly double the CAD 156 million of growth in the prior year, resulting in an ending portfolio at CAD 834 million, up 58%. Strong loan growth helped produce record revenues for the company of CAD 506 million, an increase of 26%. The net charge-off rate finished the year at 12.7%, down from 13.6% in 2017. As highlighted in my earlier comments, we are also experiencing the benefits of scale. The average loan book per branch increased from CAD 2 million in 2017 to CAD 2.9 million at the end of 2018. Operating income was up 37%, while the operating margin expanded to a record 23.7%.
Net income for the full year was CAD 53 million, up 26% from an adjusted CAD 42 million in two thousand and seventeen, which resulted in diluted earnings per share of CAD 3.56, up 20% from an adjusted CAD 2.97 in two thousand and seventeen. As also mentioned earlier, the 2017 results are adjusted to reflect the one-time before-tax charge associated with the refinancing. If we then further adjusted for the effects of adopting IFRS 9 in 2018, the company estimates net income and diluted earnings per share for the full year would have been CAD 35 million and CAD 2.46 in 2017, respectively. On this basis, net income for the full year of 2018 increased 53%, and diluted earnings per share increased 45%.
Lastly, we were pleased to report record return on equity of 21.8%, up from 19.8% in 2017. Cash flow from operations before investing in the net issuance of consumer loans was a positive CAD 194 million in the year, demonstrating the strong cash generation of a portfolio business. Based on the 2018 earnings and the confidence in our continued growth and access to capital going forward, the board of directors have approved an increase to the annual dividend from CAD 0.90 per share to CAD 1.24 per share, an increase of 38%. 2018 marks the fifth consecutive year of an increase to the dividend to shareholders. Turning to the balance sheet, on Tuesday of this week, we completed an amendment to our existing senior secured revolving credit facility.
We've extended the maturity date to February 2022 from the original October 2020, and increased the principal amount available from 174 million to 189 million. Most notable, the interest rate was also reduced by 125 basis points from the prior BA plus 450 basis points to BA plus 325 basis points, and by 150 basis points from the prior prime plus 325 basis points to prime plus 200 basis points. Based on the current BA rate of approximately 2% and the prime rate of 3.95%, the interest rate on the principal amount drawn would be 5.25% or 5.95%, depending on the pricing formula selected by the company.
Based on the cash on hand at the end of the year and the borrowing capacity under the amended credit facility, we had approximately CAD 290 million in funding capacity, which will allow us to achieve our targets for growth through the third quarter of 2020. As we have not felt the share price in recent months adequately reflected the full value of our business, we have also continued to exercise share repurchases under our normal course issuer bid. Since establishing the NCIB in November, we have now purchased back our full allowance of 555,000 shares at a weighted average purchase price of CAD 38.35. On the regulatory front, we continue to monitor the status of the Private Member's Bill S-237 , which remains idle and awaiting third reading in the Senate.
We continue to believe the bill has a very low probability of success and have not seen any evidence of government or political party support. With only 12 weeks until Parliament breaks for the summer and heads into the election process, we believe there will be more emphasis on other higher priority matters. At the provincial level, on January first, Alberta's high-cost credit regulations went into effect, and the company was well prepared and in full compliance. As expected, there has not been any impact to our business in that province. Turning lastly to our outlook for the future, in our release yesterday evening and in keeping with past practice, we have updated our three-year commercial targets.
While two thousand and nineteen and two thousand and twenty remain unchanged, we have now provided an outlook for two thousand and twenty-one, in which we expect the loan portfolio to finish between CAD 1.5 billion and CAD 1.7 billion. In two thousand and nineteen, we will work toward our goal of CAD 1.1-1.2 billion by year-end. We expect growth this year to build gradually throughout the year, resembling a similar cadence seen in years prior to last, where the effect of new initiatives drove more growth earlier in the year. We will also add 10-20 more branches in the year, staggered evenly throughout the quarters. We also continue to experience strong growth in new customer origination and increasing volume and conversion rates from the online channel, thanks to an improved digital experience.
While they produce slightly higher loan losses, new customers and loans sourced through online are highly profitable and will ultimately fuel the growth for the future. As such, we expect the net charge-off rate to be in the upper end of our targeted range for the first half of 2019, then gradually decline toward the midpoint throughout the back half of the year, eventually resulting in a year-over-year improvement by the fourth quarter. We expect that the effects of our recent credit model enhancements and further optimization of risk-based pricing will continue to have a positive impact to the broader portfolio. Overall, we believe that our strategy produces the optimal mix between growth and prudent credit risk management, which in turn maximizes the long-term profitability of the business.
