Good day, ladies and gentlemen, and welcome to the fourth quarter of twenty seventeen 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. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. David Yielding, Senior Vice President of Finance. Sir, you may begin.
Thank you, operator, and good morning, everyone. Thank you for joining us to discuss goeasy's results for the fourth quarter ended December thirty-first. The news release, which was issued yesterday after the close of market, is available on GlobeNewswire and on the goeasy website. Today, David Ingram, goeasy's President and CEO, will talk about the highlights of the fourth quarter and some of our achievements in the year. Following his remarks, Steve Goertz, the company's CFO, will discuss goeasy's financial results in greater detail. David Ingram will then provide some insights into our strategic direction and initiatives before we open the lines for questions from investors. Jason Mullins, the company's Chief Operating Officer, and Jason Appel, the company's Chief Risk Officer, are also on the call. Before we begin, I remind you 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 will provide instructions at the appropriate time. Business media are welcome to listen to this call and use management's comments and responses to questions in any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent. Today's discussion may contain forward-looking statements. I'm not going to read the full statement, but I will direct you to the caution regarding forward-looking statements included in our ND&A. Now, I'll turn the call over to David Ingram.
Good morning, everyone, and thank you for the participation in today's call. The fourth quarter and all of two thousand and seventeen, for that matter, was strong for our company. We experienced our largest levels of originations and loan book growth. We reported record revenue and earnings. We met all of our stated targets, and we delivered on a number of strategic initiatives. Finally, we recapitalized our balance sheet, giving us a new debt structure that will support our planned growth for many years to come. So all in all, two thousand and seventeen was a transformational year for goeasy. But before Steve reviews the detailed financial performance, I want to touch on some of the highlights from the quarter and recap the key accomplishments from two thousand and seventeen.
During the fourth quarter of two thousand and seventeen, our strategic initiatives and our investment in advertising and customer acquisition drove record growth. We are now the most widely recognized non-prime lender in Canada, with aided awareness levels of approximately 80%. Originations topped CAD 100 million, up 50% against the fourth quarter of two thousand and sixteen, and delivering CAD 53 million in loan book growth, more than double Q4 2016. Growth is important to us, but so is prudent risk management and responsible lending. Our continued investment in proprietary credit, underwriting, and collection models, along with the use of an ever-broadening suite of data and analytics tools, coupled with the shift towards more creditworthy borrowers, has delivered significant improvements in delinquency and charge-off rates.
Annualized charge-off rates were 12.8% in the current quarter, compared with 15.8% in the fourth quarter of 2016. The growth in revenues of easyfinancial and improved operating profits contributed to a significant increase in earnings. Excluding the one-time charge related to our refinancing, diluted earnings per share for the quarter were CAD 0.79, compared to CAD 0.60 in the fourth quarter of 2016, up 32%. The increase in earnings was despite an incremental advertising spend of CAD 2.1 million and an increase in the provision for future charge-offs due to the larger growth in the loan book of CAD 1.6 million. These two items impacted earnings per share by an incremental CAD 0.17. Overall, 2017 was an outstanding and transformational year for goeasy.
We continued a strong track record of sustainable growth. Over the last 17 years, we have delivered compounded annual growth rates of 12% for revenue and 29% for net income. Two thousand and seventeen also continued the company's trend of 66 consecutive quarters of positive net income and 31 quarters of positive same-store sales growth. Throughout two thousand and seventeen, our focus was on growth and leveraging the scale of easyfinancial. In addition to delivering strong financial results, we met or exceeded all of our stated targets. We targeted a closing loan book of CAD 475 million-CAD 500 million, and we ended the year at CAD 526 million. We targeted total easyfinancial revenue yield of 60%-62%, and we achieved 61.2% for the full year.
We targeted total revenue growth of 10-12%, and we delivered revenue growth of 16.6%. Finally, we targeted easyfinancial operating margins of 35-37% and delivered 38.3%. In addition, we had a targeted return on equity of 18-19%, and we delivered 19.8%. We also made significant progress on our strategic initiatives. In particular, I want to focus on a few key achievements. First, we completed a recapitalization of our balance sheet. This recapitalization began with the closing of our CAD 53 million convertible debt offering in June and finished with the concurrent closing of our $325 million U.S. high-yield debt offering and CAD 110 million bank revolver in early November.
