Good day, ladies and gentlemen, and welcome to the third quarter 2018 financial results call. At this time, all participants are on listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero to reach an operator. As a reminder, this call may be recorded. I would now like to turn the call over to David Yeilding. You may begin.
Thank you, operator. Good morning, everyone. Thank you for joining us to discuss goeasy's results for the third quarter ended September 30th. The news release, which was issued yesterday after the close of the market, is available on GlobeNewswire and on the goeasy website. Today, David Ingram, goeasy's CEO, will talk about the highlights of the third quarter and review our financial results. Jason Mullins, the company's president and COO, will then provide a further update on the company's outlook before we open the line for questions from investors. Jason Appel, the company's Chief Risk Officer, is also on the call. Before we begin, I remind you that this conference call is open to all investors and is being webcasted to the company's investor website. All shareholders, analysts, and portfolio managers are welcome to ask questions over the phone after management is finished.
The operator will poll for questions, and will provide instructions at the appropriate time. Business media are welcome to listen to the call and use management's comments in response to questions and 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 statement, but I will direct you to the caution regarding forward-looking statements included in our MD&A. Now I'll turn the call over to David Ingram.
Good morning, everyone, and thank you for your participation on our call today. It was a solid and productive quarter for the company. Revenue grew to a record CAD 130 million in the third quarter, up 26.5% from the prior year, driven by the expansion of easyfinancial. In the quarter, we saw total application volume climb 31% year-over-year. The increase in consumer demand, combined with a 24% increase in the average loan size, resulted in loan originations of CAD 221 million, up 40.5% from the prior year, while loan growth in the quarter was CAD 63 million, up 32% from the third quarter of 2017.
After choosing to invest more of our advertising spend into periods with the strongest consumer demand, specifically the second and fourth quarters, the third quarter was a slightly slower period for the company. In the quarter, we spent only 2.6% of our revenue on the advertising, compared to 4.6% of revenue in Q2 of this year, and 2.8% of revenue in the third quarter of 2017. In the fourth quarter, we have increased advertising spend back to 4% of revenue. We have already begun to see the impact and are confident that we will finish the year near the midpoint of our guided range of CAD 825 million-CAD 875 million for the consumer loan portfolio. We also continue to see positive results from several of our recent growth initiatives.
Firstly, lending within our easyhome stores is having the desired effect. Despite a 3.4% decline in the leasing portfolio and a corresponding decline of CAD 1.6 million in leasing-related revenue, these declines were more than offset by a CAD 1.9 million increase in financial revenue related to consumer lending. We leveraged this revenue growth to drive an increase in both operating income and margins for the easyhome business segment. Second, secured loans to homeowners grew to CAD 40 million in the quarter, which now represents 5.4% of our portfolio. After one full year in market, these loans, which are secured by residential real estate, continue to perform very well. Since inception, we have funded close to 2,000 secured loans and experienced only one charge-off thus far.
Our philosophy is to closely monitor the results of new initiatives before we begin to scale them. We're now comfortable to begin increasing the rates of expansion for this product. Lastly, with respect to the Quebec market, while consumer demand continues to remain very strong in the province, we have not been as satisfied with the credit performance. With net charge-off rates above expectations at an annualized rate of approximately 20%, we decided to moderate the loan growth while we focused on developing new custom credit models, which would be uniquely tailored to the distinct behavior of the Quebec consumer. With the first phase of these model enhancements planned for implementation in the next few weeks, we will resume growth in this market throughout December and into 2019, while keeping a close eye on the performance and refining accordingly.
In the quarter, we also recorded an incremental CAD 3.4 million of bad debt expense due to a 43 basis point increase to the provision for future credit losses. Under the IFRS 9 accounting standard, the provision for future losses, much like the in-period net charge-off rate, is susceptible to some volatility from quarter-to-quarter. In the third quarter, we saw a slight downward shift in the credit mix with certain segments of our portfolio, which we have attributed to a combination of the credit performance in Quebec and the mix of loan origination sourced from online channels, which tend to be slightly lower quality. Over the course of the quarter, we leveraged dynamic risk monitoring tools to identify this trend and have already implemented several enhancements to our credit models, which we expect will correct the trend going forward.
As a reminder, the provision is a non-cash item and does not impact the cash flow of the business. However, we estimate that this incremental expense impacted diluted earnings per share in the quarter by approximately CAD 0.17. Notwithstanding the change in the provision for future credit losses, we continue to see stable performance in the portfolio throughout the quarter. The average weekly delinquency rate in the quarter was consistent at 4.4%, and the net charge-off rate reduced to 12.9% from 13.1% in the third quarter of 2017. These results are at the midpoint of our targeted range for 2018 of between 12% and 14%.