Throughout the year, we will continue to optimize our business in Quebec and scale up our secured loan product while focusing on channel expansion and enhancing the customer experience through three key areas. First, we will focus on reducing friction in the borrowing experience by introducing more automation to the underwriting process and offering enhanced choices for loan funding to the consumer. Ultimately, our goal is to reduce the time to fund the loan and make the process more convenient for customers so that we can serve them quickly. Secondly, we are making further investments in our indirect lending and point-of-sale finance channel. With nine billion of non-prime loan originations produced at the point of sale each year, we will look to onboard new merchant partnerships and make our non-prime point-of-sale product available through e-commerce.
Lastly, we will be making transformative enhancements to our credit and analytics capabilities, including testing new data sources and machine learning algorithms that have the power to strengthen our credit and collection capabilities. That all said, our corporate strategy remains unchanged: to become the largest and best performing non-prime lender in Canada while providing everyday Canadians a path to a better tomorrow today. We believe firmly in our mission of helping customers graduate to prime credit and remain confident in our ability to extend our track record and history of execution. We will continue to focus on generating industry-leading loan growth, building a world-class corporate culture, and strengthening our balance sheet so we can access the lowest cost of funding.
The enhancements to our credit facility demonstrates the confidence and support of the banks within our lending syndicate and provides even greater certainty of future liquidity to fund our ambitious growth plans. I want to thank, by closing, the entire goeasy team for another outstanding year in 2018, and the effort they put in every day to take great care of our customers. The meaningful relationships they build at the front line play a pivotal role in our success, and they truly deserve the credit. With all those comments complete, we will now open the call for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star, then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Gary Ho from Desjardins Capital Markets. Your line is now open.
Thanks. Good morning. I want to start off with a discussion on credit here. So net charge-offs were 13.1% this quarter. Maybe this is a question for Jason Appel. Can you perhaps kind of provide some color on kind of losses or delinquencies by vintage? Any trends worth noting there, especially the more recent vintages, please?
Good morning, Gary. I think the comment that Jason Mullins had made during the call outline sort of would be in keeping with my statements. And that would be the only change we've seen in some of the more recent vintages is as a result of the slight evolution in the mix that we referred to on the call. And that's driven by two factors. One would be the ratio of new customers that we originate in terms of the net advances, which obviously in the quarter went up marginally from 59 to 62.5. And then the second piece would be the shift in mix resulting from a slightly larger proportion of our customers coming in through the online channels. It's not that the vintages of those particular channels is performing materially differently.
It's simply that the proportions of those channels is different over time, which is having some upward, modest upward pressure on the loss performance that you saw in the quarter, which we obviously believe will continue to move down over the course of the back half of the year. So I wouldn't say that we've seen material shifts in the vintage performance. It's really largely the product of a shifting mix in the business.
Okay, that's helpful. Maybe staying on a similar theme then, we haven't seen any major credit hiccups over the past number of years. When I look at your guidance for net charge-offs, you're expecting modest decline. I know, you know, part of that is due to mix, but, you know, I guess my question is, you know, how confident are you that net charge-offs will fall within that range, given where we are in the cycle? Just trying to stress test that net charge-offs guidance of 11%-13%, looking out.
Yeah, Gary, it's Jason Mullins. As we said in the past quarters, we're very confident in our ability to manage credit risk. Over the last number of years, we've continued to find there are times when we need to be able to spot trends in the portfolio and make adjustments, and those adjustments have played out as we expected and as we predicted. As you know, the guidance for the range of charge-offs for this year steps down from prior years as a result of the evolution of the portfolio, and we still feel confident in that range. We will operate probably in the higher end of that range in the first half of the year, and then eventually decline throughout the year to becoming better year-on-year by the end of the year.
So we still feel very good that the changes we've made, and will continue to make, will keep us in line with that guidance.
Okay, that's great. And then, my last question, kind of more on the operating expenses, excluding bad debts, especially on the easyfinancial side. I think it was around roughly 26 million this quarter and represents, you know, 25% of easyfinancial's revenue. How should I think about this line item looking out to 2019, though? Is the 25% of revenue a good goalpost?
... there looking out any major operating expense related costs expected in this year?
Yeah, Gary, I think if you're going to model that in, it's just not a bad way of looking at it. We also do provide the easyfinancial operating margin as a bit of a guardrail for that as well. But it's not a bad way of looking at it. There obviously are some fixed costs like rent and a few other things, but some of the labor and other pieces are variable. So that's not a bad way of looking at it.
Yeah, Gary, with the expansion of the easyfinancial operating margin, the lion's share of that comes from just getting leverage within the business. So with easyfinancial, you've got mostly fixed costs related to labor and rent and call center staff. There's a little bit of variable expense associated with adding more staff support, but by and large, we're getting leverage from the margin of the business that's expanding the margin. So your OpEx as a rate to revenue within easyfinancial would decline.