The new debt structure provided by the North American capital markets and a group of national and international banks provides us with capital structure to fund our growth for the foreseeable future. Additionally, our new credit facilities are less restrictive, offer improved advance rates, as well as lower cost of borrowing. Second, we significantly expanded our easyfinancial footprint. We now offer loans from coast to coast, having launched easyfinancial in Quebec in the second quarter of two thousand and seventeen. The growth in Quebec has exceeded our expectations, and by year's end, we grew to 11 branches and a loan book totaling CAD 23 million. We will continue to grow our Quebec business and expect to have approximately 40 branches within the next few years.
The Quebec marketplace was largely underserved by non-prime lenders, and the opportunities available in this market will be a major contributor to our growth in the years to come. Our ability to reach customers for our easyfinancial loan products was also improved in the second quarter of two thousand and seventeen, as we began to offer our unsecured lending products within almost 100 of our easyhome leasing stores. This expansion allowed us to further increase the distribution footprint of our financial service products and leverage our existing real estate and employee base that understands our targeted customer demographic. All told, we now offer lending at over 300 locations across Canada, as well as online and through mobile technology. Third, we've broadened our product offering. We believe strongly in improving the lives of everyday Canadians by helping them on their journey back to lower-cost, prime financing.
A key element of this vision is a laddered suite of loan products, which allows our customers to reduce their overall cost of borrowing and improve their credit profile. In two thousand and sixteen, we launched risk-adjusted pricing, which features interest rates starting at 29.99%. We offered this product to our best-performing customers, enabling them to reduce their cost of borrowing and increase their access to financing. After understanding the performance of these risk-adjusted loans, we significantly expanded the availability of our risk-adjusted lending product in two thousand and seventeen. More recently, we launched a secured loan product that is offered to qualifying homeowners who are looking for a lower-cost form of financing and who are able to pledge their residence as a security for the loan.
Loan sizes range from CAD 15,000 to CAD 25,000, with rates starting from 19.9% and terms up to 10 years. All loans require periodic installment payments of both principal and interest and have real estate pledged as a security for the loan. While the borrower's equity in the home is important, lending decisions are based primarily on the creditworthiness and ability of the borrower to repay, similar to how our unsecured loans work today. The secured nature of this product will result in lower loss rates and servicing costs, which will allow us to reduce the interest rate charged to the consumer. Risk-adjusted pricing and secured lending have allowed qualifying customers to gain access to greater amounts of financing while reducing their cost of borrowing.
While we will see a moderation of yield, we believe that these products will feature longer customer tenure, reduced rates of charge-offs, and lower relative cost to underwrite and administer. Thus, we expect to ultimately deliver a higher long-term value per customer. These lower-rate products allow us to reward customers that perform with a reduced cost of borrowing, greater access to funds, and enable them to improve their financial future. This strategy is the right thing for the consumer, but it is also the right thing for our company. Now I'll turn the call over to Steve to review our financial results for the quarter in greater detail.
Thank you, David. The growth of easyfinancial contributed to improved financial results for the quarter. Total revenue was CAD 108.6 million, an increase of CAD 17.3 million, or 18.9%, compared with CAD 91.3 million in the fourth quarter of 2016. As David indicated, the gross consumer loans receivable portfolio grew by CAD 53 million in the quarter, reaching CAD 526 million by quarter's end. Revenue generated by easyfinancial was CAD 74.6 million, up 33% against the fourth quarter of 2016.
The revenue increase was driven by the growth of the loan book for the reasons that David just detailed, and was offset by a 270 basis point decline in total yield due to the increased penetration of risk-adjusted interest rate loans to a more creditworthy customer and a higher proportion of larger dollar loans, which had reduced pricing on certain ancillary products, as well as the launch of secured loans. The decline in yield has been offset by lower charge-off rates and lower relative cost to originate and manage the portfolio. The growth of the loan portfolio was aided by a continued investment in advertising. We continued to increase our investment in advertising and customer acquisition during the fourth quarter.
