goeasy Ltd.

Good morning, my name is Konstantin and I will be your conference operator today. At this time, I would like to welcome everyone to the Go Easy Limited second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, Please press star, then the number two. Thank you. Mr. Sarhan Ali Khan, you may begin your conference.

Thank you, Constantine, and good morning, everyone. My name is Sarhan Ali Khan, the company's Chief Corporate Development Officer, and thank you for joining us to discuss GoEasy's results for the second quarter ended June 30th, 2024.

The news release, which was issued yesterday after the close of market, is available on Cision and on the GoEasy website. Today, Jason Mullins, Coesie's President and Chief Executive Officer, will review the results for the second quarter and provide an outlook for the business.

Al Khoury, the company's Chief Financial Officer, will provide an overview of our capital and liquidity position. Jason Appel, the company's Chief Risk Officer, is also on the call. After the prepared remarks, we will then open the lines for questions.

Before we begin, I remind you that this conference call is open to all investors and is being webcast through the company's investor website. and supplemented by quarterly earnings presentation.

For those dialing in directly by phone, the presentation can also be found directly on our investor site.

Analysts are welcome to ask questions over the phone after management has finished their prepared remarks. The operator will pull up her questions and will provide instructions at the appropriate time. Business media are welcome to listen to this call and to use management's comments and responses to questions in any coverage. However, we would ask that they do not quote callers unless that individual has granted their consent Today's discussion may contain forward-looking statements.

I'm not going to read the full statement, but will direct you to caution regarding forward-looking statements included in the MD&A. I will now turn the call over to Jason Mullins. Thanks, Farhan. Good morning, everyone, and thank you for joining the call today. The second quarter was the strongest in our history, characterized by record originations, record loan book growth, stable credit, and record earnings. We surpassed $4 billion in gross consumer loan balances and added over $450 million of debt funding capacity, further solidifying our position as a leader in the Canadian non-prime consumer credit market. A continued increase in market share and favorable competitive dynamics led to a record volume of applications for credit at $665,000, up over 34% from Q2 last year. which generated a record 48,200 new customers, an increase of 15% in the quarter. Loan originations during the quarter were a record 827 million, up 24%, compared to 667 million produced in the second quarter of 2023. Organic loan growth was a record 286 million during the quarter, with our loan portfolio finishing the quarter at 4.14 billion, up 29%. Unsecured lending continues to be the largest product category at over 58% of loan origination, and within our direct-to-consumer channel, the average loan portfolio across our branch network rose to a new high of $6.2 million, up 19%. We also continue to make progress in scaling our automotive financing product, with volume exceeding $140 million of originations for the third quarter in a row, an increase of 79% year-over-year. This quarter, we grew our dealer network to over 3,600 dealers and continue to experience an increase in funding volume from multi-location dealer groups, another sign that we are increasing market share. With interest rates peaking and beginning to gradually decline, we also began to refocus our efforts on one of our best performing and lowest risk products, home equity loans. During the quarter, home equity lending volume was up 55% year over year. This second mortgage product secured by residential real estate is primarily used for debt consolidation