Okay, that's helpful. That's it for me. Thank you.
Our next question comes from Jeff Fenwick with Cormark Securities. Your line is now open.
Hi, good morning. Just one follow-up there on the credit front there. When I look at your 2021 guidance and the net charge-offs being sustained in that 11%-13% range, I thought it might have gone a bit lower there, just as we're seeing the revenue yield also move lower as you pick up some of these sort of better risk profile customers. Why aren't we seeing a bit more variance on that line as you go forward?
That's a good question, Jeff. So a couple of things. One, we would still expect to see a gradual decline in the loss rate on a full year basis in that other year. Effectively, the two-point range that we've provided, we still feel adequately would capture both the preceding and following year, albeit the year will still gradually decline. By that point in time, the rate of decline starts to slow as the portfolio matures and we get closer to that optimization point, where we're maximizing the relationship between velocity and credit risk. So although we've kept the rate the same, we would still expect to see within that two-point range, gradual improvement.
Of course, being that it's also three years out, as we get a little closer and we see the evolution of the portfolio, if we see that it's maturing more quickly, then we'll adjust those targets and, and guide the range down accordingly.
Okay, that's helpful. Thanks. And then, maybe just we could switch the topic here to growth. A little more color in your disclosure this quarter around your point-of-sale solution and in your multi-channel or omni-channel model there, just sort of speaking to how there's a growing level of, you know, contribution from these third-party programs that you have. So can you give us a bit of color around how you've been rolling out that POS solution there? You know, what's the status in terms of signing up merchants to work with, and how should we be expecting that business to evolve this year?
Sure, so a couple of things. The first I would say is that in terms of what we have assumed, the contribution from that channel to be in the guided targets we've provided, we've been pretty conservative, so we are not banking on and depending on a substantial amount of contribution from that channel, and believe that with our current product set, we can still achieve the targets we've provided. Having said that, if that particular channel does go well and does perform well, that certainly would provide some upside to the plan we've provided.
In terms of the evolution, as everyone knows from our past discussions, our product, which is the ability to take a customer that's declined at the point of sale and offer them alternative non-prime financing, is something we've had in the market for a number of years, and we continue to have some really important key relationships, like with the Leon's group of companies. What we had found in the past was that there was some friction in the process because our system was not integrated with a prime offering, so we did undertake initiating the integration with a prime lender in the fourth quarter that is now in pilot in a select number of locations and some small retailers.
That means that if a retailer we approach doesn't have a prime financing offering, we can provide a full solution of the entire credit spectrum to that provider. And then in some cases where they do have an existing prime lender, we will simply offer the ability to take those turndowns and offer them an easyfinancial product. So I think in terms of how we expect it to grow, I think it'll be a slow and steady build. The sales cycle to get merchants to convert their product into an alternate financing provider does take a little bit of time. But so although it's early days, we still feel very, very good that that channel has a lot of opportunity for growth.
I guess when I think about this space, I've certainly seen a number of, you know, relatively smaller firms move in and try to make headway with a similar solution here. So what's your view in terms of the competitiveness of your offering versus what they've got today? Is it just that they also currently are unable to offer that integrated solution with a prime lender, and that's where you stand out?
Yeah, so the way to think about the space is there's really just one company that fully dominates the prime side of the transaction, which is Desjardins. They really own the market from a point-of-sale financing for prime consumers. And then what you've seen is a whole variety of other small companies, as you pointed out, that have emerged in point-of-sale finance, all of which whom are essentially offering a prime or very near prime offering that is attempting to compete with the Desjardins product. They just tend to focus more on the small and mid-sized retailers because they know they don't have the capacity to disrupt a major bank from the large partnerships. So those players don't really conflict with us because of the fact that we're offering and focused solely on non-prime.
What it means is that there might be an opportunity to partner with some of those companies, so that when they are unable to qualify a consumer who is non-prime, that those loans can be passed on to us for the non-prime offering. So from a non-prime point of view and point-of-sale finance... we really see ourselves as the only viable option in the market.
Okay. And then, I guess also on the growth front here, you alluded to the pace of activity in Quebec this year. So just to clarify here, you're putting through another round of model, sort of underwriting model, I guess, enhancements, and it's through the back half of the year that we'll start to see or you would anticipate that Quebec starts to become a larger proportion of the total in terms of the loan portfolio?
Yeah, that's right, so our next round of refinements, which include further enhancements to the model that's now customized for Quebec, will go in the next few weeks, so it'll be the second quarter that you'll start to see the growth in Quebec and the relative contribution to the total portfolio begin to climb. We still will do it carefully and gradually and bide our time to make sure everything's working well, but we definitely feel confident from the work we've done on the credit risk side that we can start to grow in the province again. I mentioned in the comments that the cadence of growth throughout the year for the total loan growth we expect will look more like prior years.