Despite the quarterly fluctuations we may experience in provision for future credit losses or the actual in-period net charge-off rate, we continue to remain confident in our ability to manage risk and how the credit will perform on a year-to-year basis. The revenue growth was accompanied by strong operating leverage, which produced record profit for the company. Operating income was CAD 33 million in the third quarter, up 37.5%, and operating margins expanded to 25.3%, up from 23.3% in 2017. Net income in the quarter was CAD 14.3 million, up 23.6%, which resulted in diluted earnings per share of CAD 0.97, up almost 20% from the CAD 0.81 recorded in the third quarter of 2017.
As you know, the company adopted IFRS 9 prospectively in 2018 and did not restate its 2017 financial results. After adjusting for the estimated effect of IFRS 9, which would have elevated the loan loss provision and bad debt expense in the prior year results, diluted earnings per share in the third quarter of 2017 was an estimated CAD 0.66. On this comparable basis, diluted earnings per share in the current quarter increased by 47%. We're also pleased to report a record return on equity of 23.8%, up from 21.3% in 2017. Now just looking at the balance sheet. Over the last several months, we have proactively made several enhancements to our balance sheet.
As a result of the increase to our revolving credit facility, the follow-on bond offering, and our recent equity raise, we have reduced our net debt to total capitalization to below 65% since the end of the quarter. We now have the liquidity to fund our growth plans through to the third quarter of 2020, with over CAD 340 million in available funding. Furthermore, all of the debt we currently utilize today is at a fixed rate of interest. Only after we fully utilize the cash on our balance sheet and begin to draw on the revolving credit facility will rising interest rates begin to have a small effect on our cost of borrowing.
While taking capital in advance of its use impacted diluted earnings per share by CAD 0.14 in the quarter, we continue to believe that the prudent management of our balance sheet best positions the company to grow profitably and unencumbered for the long term. With respect to cash flows, we've highlighted before that when we raise capital, those cash inflows are treated as financing activities. However, when we advance funds to borrowers, those cash outflows are treated as cash used in operating activity. For goeasy, cash used in operating activity is a positive proof of our ability to grow our loan book and our business. goeasy reported cash used in operations in the third quarter of 2018 of negative CAD 21.3 million. However, CAD 90 million was used to invest in growing our loan book.
If we excluded this investment, then cash flow generated by operating activities would have been positive CAD 69 million in the quarter, highlighting the strong cash generation of our business. I'll now pass the call back to Jason to provide an update on the progress towards this year's key initiatives and an outlook for 2019.
Thanks, David. The last several months have been quite productive for the organization, as we have made significant progress on our 2018 key initiatives. First, in October, we launched our new enhanced digital loan application into production. This new online credit application will enable us to optimize web traffic and provide our customers with a streamlined and personalized experience. The process will be faster and easier for the customer, and more importantly, will provide us with a better capability to optimize the online sales funnel, drive increased conversion, and integrate with other new digital technologies. With only a portion of our web traffic currently being routed to the new platform, we are continually monitoring the performance and increasing the volume we direct to the new application each week. So far, the performance has been very positive.
We expect in the long term that these enhancements will drive incremental growth by increasing our online funding rate by 25%. Second, we are preparing to introduce our new white-label starter loan product through a third-party partnership next week. This will be offered to the approximately 20,000+ customers that are declined for an unsecured loan each month due to insufficient credit quality. This product, called creditplus, is designed for new Canadians, students, and those with poor credit. The consumer will be able to take a loan where the proceeds are directed to a savings account. Each payment is then reported to their credit file, which can assist them in improving their credit score. We intend to monitor the customer's behavior and extend them an offer for an unsecured loan once they have demonstrated a stable history of payments.
Lastly, we have just moved our head office into expanded and newly renovated office space. With capacity for growth, more collaboration space, and upgraded technology, we are transforming the way we work, with the ultimate goal of attracting and retaining the best talent possible while driving innovation in our industry. With the fourth quarter off to a strong start, solid progress made towards our key initiatives, and a well-capitalized balance sheet, we remain confident in the outlook for 2019 and beyond; 2019 will mark a significant milestone year for the company as we cross over one billion in consumer loans en route to our guided range of 1.1 billion-1.2 billion by the end of next year. As I prepare to step into the role of CEO in January, I cannot be more excited about our future.
I am confident in the team we have built and believe strongly in our vision of giving everyday Canadians a chance for a better tomorrow, today. I'll now pass it back to David for closing remarks.
Thanks, Jason. So after eighteen years in the role of CEO, it's been my pleasure to lead our quarterly calls. I will now hand over this responsibility to Jason to begin in the new year as he assumes the role of CEO, and I move into the role of Executive Chairman. While he will now lead the operations of the organization and begin to chair our future earnings calls, I will continue to be actively engaged with the business and be available to all investors. To this end, we both look forward to updating you when we release our Q4 and full-year results in February. So with our prepared remarks complete, we'll now open the call for questions.
Ladies and gentlemen, if you'd like to ask a question, please press star then one. If your question has been answered and you'd like to remove yourself from the queue, you may press the pound key. Once again, to ask a question, please press star then one. Our first question comes from Gary Ho of Desjardins. Your line is open.