and major home repairs, providing our best customers with access to a larger loan at a lower rate of interest. During the quarter, the overall weighted average interest rate charged to our customers reduced to 29.5%, down from 30.1% at the end of the second quarter last year. Combined with ancillary revenue sources, the total portfolio yield finished at the high end of our forecasted range at 34.9%. Total revenue in the quarter was a record $378 million, up 25% over the same period in 2023. We also continue to be pleased with the quality of our loan originations and credit performance of the portfolio. Both the unit and dollar-weighted average credit score of our second quarter loan originations rose to an all-time high, highlighting the benefits of our credit adjustments and improving product mix. Secured loans now also represent a record 44.1% of our loan portfolio. Canada continues to experience a weakening economic environment, with the unemployment rate increasing by 1.3% over the past 12 months to 6.4% today. While certain pockets of our customer base have experience and pressure on their finances, our combination of proactive credit tightening and improving product mix has helped credit losses remain stable and within our forecasted range. The annualized net charge-off rate during the second quarter was 9.3%, in line with our target range of between 8% and 10% for fiscal 2024. Our loan loss provision rate reduced slightly to 7.31% from 7.38% in the prior quarter. This was primarily due to the improved product and credit mix of the loan portfolio and forward-looking economic indicators, which indicate that future interest rate reductions should lead to improvements in the economy. We believe our current level of provisioning reflects the appropriate credit risk. However, we continue to tighten our collection policies as well as underwriting requirements and plan to make additional credit and underwriting enhancements in the third quarter. We continue to feel confident in the credit portfolio and that we will continue to see stable losses in the quarters ahead. As has been the case for recent quarters, we are continuing to experience the benefits of scale through operating leverage and productivity improvements. During the second quarter, our efficiency ratio, specifically operating expenses as a percentage of revenue, improved to a record 26.9%, a reduction of 430 basis points from 31.2% in the second quarter of the prior year. As a function of receivables, operating expenses were 10.1% versus 11% during the prior year. After adjusting for unusual items and non-recurring expenses, we reported record adjusted operating income of $153 million, an increase of 34% compared to $114 million in the second quarter of 2023. Adjusted operating margin for the second quarter was 40.5%, up from 37.7% in the same period of 2023. And adjusted net income was a record of $71.3 million, up 27% from $56 million in the prior year, while adjusted diluted earnings per share was a record $4.10, up 25% from $3.28 in the second quarter of last year. Adjusted return on equity was above our target level of return at 25.4% in the quarter, an increase of 120 basis points from 24.2% in the same period last year. With that, I'll now pass it over to Hal to discuss our balance sheet and capital position before providing some comments on our new revised outlook. Thanks, Jason. We continue to build on our long-track record of obtaining capital to support our growth. Subsequent to the quarter, we took advantage of the gradual improvements to the interest rate environment, implementing several enhancements to our balance sheet. Firstly, we increased our existing senior secured revolving credit facility by $180 million to $550 million, and extended the maturity to July 2027. We added three new lenders with Desjardins, Bank of Nova Scotia, and Raymond James, and our lending syndicate now includes all of the major banks in Canada, a testament to the strength of our business.