In 2018, we had all of the new initiatives we had just launched in 2017 conspire to produce more heavy growth in the first part of the year than we have traditionally seen. I think this year will look more like the traditional years of the past, where the growth builds quarter to quarter throughout the year and of course, tying that in, that's also relative to the fact Quebec will start to scale more in the back half as well.
Okay, thanks for that. I'll queue.
Our next question comes from Nik Priebe from BMO Capital Markets. Your line is now open.
Oh, hi. Good morning, everyone. Thought I'd stay on the topic of the Quebec expansion, and I was wondering if you could just expand a little bit on the specific adjustments that were made in the first iteration of changes to the Quebec credit model, as well as the intended second round of model enhancements. Like, is it just an exercise of tightening up lending standards to capture a cohort of better quality borrowers, or are there more idiosyncratic behavioral factors that need to be considered and integrated into the model as well?
Yeah, I think there's it's Jason Appel here, Nick. There's really two pieces. One is underwriting in terms of how we look at those loans after they're credit approved and assigned a given qualified borrowing amount. We continue to tweak with that underwriting regime in terms of the information we look to validate what a customer gives us. And then the other bigger portion would obviously be the credit model itself. And it's really a function of two things to the. And the way to think about it is this: as we continue to get more outcomes from the business that we wrote in the early part of 2018 and 2017, we're able to continue to update and engineer our models to be more predictive.
Put simply, the more outcomes you have, the more able you are to predict the likelihood of an event going off, whether that event is a customer paying you or, in some cases, not paying you, so what we've done over the course of December is continue to tweak the model weights that predict those certain types of outcomes. We did that back in Q4. We've made continuous refinements, and we'll continue to make continuous refinements on that model in Q1, and as we said on the Q3 conference call, this is a continued work in progress of refinement. One tends to get very adept at predicting the future, the more information one has as one builds experience.
As we continue to grow activity in the province, we anticipate our ability to inform our prediction power on our models will continue to increase, and by that, we should be able to continue to open up the funnel to allow more customers in the door. But it really is a combination of incorporating more outcomes of the business that you've written, while thinking about the other types of information and attributes you can layer on top of that to just get your underwriting in step. So it's really a multi-phase effort, if you will.
Okay. Yeah, that's good color. Thanks. So next question, just on the credit facility. I'm just wondering, with the more favorable amendments you made there, and the lower cost of borrowing, how do you think about the other components in the same stratum of the capital structure? What I mean is, do you see an opportunity to refinance existing debt at more favorable rates as those instruments approach maturity, or do you think that any spread advantage that you may have obtained would be more or less offset by the rising rate environment?
Yeah, so I think one of the benefits of the new facility is we've got the rate down appreciably. So the BA rates that we're able to tap into now, sort of in the 5.2%-5.3% range. Ultimately, we are able to refinance the notes over the next few years, but I think this gives us a lot more flexibility and latitude of looking at different structures. We've always discussed and contemplated securitization as a potential opportunity in the future. But we're bringing the rate down, the revolver down to a rate that would approximate what securitization might look like, coupled with the opportunity to exercise the accordion. We think that's a nice option to continue to grow this business in the future.
The opportunity to issue more notes continues in the future. The notes are currently trading in around 103, which would take out an effective interest rate of around, call it 6.9%-7%. So we think there's a variety of options. Fortunately, given the cash on hand and the borrowing capacity and the revolver, we have a luxury of time and don't need to really access capital markets until, you know, call it Q3 of 2020.
Oh, okay. Okay, thanks very much. And then, maybe just one last one for me. So I was wondering if you could expand a little bit just on your philosophy on return of capital. Like, you know, on the dividend, is there a certain range for the payout ratio that you would more or less like to anchor yourself to over time? And, now that you've completed a substantial portion of buybacks to that NCIB, do you see that activity trailing off through the balance of the year, just, you know, provided that you don't see any further market dislocation?
Nik, it's David Ingram. Just in reference to the dividend, if you go back over the last five years, which I think is the period in which we've elevated the yield, year-over-year.
We have traditionally, as a board, met in February once we have the benefit of the full year results, and we can look at the budget for the ensuing year, and we've generally used as a proxy 30% of trailing EPS as the governor to what the dividend will be. The only change to that this year was, as we discussed, the EPS for 2018 at CAD 3.56. When we backed out the IFRS changes, which was the non-cash increased provisioning, the true year-over-year comparison for us was CAD 4.06 compared to 2017, so when we applied 30% to the CAD 4.06, we got to roughly CAD 0.31 a quarter, which was what got us to CAD 1.24.