Thanks, and good morning. Just wondering, you know, if you can elaborate on the reasons behind the higher allowance for credit loss this quarter. I think you highlighted two items in your MD&A, slightly lower credit quality and new borrowers versus previous cohorts, and second, higher-than-expected losses in Quebec. Can you kind of just give us a little bit more color on that and how sustainable those items are?
Yeah, sure, Gary. It's Jason Mullins. I'll start, and then Jason Hnatyk will add some comments as well. So, in terms of loan loss provision, the way to think about that is that we would expect to see some level of quarterly volatility from one period to the next, but that's similar with our in-period charge-off rate. It would be something we expect to be stable and/or gradually decline over the long term from a year-to-year basis point of view. The things that we highlighted, we attributed to, in terms of the downward shift in the credit mix, were really two elements that you pointed out in the MD&A. One being the performance in Quebec.
As David talked about, we haven't been as satisfied with the performance of the credit there and decided to temporarily moderate the growth while we're in the process of building custom credit models. So certainly, the losses we've seen there have put a bit of upward pressure. And then the second thing is, with respect to the mix of business, we've seen an increase on a year-to-date basis of the proportion of originations that we generate coming from online-related sources. So as we've talked about in the past, and consistent with why we strongly believe in the omni-channel model, those originations that come from an online source, even if they're funded in a branch, tend to be slightly lower credit quality than when the consumer walked directly in the door at retail.
So because of those two things, that's what we're attributing to that slight downward shift. We, as David highlighted, have already made a number of enhancements to our credit models that we put in place as a response to seeing this trend earlier in the year, and feel good that on a go-forward basis, that will correct the trend and will be in line with the guidance for losses in the future.
Okay. And the second question, just on—j ust a question on the revenue yield. For some reason, I can't piece together, you know, the decline that's quoted in the MD&A, and I'm just taking the interest income in easyfinancial over the average loan book. What am I missing here?
Yeah, it's a good question, so I think there's an opportunity for us to provide a bit more clarity on the yield calculation, and we can do that with some explanation now and then going forward as well, so because the easyfinancial portfolio has a portion of it that now is residing within the easyhome leasing business segment, there are some of the easyfinancial portfolio-related revenues and easyfinancial-related consumer loans that reside within that easyhome business segment, so when we refer to the easyfinancial portfolio total yield in the range that we've guided, we're referring to the total financial revenue of the portfolio, divided into the total average portfolio, of which both those numbers are reported in individual tables within the MD&A.
So I think what you may be doing is taking the easyfinancial business segment revenue only and dividing that into the average portfolio, which would then be missing a piece of the revenue that's in the leasing segment. So we'll add some clarity to this in the future documents, but the best way to look at it is to take the total financial revenue over the total average portfolio and then calculate the yield that way. The other particular thing to note, just in terms of if you're trying to square off where the full year would finish using that methodology that I've described, you'll probably then find that the decline in Q3 was a little bit larger than the decline in Q2, albeit it'll be more moderated from making that adjustment.
And then the other thing to note is that in Q4, we generally would expect to see the yield be equal to or slightly better than the yield we had in Q3. So as you model it out, we wouldn't expect another sequential decline, and therefore, for the full year, we're still expecting the total yield to come in between the low and midpoint of the range for the year that we previously guided.
Gary, it's David Yeilding here. Just to reiterate the point in terms of where to find the information. If you go to page 27 on the MD&A, you can find the finance revenue, which is the revenue for both easyfinancial and leasing in easyhome. And on page 28, you can get the average gross consumer loans receivable. That'll give you the numerator and the denominator to piece it together. And as Jason says, we'll do a better job next quarter of—
T hat's, that's very helpful. Thanks, and then just my last question. I know we're just over a month into Q4. I know seasonally it's a stronger quarter for loan book growth. Can you give us an update, kind of what you're seeing on the grounds in terms of that, as well as kind of charge-offs or delinquencies, like, versus kind of what we've seen in Q3?
Yeah, sure. So, so as David highlighted in the prepared remarks, we consciously chose to redirect ad spend into the quarters where we see the strongest demand, namely Q2 and Q4. So Q4, we are seeing is getting off to a very good start. We would expect growth in the quarter to be more consistent with Q2, and we are targeting for it to be a record quarter for growth. So, so that's part of the business is in line with what we would expect and on trend.
In terms of the net charge-off rate, we would expect the net charge-off rate for the fourth quarter to be slightly above the midpoint of our range, but that the full year will still come in below the midpoint of our range and be quite a bit better than what the full-year result was reported in 2017, which you would find was 13.6 . So, although, as we talked about, there is quarter-to-quarter volatility with the changes that we've made and the improvements to credit, we are comfortable that the number for the full year will still come in just below the midpoint of our range, and also comfortable that for 2019 and beyond, the loss rates will still be in the range that we've previously guided.
Okay, very helpful. That's it for me. Thank you.
Our next question comes from Richard Roth of TD Securities. Your line is open.