Advertising spend dedicated to easyfinancial increased by CAD 1.6 million, or 50%, during the quarter, but this helped to drive the 50% increase in originations in the quarter. Although bad debt increased by CAD 2.9 million when compared to the fourth quarter of 2016, this was due to an increased provision for future charge-offs, driven by the record levels of growth within our consumer loans receivable portfolio. Even though we did achieve record growth during the quarter, and for the full year, this did not negatively impact the credit performance of our portfolio. During the fourth quarter, we did achieve an improvement in delinquency rates through strong collections activities and experienced lower bankruptcy losses. Charge-off as a percentage of the average consumer loans receivable declined from 15.8% in the fourth quarter of 2016 to 12.8% in the current quarter.
The growth of the loan book and improvement in charge-off rates contributed to the strong operating margin recorded for easyfinancial this quarter. The operating margin in the quarter was 38.4%, compared with 34.9% in the fourth quarter of 2016. Turning to easyhome, total revenue declined by CAD 1.3 million when compared with the fourth quarter of 2016, primarily due to store sales to franchisees or closures which occurred over the past 15 months. The operating income of easyhome declined by CAD 600,000 in the current quarter compared to the fourth quarter of 2016 for the same reason. Overall, normalized operating income was CAD 24.5 million in the fourth quarter of 2017, which was up 42.4% against the operating income in the fourth quarter of 2016.
Operating margin was 22.5% for the fourth quarter of 2017, up from the 18.8% reported in the fourth quarter of 2016. In order to effect the refinancing, the company incurred a one-time CAD 8.2 million refinancing charge in the quarter. We have excluded this one-time charge in our normalized adjusted figures for comparison purposes. Adjusted net income for the quarter, excluding the effect of the refinancing charge, was CAD 11.4 million, or CAD 0.79 per share on a diluted basis. This compares with normalized net income of CAD 8.3 million, or CAD 0.60 per share in the fourth quarter of 2016. On this normalized basis, net income and earnings per share increased by 36.6% and 31.7%, respectively.
As David indicated, during the fourth quarter, we completed the recapitalization of our balance sheet by completing an offering of US-denominated senior unsecured notes. These notes are due November 2022, with a US dollar coupon rate of 7.875%. Concurrent with this offering, we also entered into a currency swap agreement to fix the foreign currency exchange rate for the proceeds from the offering and for all required payments of principal and interest under these senior notes, effectively hedging the obligation under these to a principal amount of CAD 418.9 million Canadian at a Canadian dollar interest rate of 7.84%. Concurrently, we entered into a new CAD 110 million Canadian dollar senior secured revolving operating facility with a syndicate of banks that matures in 2020.
Borrowings under this facility will bear interest at either the Canadian banker's acceptance rate plus four hundred and fifty basis points or the lender's prime rate plus three hundred and fifty basis points. We used the net proceeds from the sale of the notes to repay the existing term loan and to pay fees and expenses related to the offering. We will use the remainder of the proceeds from the offering and the funds available under the revolver to expand our consumer loans portfolio. We anticipate this financing, coupled with the cash generated by our strong net income, will allow us to grow our loan book into 2019. Our strong financial performance and balance sheet, coupled with our outlook for the future, has given our board the confidence to increase our quarterly dividend by 25% to CAD 0.225 per share.
Finally, we will be adopting IFRS 9 starting in the first quarter of 2018. IFRS 9 changes the methodology for calculating the provision for future loan losses and will result in a larger provision. Our allowance for loan losses under the current methodology was CAD 31.7 million, or 6%, when expressed as a percentage of the ending gross consumer loans receivable. Based on the analysis performed to date, we estimate that implementing the requirements of IFRS 9 would result in an increase to this provision percentage of between 300 and 360 basis points as of December thirty-first, 2017, which would translate into a CAD 15.8 million-CAD 19 million increase in the allowance and an after-tax reduction to retained earnings of between CAD 11.5 million and CAD 13.8 million.