I can't tell you what we will decide, obviously, next February, but I can tell you that the tone of the conversation is that the banking and the funding is really being strengthened over the last twelve months. The outlook for the business has further improved, and the consistency of using 30% of trailing earnings has served us well for five years. The only debate was should we use it against 356 or 406, and on this occasion, we used 406. In terms of the buyback, I think we've already disclosed that we've fully utilized the 5% of the outstanding shares, so that was what we were approved to do. What we are now doing is looking to see if we will add an extension to the 5%.
The board has conditionally given us approval to do that. So over the next few days, we'll go through the process and the administration of applying to the TSX. And based on whatever the market activity on the price is, we'll make our judgment, our decision as to when and if we use the extra, assuming that the TSX approves the extra that we put in place in the next week or so.
Okay, that's all very helpful. Thank you very much.
Thank you.
Our next question comes from Richard Tse from National Bank Financial . Your line is now open.
Hi. Yes. Just on the renegotiation of the debt, was there any sort of soft commentary between yourselves and creditors about buyback activity? Like, did they give you sort of any general restrictions outside of just normal covenants?
Hey, Richard, it's Dave. There are certain limits under the credit agreement with the syndicated banks in terms of our total volume of share buybacks. But those buybacks are ultimately net of the shares that we issue. So, but that is how it's outlined in the credit agreement.
Okay. And then on loan growth, I guess you guys came in a little bit lower than your guidance last quarter about hitting the midpoint. Is it safe to say this is driven primarily by just pulling back from Quebec and online channels, or was there another driver?
No, that's, that's more or less right. We expected we would have a quarter that would resemble a record level. The record, I believe, was net growth of CAD 86 million in the second quarter. We came in at CAD 84 million, so a few million light of the level we anticipated and suggested. But yes, if you think about what would be the drivers behind that, we continued to keep the growth rate in Quebec moderated while we worked on these credit enhancements and wanted to stay prudent there.
And then also, we have also made a number of credit enhancements, as we mentioned last quarter, which ultimately do have a small impact on growth, as we try to improve the credit quality and performance of the book and offset some of the trends we've seen in the mix of online. So those things definitely contribute, but otherwise, we feel the growth was pretty close to what we expected and felt pretty good about the level of growth.
Yeah, absolutely. And I guess last quarter you mentioned that the charge-off rate for Quebec was around 20%. Are you still getting that sort of experience now, or have things sort of leveled off?
What we can say is that it has definitely come down below that level now, and the trend is that it'll continue to move in a favorable direction going forward, which is where we get the confidence to start to scale back up again in the second quarter.
Does your—like, when you give your guidance about, you know, the first half of 2019 being in the upper end of your charge-off range for guidance, is that sort of—does that contemplate a specific degree of rollout within Quebec? Because naturally, the, you know, the more loans you originate there, just by nature of the market, the higher your charge-off rate will be. What sort of expectations, I guess what I'm asking is, what sort of expectations for Quebec loan growth have you baked in, when you gave us that guidance for being at the upper end of your charge-off rate for the first half?
Yep, great question. So yes, that, that is an influencing factor, and that has been built into those assumptions in that guide. So, we would expect that the first quarter would be a small bit of growth in Quebec, a little bit more robust in the second quarter, and then pick up more healthy in the back half. And so, naturally, it's gonna take a bit more time for Quebec loss rates to come down enough that they're at the portfolio average, and therefore, to your point, as you add business, it does influence the overall portfolio a little bit. Although, keep in mind, it is still fairly small today, at maybe 5% of the portfolio, so it probably impacts the total loss rate, maybe 10, 20 basis points, but not a substantial amount.
And sorry, you mentioned that you're expecting Quebec's charge-off rate to migrate towards the general book rate. My understanding of the Quebec market though is from the credit culture and stuff; it's generally a little bit inferior to the rest of Canada. So isn't it safe to say that it'll always be a bit more elevated?
Not necessarily. We think that in the long run, we can eventually optimize the credit so that it'll perform consistent with the portfolio average. It may mean that the credit floor, the tolerance there, has to be a little bit tougher to account for the point that you've raised. There absolutely are some structural differences in Quebec and cultural differences that generally mean that that province has slightly higher losses. They have a higher than Canadian average of bankruptcy rates, for example. So, our intent is that over time, as we refine the Quebec model, we would keep optimizing it such that even if we end up with a slightly higher credit tolerance, we can get the total business to be a very healthy level of growth and be in and around the portfolio average.
Fair enough. Thanks, guys.
Our next question comes from Brenna Phelan from Raymond James. Your line is now open.