Hi. Yes. I guess I saw a large increase in the Stage 2 high risk loans bucket. What sort of drove this? Is it specific vintages or geographies, or is it reflective of, like, the entire book?
It's Jason Hnatyk here, Richard. I can take a stab at answering that. A couple of points to make. Generally, the comments that Jason Mullins made earlier generally apply to the way you should think about the provision. Again, because the mix of originations in the first half of the year was slightly more proportionate toward online, again, because those loans have a slightly lower average credit quality, that when they get picked up by the provision, they will typically be in the lower risk ranges, which by definition requires us to take a slightly larger provision, so the impact on the overall mix in the quarter is more pronounced.
And then secondly, when you look at the experience in Quebec, certainly over the last quarter, that as well will cause the provision numbers for the underperforming or Stage 2 bucket to rise. As we said before, we would expect there to be some volatility in those buckets as we move from quarter-to-quarter. There is also a little bit of seasonality at play as well that we have seen with those three things. So at the bottom line, generally, the things that affect the net loss rate in the quarter are more or less to some degree, mirrored in the way you need to think about their effect on the provision.
What sort of annualized charge-off rates are you seeing for online sourced loans? Like you gave Quebec, but what's online look like?
Yeah, so we don't break out, specifically disclose, the charge-off rates based on the source of origination. The way to think about it, though, is when we acquire a loan through an online source and then book it through our contact center, those would be the higher loss rate loans or the lower credit quality ones. When we take an online applicant and funnel it to a retail branch, that then improves the loss rate quite a bit as a result of the relationship established in the branch, but they are still generally slightly lower quality than those consumers who are the ideal, who actually walk in directly and visit the retail branches.
So, I can tell you that the former two groups over-index the portfolio average, and the latter group under-indexes, and therefore, depending on the mix of how you acquire the business, that will have some level of influence on the in-period rate. The other thing I'll just add to the in-period rate that I think is important to see is that when we give the two points of range to the guided net charge-off rate target, we do so on the basis knowing that there will inherently be quarter-to-quarter volatility on a basis of a number of factors.
If you look at our financial or investor deck, you will see that we report the quarterly numbers going back quite a number of years, and that in any given year, there's typically between a 1% to 1.5% variance between the low quarter and the high quarter in the year, and that's part of the reason why we give that two-point range, is that there are reasons we would expect it to move a little bit within the range, but that if you were to calculate the overall annual range, you can see a very progressive decline, and that's consistent with our outlook for the future.
Okay, so I understand the seasonality argument from the perspective of charge-offs, because, you know, there's some randomization about when loans become delinquent to the extent, to the extent that you end up charging them off. And I also understand the seasonality component as it pertains to increasing your provisions on Stage 1 because of macroeconomic factors, the FLIs, et cetera. What I'm a little unclear about is when loans go from Stage 1 to Stage 2, you know, material sort of movement, which is what we saw this quarter, how is that volatility as opposed to indicative of deterioration in the underlying book?
So the way to think about Stage 2 is that it represents consumers who generally have missed a payment, and therefore they're part of the delinquency, and therefore they impact Stage 1, Stage 2, Stage 3. So the same seasonality and the same attributes of performance related to Quebec and online therefore influence this staging metric as well—i t would all be tied back to the performance of the consumer during the period that the provision is being calculated at quarter- end.
Richard, and one other point to consider is that, when we look at the shift, from Stage 1 to Stage 2, there is a little bit of a migration if you compare June to September, in Stage 2, increase, I think it's 50 or 60 basis points, somewhere along those lines. What happens when the loans go from Stage 1 to Stage 2 under the IFRS rules, you move from having to take a 12-month loss, to a lifetime loss.
Yeah.
Your effective provision rate would go up on those as well. That's one of the reasons for the increase.
How have these loans, specifically Stage 2 loans, performed in the last month and a half, I guess, subsequent to the quarter- end? I guess where I'm coming from is like the concern would be, okay, Stage 2 high-risk loans, what's the chance that a material proportion of these migrate to Stage 3 and then are written off? How have you seen things progress in the last, call it, 38 days?
Yeah. So it's Jason Mullins here. I would say that as we indicated before, because there is sort of fluid movement between the buckets, I don't think you can necessarily conclude that you'd see a larger rush of those underperforming loans now move to the Stage 3 bucket, which is effectively those loans that are greater than 30 days in arrears. What you often see is because these are customers who have experienced some repayment issues, for which we have applied a series of various remedies to assist them in repayment, often what you'll find is these customers remain in those buckets for a period of time. A portion will move into the Stage 3 in the event that the remedy that we propose cannot assist them over the long term.
But the vast majority of them actually jump back into the performing bucket. It just takes a little bit of time for them to move back into that bucket, in part because as we treat them under the IFRS 9 provision, we need to see a material improvement in their performance. And simply assisting them in making one random payment or perhaps even refinancing their loan is not sufficient cause for us to assume that that loan is out of harm's way, if you will. So if anything, our approach to how we think about the provision is quite conservative, and what we're ultimately trying to do here is represent what we think the customer will ultimately do, but we don't move them back prematurely.