The adoption of IFRS 9 on January first, 2018, has no impact on the cash flows generated by the company or on the net charge-off rate, which is driven by our borrowers' credit profile and repayment behavior. In adopting IFRS 9, we will continue our policy of charging off unsecured loan balances at ninety days and secured loans at a hundred and eighty days. Ultimately, the cash flows used in and generated by the company's loan book will not be impacted by the adoption of IFRS 9. goeasy, like most lenders and including the banks, will be reporting the impact of the transition to IFRS 9 prospectively, effective January first, 2018. Given our high rate of growth, the higher rates of provisioning will have the effect of reducing our earnings in the future as compared to what otherwise would have been reported under the previous accounting standards.
The analytical work required to support this transition to IFRS 9 is largely complete and is in the process of being finalized and approved. Now I'll turn the call back to David.
Thanks, Dave. We believe that there remains significant demand for non-prime lending in the Canadian marketplace. We estimate that the size of the Canadian market for non-prime consumer lending, excluding mortgages, is in excess of CAD 165 billion. This demand is currently being met by a wide variety of industry participants who offer diverse products. Generally, industry participants have tended to focus on a single product or a single channel for distribution, i.e., online or physical branches, rather than providing consumers with a broad, integrated suite of financial products and services. As a result, opportunities for growth exist for those lenders who are able to effectively offer multiple products spanning the non-prime consumer credit spectrum across various distribution channels. Historically, the consumer demand for non-prime loans was satisfied by the consumer lending arms of several large international financial institutions.
Since 2009, many of those largest branch-based participants in this market, including Wells Fargo, HSBC Finance, and CitiFinancial, have either closed or sold their operations due to changes in banking regulations related to risk-adjusted capital requirements, leaving easyfinancial as one of a small number of coast-to-coast non-prime lenders with stated growth aspirations. With our strong balance sheet, robust infrastructure, expanded product offering, and coast-to-coast branch network, we are well-positioned to capture a much larger share of this CAD 165 billion non-prime consumer credit market. We believe that the current market conditions are supportive of growth opportunities. The macroeconomic indicators support strong credit performance in the coming quarters. Unemployment levels are at or near record lows. The prices of oil and gas have moderated, and inflation remains at reasonable levels.
While we will continue to monitor these indicators and adjust our credit underwriting as necessary, the strong and stable current macroeconomic environment gives us comfort in continuing with our growth plans. In short, we believe there has never been a better time for well-managed organizations to build their enterprise here in Canada. In 2018, our focus will be on leveraging the investments we made to continue grow both our loan book and earnings. We will continue to invest in our digital properties. We believe the online experience of our customers is good, but it could be better. We will be upgrading our existing digital loan application platform, utilizing leading architecture, which will further streamline the customer experience while significantly reducing the customer's effort to get a loan.
The new loan app will also capture key data that will allow us to rapidly test and learn what application methodology and format delivers the optimal customer experience and maximize the ratio of started apps to funded loans. We believe that this investment will increase the volume and ultimately drive increased conversion rates. Machine learning and artificial intelligence offers great promise for our business. We already employ many elements of machine learning in our credit adjudication models. We believe that we have only scratched the surface, and that many more opportunities exist to employ artificial intelligence by improving and streamlining our business processes with the potential for significant improvements in efficiency and cost reduction. We will further explore the potential of this exciting and burgeoning technology in two thousand and eighteen.
In addition, we see further opportunities to provide our customers with additional products that meet their financial borrowing needs and assist them on their journey back to lower-cost financing. In two thousand and eighteen, we will research and explore other lending products that can be added to our product suite in two thousand and nineteen and beyond. We remain committed to building out a full suite of products that will ultimately serve all the borrowing needs of a non-prime consumer. The growth experience in the fourth quarter gives us renewed confidence for the future. Given the strong growth of our core products, risk-adjusted lending, Quebec expansion, and our outlook for secured lending, we feel very confident in our stated targets.