In addition to the amendments to the credit facility, we issued $200 million U.S. of senior unsecured notes as an add-on to our notes due in 2029. In connection with the offering, we can currently enter into a crossover

into a currency swap agreement, which served to reduce the Canadian dollar equivalent cost of borrowing on the notes to 6.38% per annum, full 80 basis points better than the notes we issued in February.

Based on the cash on hand at the end of the quarter and the borrowing capacity under our existing revolving credit facilities, as well as the aforementioned balance sheet enhancements implemented following the quarter, we have approximately $1.6 billion in total funding capacity.

Border ends, our weighted average cost of borrowing was 6.8%, and the fully drawn weighted average cost of borrowing was 6.9%. We also continue to remain confident that the capacity available under existing funding facilities and our ability to raise additional debt financing is sufficient to fund our organic growth forecast.

The business also continues to produce a growing level of free cash flow, free cash flow from operations before the net growth and

$23 million in the quarter, while the trailing 12 months of free cash flow exceeding $389 million. As a result, we estimate we could currently grow the consumer loan book by approximately $250 million per year solely from internal cash flows without using external debt, while also maintaining a healthy level of annual investment in the business and maintain the dividends. Once our existing and available sources of debt are fully utilized, we could also continue to grow the loan portfolio by approximately $450 million per year solely from internal cash flows. Based on the current earnings and cash flows and the confidence in our continued growth and access to capital going forward, the Board of Directors has approved a quarterly dividend of $1.17 per share, tabled on October 11, 2024, to the holders of common shares of record as at the close of business on September 27th, 2024. I'll now pass it back over to Jason. Thanks Al. Subsequent to the quarter in July, we announced that I will be transitioning out of the role as president and CEO at year end. The board of directors has since commenced a formal search process and similar to the previous CEO transition at Go Easy in 2018, I will continue to serve as a director on the board, providing the company continuity of knowledge and expertise. Between myself and David Ingram, our executive chairman and former CEO, there is 38 years of combined GoEasy-specific management experience on the board. The company is in an excellent position with a very strong executive team to continue its 23-year-plus track record of delivering industry-leading performance. Given recent trends, including the accelerated loan book growth experienced during the first half of the year, we have revised our three-year commercial forecast, consistent with past practice at the midpoint of the year. The most notable revision is the increase we have made to the loan growth of the portfolio, which we now expect to finish this year between $4.55 and $4.65 billion in consumer loan receivables, then scale to between $6 and $6.4 billion in 2026. In consideration of the deferral of the implementation for the previously announced reduction in maximum allowable rate now to January 1st, 2025, versus our prior forecast, which assumed mid-2024, we have also increased the yield and loss ratio for 2025 by 25 basis points, respectively, to account for an additional half year of underwriting in higher risk borrowers and higher APRs. The risk-adjusted margin of the loans we underwrite will remain unchanged. With the higher levels of loan growth, we also expect an increase in operating leverage resulting from scale, leading to an increase in operating margins for the company. When all combined, the net effect of these forecast updates is positive to the overall business outlook. Turning to the upcoming quarter, we continue to take a conservative and prudent approach to managing credit by layering an additional tightening to our credit tolerance levels. Yet, we also continue to experience healthy demand and limited competitive tension, allowing us to grow at an attractive rate while being selective about the loans we underwrite. In the third quarter, we expect to grow the loan portfolio between $235 and $265 million. As we continue to optimize our pricing, we expect to maintain the current total annualized yield of the consumer loan portfolio, which is finished between 34% and 35%. We also continue to expect stable credit performance, with the annualized net charge-off rate expected to be similar to current levels at between 8.75% and 9.75% in the quarter. Furthermore, we are well underway on our strategic priorities. During the quarter, we welcomed Patrick Enns to the team as our new president of the EZ Financial Direct-to-Consumer Lending Brand. Patrick, who brings 17-plus years of consumer finance experience, will lead several of our growth initiatives, including the development and launch of our new credit card product in 2025. We're also continuing to invest our infrastructure, finding ways to improve automation and productivity. As evidenced by the continued reduction in our cost structure and margin expansion, we believe there are many opportunities to run this business more efficiently. In closing, I want to thank the entire GoEasy team. as we owe these outstanding results and performance year-to-date entirely to them. Whether it's the staff in our branches, the team members in our call center, or the development representatives working with our merchant partners or our corporate office team who support the front line, the company today is a lending platform powered by 2,500 talented team members that aim to provide everyday Canadians the access to credit they need and deserve. In May, we were thrilled to hold our company national conference, providing us the opportunity to celebrate and recognize all of the incredible talent across our organization. I am just as convinced now as ever before that we have a winning team who are deeply passionate about our vision. They play a central role in the financial system by serving the millions of hardworking Canadians that rely on us for the access to credit that fuels their lives. I am very proud of the entire team. So with our most ambitious growth forecast in front of us, it is certainly fitting to say that we are truly just getting started.

With those comments complete, we'd like to now open the call for any questions.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please make sure to lift the handset before pressing any keys. Your first question comes from the line of Nick Praley from CIBC Capital Market. Please go ahead.

Okay, thanks.