Hi, good morning. So I'm gonna stick with credit, but looking at the balance sheet side. So the allowance for credit losses that IFRS 9 is prescribing to sit on your balance sheet at 9.6% was consistent with the prior quarter and actually up a little bit year-on-year. Can you talk about the moving parts of what's driving that, be it recent charge-offs versus the outlook for the important forward-looking indicators, and how you expect that to trend over the next year?
Sure, Brenna. It's Jason Mullins. I'll start, and then Jason Appel may have some added comment. So, if you think about the provision rate, it's really a factor of a combination of the credit risk mix of the portfolio between the low, medium, and high-risk segments that we disclose, the mix of loans by the staging group, stage one, two, and three, the historical loss rates of the portfolio within each of those segments, and then the forward-looking indicators layered on top. So the way to think about the evolution in the quarter, and you can see this in the results on the financials, we got a slight improvement in the mix of business by credit risk segment. So an increase in the proportion of the portfolio in the low and the normal credit risk segments.
That was then slightly offset by a mix in the staging from a slight increase in the two and three, and then offset by the slight improvement in the FLI, that altogether gave us that six basis point reduction that we saw in the quarter. So as we've said in the past, because there are multiple mechanics at play, we would still expect that that will be volatile and move up and down quarter to quarter, but that over the long haul, year to year, the provision rate would stay quite stable and/or we would expect to see gradual declines in the future as well.
I think the other thing to note, just on the provision I would add, is that if you think about it over the quarter or over the year, the actual impact of the provision rate change itself has been very, very minor. The majority of the change in the allowance for credit losses is related to the growth of the portfolio. So for example, if you look at the full year for two thousand and eighteen, the net change in the allowance for credit losses was CAD 31 million. Just under 30 million of that came from the change in the growth of the portfolio, and only about 1.5 million came from the cumulative effect of the change in the rate over the year. So the lion's share of the provision change is really ultimately down to the growth and the change in our portfolio.
Okay, that's helpful. And then looking at the point-of-sale financing initiatives, how do we think of the credit profile there? Are they more similar to online sourced with slightly higher charge-offs but lower customer acquisition costs?
No. In fact, our experience so far has been that the point-of-sale financing channel generally produces better than portfolio average loss rates. You generally see that the credit quality and the mix of the customers coming through the point-of-sale finance are slightly better than the consumers that are looking to borrow straight outright cash. So if you think about it, these are customers who are actively in the market, looking to make a specific purchase for a good or service. They generally have very specific intent and have more of a wants-based driven need, and so they are generally slightly better quality. So, so far, we've seen the portfolio, the losses in that channel perform better than the portfolio. I think we would expect that to continue to do the same going forward.
Okay, and in your MD&A, you referenced three specific segments that you're looking to do point of sale, automotive, healthcare, and... Oh, no, I'm forgetting the third one. Can you tell us where you're at in each of the three of those, and what proportionate contribution you expect each to contribute?
Sure. Yeah. So the verticals that we've highlighted were kind of healthcare, which includes consumer healthcare and veterinary, automotive, which is primarily things like automotive repairs, and parts, and then also traditional retail, which is gonna be furniture, electronics, computing, that kind of stuff. We're exploring all three channels. The rate of growth within each one highly depends on when we find merchants that are interested in the financing product and are available to deploy it within their network. So I couldn't provide any suggestion as to how the growth between those different verticals will play out. I don't think it should matter too much because generally speaking, the, from what we've seen, the quality of the business, the type of business in each of them is gonna be roughly the same.
Some will have a slightly higher average ticket than others, but by and large, roughly the same. We are talking actively to or have begun to pilot partnerships with companies in both retail and automotive, the automotive space. I don't think we have anything currently on the go in the healthcare space yet, but something we're still exploring.
Great. And last one for me. So we should be thinking of ad spend for next year at roughly 4% of revenues in easyfinancial?
Yes, that's right.
Okay, thank you very much.
As a reminder, ladies and gentlemen, that's star then one to ask a question. And our next question comes from John Sarolis from Spartan Fund Management. Your line is now open.
Yeah. Hi, I had a question. I wanted to get into the whole discussion of the buyback, but I just had a few quick questions before that, that will lead into that. The first question is, in terms of comparables or public competitors in the space, are there any or is there anybody sort of tangentially that's publicly traded that could be considered somewhat competitive?
Not specifically within the Canadian market, but the ones in the US market that we look at and would consider to be broadly within our peer set would be OneMain Financial and Regional Management Corp. Those two in particular have somewhat similar businesses and somewhat similar credit segments, so they're not identical, but as far as at least having something to compare and use as a proxy, those two would be worth looking at.