We are right on track to achieve our near-term goal of a loan book that exceeds CAD 1 billion by the end of two thousand and twenty. As we close out two thousand and seventeen, I want to take this opportunity to thank our entire team for their commitment and hard work that allowed us to meet our goals. Two thousand and seventeen was a transformational year for goeasy that featured record growth and many strategic achievements that position us for that long-term success. In some ways, being the first Canadian non-prime installment lender to receive large revolver facilities from major Canadian and international banks was an inflection point for our journey to grow goeasy into all of its possibilities for the future. We have a history of setting ambitious goals, but we also have a history of delivering on our promises.
While we will use technology to facilitate our growth, we remain true to our principles of first, being great managers who focus on lending and collecting. With our formal comments complete, we will now open it up for questions.
Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question at this time, please press star then one.... and our first question comes from the line, Stephen MacLeod from BMO Capital Markets. The line is now open.
Great, thank you. Good morning, guys.
Good morning, Stephen.
Great. I just wanted to just get a sense of the pace of growth through twenty eighteen for easyfinancial, you know, just in terms of what to expect in terms of loan book growth and store count, and then I guess related to that, you know, margins. Do you expect all that to sort of accelerate through the year? Or would you pick up on the momentum that you had in Q4, and that continues into Q1 and it's more evenly spread out?
So, I would share with you that we obviously saw a change in the growth pattern coming out of Q2 and through Q3 and Q4, and we've continued to see that elevated demand for the product. So the season has started well for us in 2018, and the target that we gave in November, and we restated again today, we feel very good about that given the trend that we continue to see. So, for us, we think you're gonna see that growth continue acceleration, and we're feeling quite ambitious that we can now get to the high end or exceed the high end of the stated range we gave you for this year.
Okay, great.
In terms of the yields, the yields are looking very good for us. We still see highest demand for the unsecured product at the highest price point. So while we've seen good performance from the risk-adjusted pricing, and that's driving quite a decent percentage of originations. So, in Q4, that drove somewhere in the order of 24% of originations. It's the product that's at the higher end of the unsecured rates that's still driving over 50% of the originations for us. So yields for us, again, they're looking positive, starting the year in 2018.
Great. So can you just repeat the, you said you're seeing good demand for... Is, did you say the secured product is outpacing the unsecured product?
So the demand, as you understand, we tested risk-adjusted in twenty sixteen. We rolled it out to up to 20% of the volume apps, and we captured at that rate for most of twenty seventeen. We opened up the valve slightly. So when you look at origination volumes for the Q4 period, roughly 24% of all originations came from risk-adjusted pricing, which is the product that is essentially ranged from 29.99% to 46.9%. And then if you look at what we did at 46.9%, that was well over 50% of our total origination channel. So that tells you that the blended yield is slightly more favorable than we thought it would be coming out of Q4.
For the secured loan product, we only launched that the beginning of November. Right now, it's not a material part of originations. We expect it to continue to grow as we get more experience with the products and more consumer knowledge of that product. But today, it's not a material portion of the loan originations.
Okay, that's helpful. That's what I was getting at. Thank you. Okay, and then just to follow up on that, you know, David, in your prepared remarks, you mentioned you talked a little about some expanding your suite of products into 2019 and beyond. And, you know, I know we're in early days here, and obviously, you're working on, you know, several things at one time. But is there... Are you able to give a little bit of color as to what you might expect in terms of broadening your product portfolio?
So I guess the easiest way to be helpful to you on this is if you look at the makeup of the CAD 165 billion non-prime lending sector that excludes mortgages. The majority of that is gonna be taken up with customers whose credit has degraded slightly from being prime product that the banks hold, and therefore they've started to move into non-prime type of credit. So that credit could be held in credit cards, primarily, and a lot of it could be in auto finance. So if you think of those two are the biggest occupants of the space of the 165, there are other products, but those are the two biggest.
So our lens is to look at the size of the opportunity inside that market, so we would definitely look at those two products, but there's a bunch of other products that we're looking at. And, I think at the point where we know we've got the right test results and the right infrastructure to support that, then we can be a bit more helpful in telling you what we're gonna be using in 2019. But at this point, we're looking at the whole size of that market to understand which ones would be a good complement to our existing range for the customers in the non-prime sector.