I just wanted to start with a question on the credit front. So the loss rate was stable in the quarter. I noticed the delinquency rate ticked up. and the value of loans in the Stage 3 risk bucket increased pretty significantly at the end of the quarter. But based on your guidance that you just outlined for Q3, it sounds like you're not expecting much of a near-term impact on the loss rate. So I was just wondering if I could hear your perspective on that dynamic regarding the arrears rates in the quarter. Yeah, for sure. Happy to. First point, Stage 3 and delinquency are fairly correlated. They're predominantly one and the same, so I'll comment on the topic as a general matter, but they're kind of otherwise deeply correlated. So a couple things. One, as a smaller matter but a relevant one, you probably have noticed over the last several years that as we've grown the secure product mix, the delinquency at any given quarter end has gradually increased. And that's simply a matter of that all of our secured loans have a longer charge-off cycle, so you have more loans to sit in the delinquency buckets, even though the roll rates from delinquency to charge-off are lower, and you've got the asset to offset those losses to reduce, therefore, the net charge-off rate. So that's a smaller component, but it is a component, and it's sort of structural to what we've seen steadily for several years. That's kind of one point. Two, as we've noted, we have seen some level of economic pressure. I think it would be inconceivable to imagine that given the unemployment rate has risen, the degree that it has, as I said in the prepare remarks, there are pockets of our customers that we've seen struggling a little bit more, and some of that is in the delinquency number. And then lastly, we have also done some tightening, as I said in the prepared remarks, to collection practices. So one of the things that the lender you can choose to do is not only tighten and modify underwriting standards at the front end, is you can also choose to tighten and modify collection practices at the back end. And we've tightened a number of our collection policies that limit the customer's ability to have greater flexibility. As you get into a recessionary period, customers have to choose. about where they're going to deploy their discretionary spend and which debtors they're going to or lenders they're going to pay. If you're a little bit too flexible with certain customers, you may actually then defer the amount of cash that they commit to repaying on their loans. We've tightened a number of collection policies as well. Despite all of that, to your point, based on what we're seeing in the performance of the collections activity and the roll rates or what percentage of that delinquency will roll to charge off, we're still very confident that the actual net charge off rate after factoring what rolls to charge off and any recoveries we get from secured assets will still be stable and consistent with the levels we're at today. So a little bit of a disconnect between that slight uptick in the delinquency and our charge off outlook, which we're still very confident in. Got it. Okay, that's very helpful. And then you've been adjusting prices a little bit higher to accommodate a higher cost of financing over time. Now that policy rates are coming down, do you anticipate the pricing strategy to follow, or are you kind of comfortable where you're at just given the forthcoming reduction to the interest rate cap?

Yeah, generally more comfortable because the rate cap pending.

I think if it were not for that, we would probably take advantage of lower rates in the coming year or two ahead to pass some of that benefit on to borrowers. But we're in this sort of unique spot where we're operating in an environment that the rate cap itself will sort of force down pricing. And for us, every customer that we price down below the rate cap causes us to have to forego another customer from getting approved that's sort of on the margin. So I think for right now, when you look at our yield forecast, you can assume The pricing strategy we're using in the market is basically unchanged. The overall step down in the total yield is really nothing more than just the result of the rate cap that goes in Gen 1. Got it. Makes sense. Okay. And then just last question. You alluded to plans to implement further credit enhancements in the third quarter. I was wondering if you could just elaborate on that. To what extent you might be contemplating a tightening of the credit box, like you're looking at adjusting LTVs on a secured lending product or raising the threshold for affordability calculations on unsecured. Can you just help us kind of understand that a little bit better? Yeah, I'll let Jason kind of add to this, but we're basically doing kind of all of the above to varying degrees. Depending on the product and the credit risk tier of lending, in some cases, it's more effective to raise the credit floor and actually increase the custom proprietary score that's required to get a loan. And in other cases, it makes more sense to simply reduce the amount of credit that you're willing to extend. So generally, we've done all of the above pretty consistently now every quarter or two for, as you know, going all the way back to pretty much 2022. But Jason, is there any specifics you want to share there?

Yeah, I mean, you hit on a couple of them, Nick. So obviously, the most obvious ones are we have made some modest modifications to the LTV ratios in our home equity product, though that product continues to perform actually higher than our expectations, which is great. The other thing we are doing is introducing some additional model adjustments New generation bankruptcy and insolvency models that we've been working on over the past several months. So those just give us another angle to deal with a portion of our charge-offs, which come in the form of unexpected insolvencies or what we call surprise bankruptcies. Those are ones where we're obviously spending a lot of time trying to narrow down because that is a very isolated group of individuals that's hard to identify. So those are some examples of the things we can anticipate putting in place over the course of the next one to two quarters.