Do you have the ticker symbols on those two, so it'd be easier to find?
Yeah, OneMain is OMF, and Regional is RM.
RM, yes.
My question is, are the capital structures of these two similar to yours, where, I mean, there's a lot of senior debt, and then there's, I guess, you know, some mid debt, like to the debentures, and then there would be sort of, you know, equity, which is smaller, where, you know, the Tier one debt is obviously overshadows the equity, I believe. Are they similar to you in that sort of business model, say, capital structure, competing on capital structure model, or are they different?
Sure. So I would say Regional is fairly similar. If you looked at our, you know, net debt to cap ratio, versus Regional's, they're kind of comparable. If you were to look at One Main, they are a much larger business, sort of $16 billion loan book range, so they have a much more sophisticated cap structure. Where we have, you know, converts, revolvers, and notes payable, it's a fairly simple, cap structure. They have various series of revolving lines of credit, various securitization structures put in place. So I would say One Main is quite a bit different than us from how they finance their business. They also have a higher leverage ratio. So we're around 66% net debt to cap. They're sort of around 80%.
Do you find that these two are also having, I guess, issues with the valuation of their shares and having to do buybacks, or are they somewhat content with where their share price is? I guess what I mean to say that, are you kind of fetching perhaps not the same premium that they do because they're U.S., or because they or would it be because their capital structure is different in the case of the one and not the other? Or would it be a bit of both, or would it be other factors?
Yeah, I mean, I think I answered part of your question. You know, if you look at the overall movement in our share price, from sort of the peak in September through to the when it hits lower points towards the end of the year, and subsequently rebounded. The movements that we've seen, at least qualitatively, were quite similar to what you would see with those other players. I'd have to defer to and just check in terms of whether they've actually been actively buying back shares over the last few months. I'm not sure about that.
No, I think you'll find that the most similar trait recently was OneMain introduced for the first time a dividend payout, which coincidentally is exactly at the same rate as ours, at 30% of trailing earnings . You do see some similarity. I think from our perspective, we had viewed the intrinsic value of our stock was at CAD 50, which is why we did the equity issue at that price. The industry trades at around 10-11 times future earnings. We've been trading around eight times future earnings. We felt that the arbitrage between a CAD 40 price and below to the CAD 50 price was sufficient to be the best way to give shareholder return to buy back the shares.
So we've used our full facility, but as I said in the earlier comments, we'll probably trim that up a little bit. But we're very close to where we think is the cap to where we'd be buying shares back up.
Yeah, I mean, because, you know, it is a fairly relatively new business, and it's a great business, and I think sometimes the market's having trouble valuing it. And it seems like these businesses. I've looked at a private business similar to yours as well, and it seems like it's almost a binary function of the amount of capital that you have, whether it's in equity or whether it's in, you know, what I would call Tier one debt. The multiple seems to be binary to that, which is unfortunate. And I'm just wondering, and I'm just coming at you sort of from the right side of the brain here.
If you contemplated a structure where you would have less, senior debt, what I would call Tier one debt, and maybe more equity, and if you could move all that into equity, do you think that the dynamics of the business and the share price and the multiple that might be allocated from the market, might be different? And, you know, it seems like you know, you're buying back the shares, hoping that will have an impact, and also raising your dividend might have an impact. But also one of the other callers kind of was alluding to this: What about if, you know, you moved to more of a structure where you were more equity and less senior debt, would that sort of unlock value or perception from the market? I'm just asking that sort of openly.
So I mean I think we always have different views on this in terms of how investors see the opportunity. All I can give you is a few data points that might help you inform the past into the future. I think we've traditionally traded around 11-12 times earnings. If you look at our industry set peer group over the life of the same period of 18 years that I've been doing this, they have tended to trade around 15, 16 times earnings. They obviously took the hit like everyone in the October-November market challenge. Over the life of their trading period, they generally traded at the medium range that the U.S. exchanges trade at. We've traded generally slightly below that historically.
When we think about the future for us, the use of debt has become much more attractive as the price of debt has reduced. When we look at leverage ratios, and we look at rating agencies, we see that provided we stay below 70%, debt to cap, then we're in a pretty good range to give a return on equity of 20, 24, 25%. So all of that combined tells us that the cap structure we have, while it's not completely optimized, it's getting pretty close. The opportunity to trade higher really comes as the size of the business grows and the market cap grows and the velocity of the stock trades at a much higher level. If you think about today, the stock trades about 80,000 shares a day.
That's about double what it was a year ago. If you think about, market caps above a billion dollars, they get entered into many more indices that then create more volume for the trade. So many of those features, when combined, we believe additively, will give us, more volume, which will give us a better multiple, which should give a better shareholder return in total. So that's, that's how we approach it, that's how we think about it. And we think right now for us, being in that 60%-70% debt range is probably about the, the optimal place for us to continue to grow the business with the demand that we have from the customers for that business.