Right. Okay. That's very helpful. And then, maybe just finally, Steve, you mentioned that, you know, the IFRS 9, which you provided some good color on, is there any way to, you know, give some color around what the retained earnings impact is and what the impact of the allowance is? Is there any way to, you know, quantify on an apples-to-apples basis what the expected reduction to earnings looks like?
Yeah, we, you know, I think as a quick number, you can say an increase to the provision rate. We said 300-360 basis points. As a quick number, if you apply that to the originations, to the growth of the loan book, excuse me, over last year and the forecast for next year, and then tax effect, that's a rough impact of what the impact will be on 2017 and 2018 earnings. As we get further into the quarter and release the results for Q1, we'll be able to provide some more commentary there, as we do the look back and the look forward.
But for a quick guide, apply that same percentage against the growth of the portfolio, looking backwards and forwards, and you've got a rough estimate of the impact on retained earnings or sorry, on income.
Okay. And I noticed that the tax rate was a bit higher in the quarter, and I think it's trended higher through the year. Is that something that you expect in 2018?
Now, the tax rate on a normalized basis is still about 27.5%. It moves up or down, you know, as we've taken some charge-offs in for the U.S. receivables, and don't get the tax benefit of that. But also, as we've recognized some gains on sale, obviously, lower tax treatment for those. But on a normalized basis, that 27.5% statutory rate is pretty good.
Okay. Okay, that's great. That's it for me. Thank you.
Our next question comes from Gary Ho, Desjardins Securities. Your line is now open.
Thanks. Just first question, just on the macro side of it. Just wondering if you can give us an update on what you're seeing on the credit environment, and related to that, just noticed the IFRS 9 impact is now at the higher end of your previous guidance, just any color on kind of what drove the change versus three months ago?
Sorry, who is that speaking again?
Yeah, it's Gary from Desjardins.
Hey, hey, Gary. I missed the name.
So, in terms of the overall credit environment, I can tell you that we get regular quarterly research reports from TransUnion, and very similar to the macroeconomic stats that David shared earlier about the low unemployment and relatively moderated inflation and oil and gas prices. As you would imagine, we're seeing that that has a positive impact on losses on a general basis. So the credit performance of the entire industry across both prime and non-prime continues to be very healthy and stay at fairly low levels.
Yeah, on the IFRS 9, if you recall, with our Q3 numbers, we indicated that the impact of IFRS 9 would be between 250 and 350 basis points. We've tightened that up, and the range has moved up a little bit. And the biggest reason for that increase in the range is the future-looking economic indicators. IFRS 9 requires you to incorporate future-looking indicators in your calculation of your provision. If we look at those future-looking indicators that mostly impact our customers, inflation, the price of gas and oil, and employment, the trend has generally for those forward-looking indicators to get a little bit worse from Q3 to Q4. As a result of that, it's moved the provision up just slightly.
You know, one of the things, as we fully understand IFRS 9, the incorporation of those forward-looking indicators, is going to introduce a little bit more volatility in the provisioning rate than we've seen in the past, and that was evidenced by the movement that we saw between Q3 and Q4, even though the fundamentals of the portfolio and the inherent charge-off rates were relatively unchanged.
Yeah, just to add to that, you should also look at what our ending delinquency rates look like. So, that has been a great predictor and indicator for us, what the loss rates will be, kind of six to 12 months out, and our ending balances continue to be lower year on year. So even though the indicators might suggest that they could worsen, they're coming from the lowest base that they could start from, and that's why it can only get slightly worse. But in terms of delinquency and loss rates, everything that we see today still looks very strong and improved year on year.
Got it. That's helpful. Just second question. Just wanted to get an update on the Quebec expansion, so that you're now at eleven branches. Any surprises so far, positives or negatives, or any response from the existing players in Quebec?
So, in terms of the growth profile and the outlook, we've said 20-30 new locations this year. About 10-15 of those will be in Quebec. So we'll continue to progress towards the stated number David mentioned earlier, of about 40 locations in Quebec once we get to full scale there. Lots of little operational learnings along the way as we navigate the market, as we would have expected, but nothing material in terms of the way we do business. The customer response there continues to be very positive. We've continued to have great success in attracting and retaining really good talent on the ground level. So, I think everything continues to move forward there as we would have expected and above our expectations.