Understood. Okay, that's great, Colin. Thanks very much.

Your next question comes from the line of Etienne Ricard from BMO Capital Markets. Please go ahead.

Thank you very much. To circle back on non-current receivables, is there a way for you to quantify how much of the increase is driven by a weakening consumer relative to a mixed shift? where it's the secured loans, which, as you pointed out, tend to carry more imbalances?

Yeah, so I think if you were to unbundle the increase in the delinquency rate, say, for this quarter versus last quarter, it's moved by about 1.4%, which, based on the loan portfolio size today, is about, call it, $55 million. You then have to... sort of bifurcate between secured mix, some level of macroeconomic pressure, and some of the proactive kind of collection policy tightening that we've done. The secured mix would be very proportionate to the change in the secured mix. So I think quarter on quarter, we went from 41.7 to 44. So it's up two or 3% on 41. So think of that as it's probably five to 10% of the shift. The balance, you could probably think of it as about Maybe a quarter to a third is just macroeconomic, and then the majority, the remaining call it two-thirds, is specifically stuff we know we've done in our collection policies and collection practices. So because the majority is sort of very self-inflicted and we're aware of the changes in the timing that we're making, we think those are actually good for the portfolio long-term and for our ability to collect cash. That's kind of a big part of what underlies our confidence in the delinquency, not flowing through the charge-off rate at the same rate.

Okay. Appreciate the details there.

And, Jason, a candid question for you on succession planning. If we go back at the time of your appointment as CEO back in 2019, what did you find most challenging in terms of assuming this leadership role? In other words, what came as a surprise to you in the early days of assuming this CEO position? And the reason I'm asking you is, well, you've been in this position in the past, and you'll continue to be providing guidance as a board member.

So I presume this will help choose the right candidate. Thank you. Yeah, great question.

So I guess, you know, I would say when I took on this CEO role six years ago, I was new to being a CEO. And so, you know, I had a lot to learn, frankly, over the last six years by trial and error in many ways, obviously had. a lot of good business training, had incredible mentorship from David, our exec chair and former CEO, and the balance of the board. So it was certainly surrounded by a lot of support, but it was still a brand-new leadership position for me. So you can imagine the number of lessons learned in terms of decision-making, managing the team, the power of your words, and how it affects people's actions and work. So it's a pretty big list of probably learnings and reflections. I would say in this case where we're seeking ideally based on the standard that's been set, a very seasoned, experienced executive, particularly one that's been a CEO, you know, the thinking would be that they likely come in with many of those lessons already having been learned. And so for me, where I had the deep institutional knowledge but had to learn the CEO skill, what's more likely here is the person comes in with the CEO skill and then needs to learn more about our specific business and our specific culture. The reason we feel so good about that is if you look at the management team on the executive group that today reports it to me and then, of course, a new individual, The tenure of that group is very, very strong. It's pushing eight or nine or ten years. The board has a tremendous amount of tenure. They'll be advantaged, again, to take advantage of both David and myself as advisors whenever they reach out for support. So you're going to get someone that's kind of sandwiched between a very experienced, talented, tenured board and a very experienced, talented executive team. It really does, you know, probably set them up for the best success possible. So, yeah, so lots of learnings for me, but I think a big part of that just being, you know, new to the role at that time and learning the lessons along the way.

Inverse for someone else maybe from the outside that brings CEO experience, but will have to sort of ingrain themselves and learn the go-easy way of operating. Thank you for sharing. Next question is from the line of Jamie Glenn from National Bank Financial.

Please go ahead.

Yeah, thanks. Good morning. Wanted to dig in a little bit again on the delinquencies. Just are you able to provide a little more granularity in terms of product line or borrowing segment, what you're seeing in terms of driving that delinquency rate higher?

There's really no specific concentration.

Our collection policies and practices, we apply pretty uniformly across products. There's not really any uniqueness there to specific product lines. So if you were to look at the delinquency, the proportion across the products is pretty typical to what it historically has been.

So nothing product-specific to call out, to be honest. Okay.