But again, the vast majority of those customers who go into bucket two actually find their way migrating back into bucket one and not the other way around.
Great, thank you.
The other thing I'd highlight, too, Richard, if you look at the percentage of loans in bucket three at June and September, it's fairly consistent. There has been a shift from one to two, June to September, but bucket three, which is obviously the loans at the highest risk of charging off, were quite consistent sequentially.
Yep, thank you very much. Appreciate the color.
Our next question comes from Stephen Boland of INFOR Financial. Your line is open.
Thank you. Just to go back to Quebec, can you remind me when you set up the Quebec operations, did you just use the same, I guess, credit adjudication formulas that you were using, I guess, across the country? And now, as you said in your comments, that you've realized that maybe that's not consistent, you're not getting consistent performance, and you're going back to, I guess, adjust that adjudication formula. Is that a fair characterization?
Yeah. It's Jason Mullins. So generally, yes. Just a bit more color, though. We knew from our own research that the performance in Quebec would generally be poorer than other provinces. There's a couple reasons for that. Generally, one is consumer behavior. They have a slightly different sentiment towards managing consumer credit. And then the second is structural. Within the province of Quebec, the procedures for a consumer to file a personal bankruptcy are a little bit more lenient than they are in the other provinces. You can correlate those two points back to the fact that if you looked at the bankruptcy rate of Canada by province, Quebec is substantially higher than the next second highest province. It rates the highest for the bankruptcy rate. So we knew that we would see a more challenging credit consumer there.
As a result, when we built the credit tolerance level for going in, we set the credit tolerance for higher to account for that. What, what we've experienced, though, is that the model that we've used, the latest version of our custom model, which works very carefully and well in all the other provinces with very little variability, province to province, is not working as well in Quebec. Effectively, the unique individual variables that accurately predict risk are not working as strong. And as such, we had to wait until through the test and learn methodology, we could accumulate enough sufficient data on the consumer to then develop custom models that are unique to their behavior. So we've already made one first- round phase I change to the model, that's going in, in the next few weeks.
The team is already working on another second phase custom model that'll go in early 2019. Effectively, you can think about it that we moderated growth intentionally in order to give ourselves time to do that, and that as we move into 2019, we'll begin to start to scale up the growth again as the new model gets put in place. We've also already seen the delinquency begin to moderate in the province of Quebec as a result of the changes that we've made and the response to that market as well.
Can you comment just on, on a, and maybe, sorry, this might be in the MD&A, the, like, the, the vintage or the duration, however you wanna characterize it, of what you're seeing going into the charge-off rate? Is, is it, you know, you know, six-month loans, 12-month loans? Any kind of bucket that, you know, size of loan that, that you're seeing maybe, that is kind of responsible for this, the, the issue in Quebec?
Jason, I can answer that. I would say that, you know, based on the floor that we had set, it's not necessarily localized to any one particular vintage size loan that we have. It's more of a generic attribute about how the broader customer population is performing. Again, I think the thing you have to think about here is what makes the Quebec model, Quebec market very interesting is that mix of contractual and bankruptcies in the charge-offs. What makes the Quebec market a little bit more interesting is you've got a much higher incidence of that bankruptcy charge-off.
So when these customers do encounter some degree of problem, it's much harder to detect and then remedy versus other provinces where you have a little bit more time to work with the customer in parallel to devise restructuring opportunities and solutions. But by and large, we haven't found there to be a specific pinpoint, which as Jason said, as Jason Mullins has said, while we've got a first iteration of the model changes going in, and while we're also building a completely new model that leverages both our own experience, which you actually need in order to build an effective model, as well as some additional market data which we've acquired that we think will be quite helpful in our ability to evaluate and predict risk with better accuracy moving forward.
Okay, and—
Just to add to those comments, I think what's really important is that, as we step back and look at the way that we philosophically manage the business and the way that we test and learn from new initiatives, ultimately, when we put something new in place, we intentionally moderate its total growth and expansion until such time as we believe we've had enough history of data to be confident in the way it will perform. So if you take a look at both secured lending and Quebec, for example, both of them about a year and a little bit in operations, both about similar size portfolios of CAD 35 million-CAD 40 million. In one case with secured, we've been actually very satisfied, and the performance of the credit has been much better than we expected.
And as David said in his remarks, we're now more comfortable to start to increase the scale and the rate of that product. In the case of Quebec, it was the opposite way. It underperformed to our expectations, but the key is that in all cases, we know how to moderate that growth appropriately. We've got the tools in place to dynamically monitor the credit and then react accordingly. As in a comparison for that, you look back to our credit losses, particularly in 2016 and more specifically the back half, you'll notice that we also saw a bit of an upward trend in the incurred charge-off rate at that time for a variety of different issues.