Yeah, right. So I guess, when I look at sort of if I strip everything out and I look at market cap to shareholders' equity, if you can consider that a ratio of sorts, I haven't looked at it in these numbers, but in the last numbers, I believe market cap is 1.5 times shareholders' equity?
It sounds about right. It's not a metric we look at per se, but it doesn't sound like that's not far off.
Yeah, and that's just sort of, you know, me looking at it and saying, well, you know, probably the shareholders are thinking with all this senior debt above our heads, you know, if anything was to happen, they're gonna get first call on it, so our equity maybe is not as worth, you know, that much. So that's where my real question comes into play. Like, if you were to build more equity into the business and have less senior debt, I think you might be able to fetch a much higher multiple in the market.
You'd ultimately end up with a much lower earnings base. You would reduce down the rate of growth because you'd be just using the cash you generate from the equity, and you'd be paying back down debt. That would be one way to arrive there, but it would be a much slower pace of growth. The yield that we generate on the growth is about 50%, so we'd be giving up a lot of opportunity for future profit by slowing down that growth.
Right. No, I can understand that. Okay. And my last question had to do with point of sale. And I know that there's some other competitors coming into your space. There's a lot of private guys as well starting to do this. And I know that there's many of them are financing also, you know, at lofty interest rates. But there's also some other ones, you know, if you take a Flexiti Financial, for instance, I know they're coming in at the point of sale level, and they're introducing a credit card, and, you know, it gives a few months of free interest, and they're basically taking over some of these retailer programs that were out there. I'm just wondering, you know, how does that affect you?
And will that create, you know, a form of margin compression? And I, you know, I know somebody like Flexiti could also have, you know, access to capital because, I mean, they're tied into a publicly listed company in Canada as well, Globalive. Would something like that compress margins? Have you looked at that?
Yeah, so I mentioned a little bit earlier that they would be an example of one of several, generally somewhat smaller, and as you pointed out, private companies in point-of-sale finance, but again, all of them are focused very much on the near-prime and prime market, so where we differ is we really focus on our sweet spot, which is the non-prime customer. Our business would really be the one to cater towards the customers they would generally decline or reject, so it's not uncommon or unreasonable that you would find a company like that in the same merchant partnership as us, where we're simply being presented as an option to the customers that don't qualify, so in point-of-sale in particular, we haven't seen anybody yet that's really aggressively doing non-prime point-of-sale finance like we are.
Most of the companies like Flexiti and some of the others there are pretty focused on prime. So, not really kind of in the same zone as where we are.
Okay, thank you very much. I appreciate all the answers.
No problem.
You have a follow-up question from Brenna Phelan from Raymond James. Your line is now open.
Hi, just on, wanted to ask about credit in Alberta. Anything of note, given some challenges with oil, in either delinquencies or unemployment insurance claims?
Hey, Brenna, it's Jason. On both fronts, we haven't seen anything materialize as of certainly the end of the fourth quarter. Delinquency at that, at the end of the year, and Alberta was actually below the portfolio average, and the claims rates that we have seen in Alberta had not moved materially over the course of the year. So, from what we have seen so far, so far as this year has begun, we haven't seen any material uptick. So, whatever is occurring in the province of Alberta has not found its way into our portfolio, either in terms of front end or in terms of overall performance on the book.
Okay, great. And then actually, just going back to the point of sale products, will those come with associated ancillary fees at similar take-up rates, do you think, to your standard secured or unsecured installment loan?
Generally, the take-up rates of ancillary products, no. You don't see in point-of-sale finance that the added product sales are generally as common. Either there are certain products that aren't even necessarily offered, or the take-up of those that are offered is generally lower. The way we would think about point-of-sale finance is more as an acquisition channel to fuel a lifetime value. So a customer that gets approved for CAD 1,800 of financing in a furniture store and comes in initially with less different sources of revenue, but then once they're brought into our ecosystem, we can then start to offer them other products. We can then offer them the ability to increase their the size of the credit that they borrow, and then they feed into ultimately the lifetime value of the customer.
We wouldn't look at the point-of-sale loans themselves as being directly comparable. There's gonna be some unique differences, but the primary objective is to use that as a source to acquire a customer and be able to put them into the journey and offer them the other products that we have available.
Okay, thank you.
I'm not showing any further questions at this time. I would now like to turn the call back over to Jason Mullins for any further remarks.
Okay, thank you, everyone. Appreciate your attendance on the call, and we look forward to speaking to you when we release our Q1 results and when we have our AGM in May. So thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.