In terms of the action to tighten your collection policies, I would assume that was put in place some time ago, maybe early in the quarter. Do you have any color, anecdotal, maybe some data around how those borrowers or how these borrowers are adjusting to, let's say, a more firm hand when it comes to collections and deferred payments?

So far, so good.

You know, in non-prime lending, you're constantly balancing the need to give the customer some level of flexibility because the segment we serve is just embedded in the model. The segment we serve is apt to find they're going to run into some trouble at times and hit some speed bumps. And if you're too rigid, you end up burning relationships with a lot of customers that are otherwise good customers that if you simply gave them a temporary helping hand would be very, very good, valuable long-term customers. On the inverse, if you're too flexible and give them too much grace, then they can take advantage of that and you won't collect as much cash as you should and it doesn't create the right discipline. To be clear, what we're talking about here is nothing different than what we've always done, which is how to constantly optimize those collection policies and collections practices. I think that we felt there was a bunch of collection policies and practices that we felt we could be tighter on, we could be more disciplined about, we could give less flexibility and freedom to the customer. We think that's actually net good for the business and for the performance of the loans. It does come with a little bit of temporary pain because a bunch of customers now roll up the delinquency, and now you've got to work your way of working with those customers and try and get them back on regular payments again. But that's the good blocking and tackling you have to be doing in the business model all the time. And so, so far, so good. We'll obviously constantly reassess that, but at this point, we still feel very good that when we factor in the roll rates of that delinquency number, we factor in the recovery rates post-charge-off, we factor in the assets that exist on these loans, all of that we feel good will conspire to still keep us in that low 9% loss rate range, so we feel good.

Great. In terms of the loss rate guidance over your three-year forecast, picking up 25 basis points, obviously not a huge, huge jump, but just want to get a better understanding of maybe some of the assumptions that are going into that guidance and sort of the range of those assumptions that would keep us within the band over the next couple of years, maybe around macro forecasts or impact of some of these credit tightening that you've implemented over the last several quarters? Maybe just talk us through some of those assumptions.

Yeah, for sure.

So to re-baseline, the forecast methodology that we use is built on a down the fairway, what we consider to be very reasonable, very realistic set of assumptions around how the business is going to perform, how the market and the customer is going to perform. It's based off our existing suite of products and channels, so we don't layer in an assumption for new contribution from things we have not yet built, like credit card, for example, is based on current products. We then overlay a set of macroeconomic forecasts and probability weight them to come up with a certain economic outlook that we then apply so that the loan performance we're expecting is adequately stressed to account for whatever economic conditions we're operating in. Our going model today is still mild to moderate recession in 24, early 25. We're kind of beginning or on the cusp of experiencing that now with the current level of unemployment, although it held at 6.4 today. That version of mild to moderate recession, as we've talked about before, assumes unemployment going up to 7%. And so if you think about our range for, let's say, 2024 of losses of 8 to 10, and the unemployment rate having risen from 5 to 6.4, you can see why we're at the low to mid-nines. And we've got the capacity and the buffer for unemployment to continue to rise to as high as 7 and pretty confidently still stay within our range, although we might be in the upper end of our range. if the economic conditions were to worsen beyond that and you had unemployment now rising up into the 7s or 8s, that's where we would obviously have to revisit our assumptions, either modify our forecast or get even more aggressive with tightening credit. The reason the loss rate range steps down next year and beyond is a combination of factors. One, as was always the case when the rate cap goes in, there's a bunch of borrowers that are at higher APRs we now reject, and so that improves the long-term credit quality of the business. all of the credit modifications that we've been making will continue to flow through gradually over time. And then lastly, there's an underlying assumption in the economic forecast that even though it's actually going to get maybe a little worse before better, the next little while is more likely to be in this sort of verge of recession or recession-level territory. As you get a full year out from now, the effect of rate cuts should lead to an improving economic environment, particularly as you get to sort of mid-year and beyond. So all of that has been factored in and weighs into why we think that losses will gradually step down next year. But because that rate cap has been deferred by that full six months, another half year of higher APR lending, it just simply kind of defers or protracts the rate at which we would expect that loss rate improvement.