But as a result of those same monitoring tools and changes we made to the credit models, it made a material reduction in the loss rate in the subsequent year, in 2017. So this is not something we are unfamiliar with or haven't seen before. We're very used to seeing that certain things don't always work the way you want them to. The key is that you have all the right tools and capabilities to monitor the progress, and that you react and respond to changes to credit to move things back in the right direction. And, and so we're quite comfortable with that same, that same thing playing out here.
Okay, that's great color. Thanks.
Our next question comes from Jeff Fenwick of Cormark Securities. Your line is open.
Hi, good morning. I just want to follow up the discussion here on that course correction and how that feeds into the growth expectations for the year. I noticed you only opened one new location in the quarter. And just as you're going through this process here, obviously, you're going to slow a little bit in Quebec, and what's your expectation around putting the changes in place as you require them, and then reaccelerating growth there? Or can you find growth elsewhere that's gonna help you get to that year-end target range for loans that you've set out?
Yeah, sure. Great question, Jeff. So, yeah, so the expansion of new locations in the quarter is directly tied to the same, the same issue. So given that we had decided to moderate growth in the quarter, while we focused on making enhancements to the model, as Quebec is the market where the majority of our new store locations was intended to be, it was for us an easy choice to say, "Why not defer those locations until the fourth quarter when we are closer to the point in time we can put in the model enhancement?" So although the number of new openings in the third quarter was quite light, you'll see that pick back up in Q4.
You'll see the total number of openings for the year still come in within the range we guided, and then that'll correspond with some of the changes we're making in the credit to try to allow those branches, when they open, to grow at a more appropriate pace. In terms of the overall growth of the business and guided range, while Quebec will be a little bit more tempered, while we work through some of these changes, we're quite comfortable that there are a variety of other sources for growth that we can continue to leverage that will still give us the total growth of the business that we've projected. So there's absolutely no change to our guidance for loan book growth, and we're still comfortable with the guidance we've given.
Okay. Then on a second point here on operating expenses, when we strip out the bad debt expense here, pretty notable step down QoQ. What should we be expecting here through the fourth quarter? I'm guessing some of the slowdown here may have, again, been tied to this course correction you're making. So what, how should we be thinking about OpEx through the end of the year?
Sorry, Jeff, are you referring to division OpEx or corporate spend?
Yes, I'm looking at OpEx within the easyfinancial segment here. Looks like it was down about CAD 3 million quarter-over-quarter, if I've got my numbers right.
Got it.
So, Jeff, I'll chip in here. I think you'll see a slight increase in the spend. Part of the quarter had a bit of a slowdown in the bonus accrual for the full year. I think the Q4 as we look forward to expectations on performance for Q4, there'll be a bit of a pickup in bonus accrual in Q4. So, I would look at the next quarter being approximately another CAD 1 million-CAD 2 million in corporate expense in totality for investment in business, plus a bit of bonus pickup for the quarter as well.
I think the other way, Jeff, if you're looking at corporate expenses into the future, you can probably model them out in the, you know, CAD 12.5 million-CAD 13 million range.
Sure.
Going into 2019.
Fair enough. And just within easyfinancial, I mean, I'm assuming along with year- end coming up here, you pick up the advertising spend, and we'll see a bit more go into the easyfinancial operating expenses and with easyfinancial with respect to that?
Yeah. If you're referring to sequential OpEx within easyfinancial, one of the biggest reductions was advertising spend. It's quite high in Q2, and we brought it down a little bit in Q3, so that's a large part of it. I think also some of the branch incentive compensation was a little bit lower in Q3 than Q2 as well, largely just due to the fact that the growth was a little bit lower.
Okay, that's great. Thanks for that. I'll reach you.
Our next question comes from Brenna Phelan of Raymond James. Your line is open.
Hi. Good morning.
Morning, morning, morning.
I'm also gonna ask about Quebec. I was hoping you could just give us some color on the charge-off rate that you were targeting to underwrite at the yields that you're getting in Quebec. We know that the yields that you're allowed to lend at in that province are lower. So versus the actual realized experience of about 20%, what were you targeting in that loan book?
Yeah, so, good question, so because as you highlighted, that we get a slightly lower yield in the portfolio, in a perfect world, we targeted that the charge-off rate would fall just below the portfolio average. We knew that for a period of time, as you're going through the expansion phase, because the majority of your business is gonna first all be dependent on brand new customers who perform at a slightly lower higher rate than the existing customers we lend to, that it would be on par or over indexed somewhat for a period of time, but that in the long run, the objective would be to get it to at or slightly below the portfolio average.
So given where it's at, as David mentioned, it's just a little bit too far beyond that level that we were comfortable with, and then, of course, that necessitated a change. Just Brenna, just a couple more comments. On the total yield, if we look at where we budgeted the yield to be this year, it was around 48%, and we're coming in around 46%, all in. So, we're not that far off the yield. We've got more of the work to do, as Jason mentioned, around the charge-offs. But if you actually look on a operating contribution from the province, we're actually losing a little bit less than what we had planned for the full year.