Okay. That's, that's great. And then just lastly, just back to, David. Just another question on the potential new products. Would you look to build that out organically, or are there potential M&A opportunities that you see in the marketplace?
So it's a very good question because we are toiling with that choice ourselves. If we find the products that we believe we already have the in-house competence to do, then we'll build it ourselves. We're not frightened to find a partner that has more experience and expertise in the particular space, and if we find the right one, then we're quite open to doing some M&A to assist us and speed up the process and remove some of the potential for risk and getting it wrong, so I think you should see or expect us to toggle with that question as we see each opportunity, and we are being quite diligent at looking at options that exist in the market today, so I think it'll be a combination of both.
That is what ultimately what we do.
Then in terms of size, financing, like how big can you guys go in a certain M&A scenario?
We can go as big as buying what was our biggest competitor a year ago, so we told you then that we had the financing capacity and support of particularly the North American banks to balance sheet us for very large acquisitions. In this particular case, we're looking at some different options that are domestic, so Canada, and once you get past the two or three big operators that exist here, there's a lot of very small-sized options, so it's not at this point, we're not seeing anything that's of material size, but we are seeing things that could be very complementary to us.
That's great. That's it for me. Thank you.
Thank you.
Once again, ladies and gentlemen, if you have a question at this time, please press Star, then One. And our next question comes from the line of Brenna Phelan from Raymond James. Your line is now open.
Hi, guys. Good morning.
Morning, Brenna.
So looking at the improvement in charge-offs year-on-year, down to 12.8% annualized, can you just give us some more detail on how we think of the contributions from, firstly, a decrease in credit risk, but then also the contribution of better credit adjudication, better collections policy, and analytics?
Yeah, Brenna, it's Jason Appel here. Good morning. I think it's a combination of factors. It certainly is a function of ongoing analytics that we use to support our credit underwriting. I've said on previous calls, obviously, we regularly refresh and revisit the performance of our underwriting models and the supporting documentation that we require from the customer in an effort to really triangulate how best to manage the risk-reward trade-off. That's a piece of it. The other big piece, as David and Stephen have both mentioned on the call, is obviously the decision to move into risk-adjusted rate loans was twofold. Obviously, it's done a better end on the customer who's demonstrated their ability to pay, but we've also seen that bear itself out in terms of overall loan performance.
And as we're able to give those customers a larger loan on average because the rate has come down, we're seeing that translate into equally better, if not, superior performance when it comes to overall repayment and reborrowing. That lent itself to be a positive factor. And I'd say the third factor that's also contributed to that movement down in losses is the continued ability of our branches and also our centralized collection staff to, I'd say, with some degree of excellence, as well as support through credit modeling, pursue the collection of loans or cash where we have to, and on a regular basis. Our ability to get lending and collections right is an ongoing effort that requires a fair amount of engagement and support within the business.
I'd say it's through a combination of that data analytics, as well as having continued improvements in our staff's ability to collect repayments from our customers, normal repayments from our customers. That's really combined to keep those loss rates strong. Finally, it's worth pointing out one final point, and that is, obviously, we are being aided by some measure of ongoing growth in the book. While our overall year-over-year growth in the loan book continues to be at strong double digits, we haven't necessarily seen that come at the expense of worsening loss performance on an ongoing or vintage basis. So we feel pretty good about the continued trend of the loss rates and our ability to keep moving forward as we head into the new year.
Okay. What I was trying to get at, though, is if I'm- if we'd expect the growth yield to move down as charge-offs move down also with credit quality of the borrower, what's the contribution that's assisting that? Like, how do I think of the relative contribution from better collections and data analytics versus the basic, just generally higher quality borrower?
So I don't know that the answer is as scientific and precise as maybe what you're looking for, but I would say my best guess for what the contribution of those pieces would be. I would say probably about a third of the improvement in the credit quality is coming from the risk-adjusted pricing and optimization of our underlying credit models, so just the ongoing improvements to our sophistication. Probably about a third is coming from improvements in collection performance, and then a third will come from the overall product mix into the next couple of years as the secured loan product, which has a much lower loss rate profile, starts to slowly consume a larger portion of the total portfolio.