Losses, net losses for the overall operation in Quebec are around CAD 0.02 a share versus a budget of around CAD 0.04-CAD 0.05 a share. As we continue the dialogue around Quebec, in totality, when you do all the pluses and the minuses, is not that far off what we had intended the business to do in its first full year of operations. We've just got to get the work completed now to get the next version of credit so that we can start to see a positive contribution in the operating income for 2019.
Okay. Thank you. That's really helpful. Following on that, would you say in Quebec, the take-up of ancillary products that drive that fee-based yield, is that consistent with the rest of the product, with the rest of the country? Over or under?
That would be true.
Consistent.
Yeah, it would be consistent with the rest of the country.
Do I think of some of the impact of credit underperformance as showing up in unemployment insurance claims? Or have they all really moved to charge-off?
Yeah, I think it's more a function of the higher level of bankruptcies.
Okay
T han it is to do with anything else. And as Jason said earlier, as the behavior or the medicine was applied in the summer, you can now see delinquency rates actually performing better than the rest of the country, which will give you an indicator that in the future periods, we will start to see some level of improvement.
Okay, and can you tell us the average term of a Quebec-based loan, like what, where the kind of maturity is clustered around?
Yeah, it's Jason here, Brenna. It would be, our average for the book is in and around just over 32 months. Quebec would be slightly longer than that, only owing to the fact that since we've put our credit changes in, I think, we've seen that average term come down a little bit. The only other comment I would say is the notion of the 20% loss rate is also being driven by our purposeful slowing of the growth of the book. Granted, your loss rate is gonna likely remain elevated until such time as you both improve the credit on the front end and you open up the spigot to let more customers through. So the loss rate of the 20% number that's been quoted, the net charge-off rate, is very much a function of two things.
One, obviously, the experience of the business that we wrote earlier in the year and from the prior year, and equally as important, the degree to which we have slowed and tempered the rate of growth, which by definition, since the denominator is actually slowing or not growing at the same rate, puts a natural upward pressure on your actual loss rate. As we work through the credit changes, which I'm confident we will work through, and as we once again resume our growth in the province of Quebec, we should be able to see a dual benefit, both in terms of the go-forward impact of the new vintages we book, as well as the underlying denominator effect of being able to grow the book positively as we have prior.
Yeah, for more color to that, the growth that we sort of chose to throttle coming from Quebec in the quarter, we would estimate to be about CAD 5 million, if you just look simply at the year-on-year originations in the quarter from that market. So as Jason said, you could have kept on continuing to grow at that rate.
That would therefore increase the growth and the denominator and actually have helped in the charge-off rate, and the credit-related metrics. But that wouldn't be the right thing to do. The right thing to do is to moderate that growth, and even though that means temporarily a higher elevated loss rate, it's still the right thing to do long term because it gives you the capacity to make the credit changes and then improve the credit for the future. So, so it does have a temporary effect, but it's absolutely the right way to manage the business.
Okay. And then last one for me. So to get to the midpoint of your ended gross loan balance guidance, it looks like you have to, that would imply net loan growth of somewhere around CAD 95 million. Could you give us an idea, so if Quebec's not really contributing so much to that, do you redirect to secured loans or the risk adjusted? How are you thinking of achieving that net loan growth in the fourth quarter?
Yep, those estimates are correct. And yes, the intent would be that we would make up some of that growth that we would forego in Quebec from the other product categories, so secured loans and risk-based pricing. But then also, we expect that with the redirection of some of the ad spend into Q4 and ramping up that brand and media campaign we did in Q2, that will also help growth even in our core product.
Okay. Thank you very much.
Our next question comes from Stephen MacLeod of BMO. Your line is open.
Hi, good morning, guys. This is actually Nick Warner, filling in for Steve. Congrats on the quarter. I just have a couple quick questions since a lot of, a lot of it has been covered already. The first being, in terms of same store sales growth for easyhome, you guys posted an impressive 6.2%. Can you talk about the, some of the drivers behind that and where you see that going forward?
Yeah. I think, Nick, it was a bit soft on the volume there. I just wanna make sure I heard that right. You're just asking about the specifically same store sales growth within the easyhome leasing business segment, and what was the driver of that, and which way is it headed in the future?
Exactly. Yep.
Yeah. Yeah. So, so that was, purely driven by the expansion of consumer lending within easyhome. So as David touched on in his comments, when we decided to implement the offering of easyfinancial loans in the easyhome leasing business, that was a direct response to the fact that the easyhome leasing related portfolio revenues, we expected would continually, slowly and gradually decline over time, as they have done for a number of years, which is also consistent with that industry, broadly speaking, in other countries. The benefit has been that the growth from the loan portfolio inside those four walls and the revenue associated to it, has actually more than outrun the leasing-related declines, such that we saw an absolute revenue increase and operating income increase from the business in the quarter.
We would expect that that trend would continue and that there will be a slow and steady expansion of revenues and income from easyhome leasing as a result of the growing portfolio in that business. So it won't be significant, but it will continue to be healthy and at least more than offset any leasing-related declines.
The only other thing I'd add to Jason's comments is, you'll, the lenders year-over-year, we closed a number of easyhome stores. You have the benefit of moving that portfolio into an adjacent nearby easyhome store, and that tends to increase that metric a little bit. Okay.
Okay, I appreciate, I appreciate that clarity. So in terms of the margin expectations going forward with the fact that some of those stores have been closed, I know you guys recently said that that income is expected to increase, but over the course of the next year or two, how do you guys see that trending for the same segment?
Yes, I think the margin will be probably consistent with what it's been lately, maybe not quite as high. I think the margin in the quarter was like 17. So, I would say somewhere in the 15-17 range, maybe the higher end of that range. I think what you saw in the last quarter is more directional of the future than what it's been in the past.
Perfect. Thank you. And just one final one for me. So in easyfinancial, just wanted to get some more color on the performance of the secured lending business, in particular, how it's being received by customers and your guys' outlook on that segment.
Yeah. So far it's been a really positive response. As we've mentioned in the past, our approach into that product has been cautious and conservative, and we wanted to give it some time to be comfortable with the performance and the data, so far it's performed better than our expectations. The average loan size, the yield, and the losses have all been a little bit better than what we would have anticipated, so as David said in his prepared remarks, we'll now start to slowly increase the rate of growth of the product. That will come from a variety of areas. There are some areas within our underwriting where we intentionally were very conservative at the beginning that we feel there's an opportunity for some subtle adjustments.
And then we'll also start to be a bit more active in advertising and promoting the product to customers now, which again, we didn't want to overdo at the beginning until once we got a good year under our belt and got comfortable. So quite happy with the way it's performing, and we see some good long-term upsides from that product line forward.
Okay, thanks, guys. Those are all my questions.
Our next question comes from Robert Arrow. Your line is open.
Good morning. I'm a long-term investor, I guess. In any event, in the past, the financial performance has been incredibly good, and, I'm proud to be associated with you guys. The only concern I have is that, it seems that these financial results are not being interpreted very well by the market. I see that, our stock price went down about 13%, during this, conference. It's recovering slowly now. Is there anything material, adverse, situation that would reflect, a negative response in the market? Because it sounds like everything's business as usual, pretty much. Please let me know.
Yeah, so, yeah, this is David Ingram. So obviously, we're not on the, we're not on the side of the buy and, what the, what the investors are discussing or sharing. I can only tell you the perspective from the management side of the business. So from our perspective, as I said in the press release, and I've said in the comments today, from our lens, this was a very solid quarter, marked by record results and, really good progress on strategic initiatives. I think the only one area that my experience doing this for a number of years would tell me that there may be an adverse reaction to is, people's sentiments about reading too much into, the credit loss rates in the quarter.
In our business, obviously, credit is a very important measure of the stability and the quality of the business. From our perspective, we probably understand much more than anyone else that volatility occurs quarter-to-quarter. As we see ourselves hitting the guided range at the midpoint for the full year, we don't see the same nervousness or concerns that maybe other people do, but we're here running the business day in and day out. From our perspective, we are a bit perplexed as you are as to why the stock would react this way today, given that these are record results and some of the best numbers we've ever produced.
But again, if you're on the other side of the desk and you look at maybe one metric or one dimension, and you see a credit loss that looks like it appears negative, then that could be a reason why there's an adverse reaction. But again, as we've said in the call, and we said it on the press release, there will be quarterly volatility in losses. But on an annual basis, we expect the full year to come in lower than 2017. We have said, as Jason said in his comments, that 2019 is modeled to come in lower than 2018, and we sit here today telling you we are confident of achieving that.
And as I look at targets we've provided the market since 2012, I don't remember a period in the last six years where we've missed those targets. So, I can just tell you how we feel. I can't honestly get into the minds of how the investors are responding right now.
David, thank you very much, and thank you very much for your long-term involvement in the business.
You're very welcome. I appreciate the comments.
Once again, to ask a question, please press star then one. Our next question comes from Roland Keiper of Clearwater. Your line is open.
Hi, just wondering, there was some notation in the MD&A, about one-time expenses. At least severances was referred to. If you could break out what some of, the one-time expenses or, that you might have experienced in this particular quarter? Thank you.
Hi, it's David Yeilding here. Yeah, it was maybe CAD 300,000 of one-time expenses in the quarter, so let's say a couple cents a share.
Yeah, Roland, there was— obviously, we had the expense in Q2 for Steve, and then in Q3, there were a couple of others that we saw leave the business. So, there is a little bit of noise in the last two quarters for expense for senior managers who have left the organization.
Thank you.
Operator, next line. There are no further questions. Let's turn the call back over to David Ingram for any closing remarks.
Well, since there are no more questions, I want to thank everyone again for their continued support and participation on the call. And, as we've said throughout the call, we are looking forward to a very strong Q4, and we'll update you in the new year for the full year in February. And, thanks again.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.