If you were to try to disaggregate the decline in loss rates into those buckets, that's how I would divvy it up. Obviously, over top of all of that is that currently, we face a really favorable macroeconomic environment, and that also helps create some tailwind for us as well.
Okay, that's really helpful. Thank you. My next question is about the investment in the digital loan application system and associated investments in machine learning and AI. Is that captured in your expense forecasts, your margin guidance for 2018, or is that? Can we expect some incremental spending there?
Yeah, you know, some of that's gonna be capitalized, particularly as we develop new systems online. That would be a capitalized system, and that would be included in our capitalized costs, which obviously be depreciated over the life of it. The rest of it, stuff such as investigating AI, will be more expense in nature for the upcoming twelve months as we explore the opportunities. You know, so some of that will be expense load. Fortunately, most of that will be conducted by our own in-house people, so the staff that we got in place. So the incremental cost won't be that significant.
... So yes, it would be incorporated into the margin rates that we've talked about.
Okay, great. And then just the capitalized spending, could you give any guidance on what that would be for a system?
Yeah, on the side we haven't given it for the individual components. You know, for the last couple years, our capitalized spend has, you know, and split between hard assets, leasehold improvements, and technology, has been about CAD 12 million a year. That's likely to tick up by about CAD 4 million in the current year, you know, as we have to go through some corporate office renovations and continue to build out our technology platforms.
So four million a year. Okay, great. And then last question from me. Can you talk about what you're seeing in terms of advertising, marketing campaign spends from your competitor, Fairstone? Are they becoming more aggressive? I also noticed on their website they offer a partner affiliate marketing program. Is that new? Is that something you guys offer or are looking at? Just any color there would be helpful.
Sure. So generally speaking, yes, we've seen in the last number of months they've now started to increase their level of investment in advertising and in trying to create brand awareness for the brand. So we expected that to happen once they were able to fully digest the acquisition and go through the rebranding and resolve all of their technology-related matters. So what we're seeing is right in line with what we thought and the timing that we thought. You know, from what we can tell, the brand awareness for the new Fairstone brand is still quite low. So that's that is a big challenge and hurdle for them, and it represents less than half the aided brand awareness that easyfinancial currently has because of obviously the time we've had in market.
So, some of their overinvestment and spend in the... and the recurrence you're seeing in TV, for example, isn't necessarily going to translate into immediate origination. Some of that is what we had to do a few years ago, which is first just create an awareness for the new brand. We are seeing a increase in their amount of penetration in the online, marketing space. So when we look at the impression share, which measures when we do digital paid search ads, what percentage of the time do they also come up bidding for those same keywords as us? We have seen an increase year on year. They've gone from about a 20% impression share of the same keywords we're bidding on to about 30%. So there's an uptick there.
And then, of course, generally speaking, that drives up your cost. Fortunately for us, because we were ahead of the curve on our investments in digital marketing and digital advertising, we've been able to outrun that through improvements in our SEO, organic traffic, other digital vehicles outside of paid search, like Facebook. And so net-net, we've been able to drive growth without seeing that increase in cost that, that they would otherwise, be driving. So I guess a long way of saying is, yes, we've seen an increase, but we've been able to continually outrun it. As it relates to the affiliate, that's something we've been doing now for several years. So, you've probably seen on various documents we've had in the market, a portion of our application volumes comes from, indirect or third-party, sources.
Affiliates are a part of that. So we've always had partnerships that have driven referrals to us, and it's a pretty strong channel for us. So although they're new into that space, it's something we've had for some time.
Great. Very helpful. Thanks a lot, Ulrich Q.
Thank you.
At this time, I'm showing no further questions.
Okay. Well, since there are no more questions, as always, I'd like to thank everyone for their participation in the call today. And we continue to look forward to the growth at goeasy and updating you on our start in twenty eighteen when we come back in May. So once again, thank you very much.
Ladies and gentlemen, thank you for your participation in today's offering. This does conclude the program, and you may all disconnect. Everyone, have a great day.