Yeah, that's great. I'll turn it over. Thanks, Jim.

Your next question comes from the line of Gary Ho from Desjardins Capital Markets. Please go ahead.

Thanks. Good morning. Just the first one, just want to go back to the rate cap implementation. Now that we have the actual date, can you talk about the strategy up to and post? Will you take advantage of writing higher rate loans up to year-end, obviously with higher net charge-off profile? Do you anticipate a rush near year-end and maybe post, I think you've talked about in the past, options that you have to mitigate some of the rate decreases, including extend a new credit at the 35% rate. Yeah, maybe just talk to us a little bit about that.

Yeah, so we don't foresee any material change in the volume of the loans that we write at those APR levels or any sort of consumer rush. Frankly, I think that's majority of consumers in this segment are still probably not even fully understanding and aware of the regulatory changes that they're about to face. So we don't expect any real change in trajectory or behavior in that sense. We will continue to offer loans with those APRs to those customers all the way right up until the time at which we can. Some of the some of the customers that would be otherwise rejected as a result of the lower rate cap are already, in fact, many of them already captured in the credit tightening we've been doing and continue to do because they represent the higher risk segment. So as you're trying to tighten credit, it tends to kind of tackle those customers that are higher APRs because they have higher credit risk anyway. So the amount of additional tightening that has to be done to prepare for the rate cap is limited at this point. There's a little bit more, but not a ton. Once that rate cap is in, to your point, the strategy will be that for the customers that we are able to continue to lend to, we'll give them incremental credits at the new 35% level. So you're going to have some customers that get rejected, some who will continue to get more credit, in an incremental form at 35, and then a whole proportion of borrowers, two-thirds of our business and rising, that are already at rates below that level. And for them, it's business as usual, and there's really no change. Other than that little bit of pricing increasing we've been putting through to account for higher funding costs, the vast majority of our customers in our portfolio are well below that level, and there's really no change to their day-to-day borrowing experience.

Okay, got it. Makes sense. And then my second question, I just want to talk about your efficiency ratio that continues to improve. Can you elaborate on kind of what you're doing on the cost side to drive that ratio better? Is it a function of keeping OPEX in line while growing top line? Just provide some color that would be helpful.

Yeah, it's really three buckets that we've kind of talked about before.

Bucket one is just natural scale. There's aspects of any business that are more fixed-like costs and thus as you grow revenues. you get more leverage on those fixed costs and more of that revenue flows to the bottom line. So every business has an element of the benefit of scale and we're no different. So that's bucket one. Bucket two, we're doing, I would say, proactive, cost management activity. That could be just being more conservative with cost. And when you're operating in a higher credit risk, higher funding cost environment, every business is being probably more prudent about expense management. It's also in the format of investments in productivity and automation. As we talked about before, there's lots of our business where we've developed maybe a manual process or a human process that's been perfectly fine, but now it just creates the opportunity to do some automation and take some cost out of the system. So that's kind of the second bucket, kind of cost management. And then the third bucket is also just a function of mix. We've talked about before how direct-to-consumer lending has a higher cost structure than the indirect lending. So as we shift gradually and slowly the mix of businesses coming through indirect channels, lead generation partners, automotive financing dealers, point of sale merchants, those channels and products tend to have slightly lower cost structures. So simply the mix shift alone is going to mean that the off-ex ratios of the business are also going to gradually improve. So all three of those things are checking in and conspiring to drive the improvements in the efficiency ratio that we're seeing.

Okay, great. Thanks for the color. And then my last one, Jason, I think you mentioned potential credit card launch in 2025. Maybe just give us a glimpse on kind of what you're working on behind the scenes, any early read into potential uptake or cross-selling opportunities there.

No real meaningful progress to share.

We're at the beginning. I think we've done a decent amount of legwork on the product design. We've narrowed in on a couple of potential platform partners. But with Patrick's addition here recently and his background experience, we kind of have just maybe taken it fairly slow. Get him enough to speak because he'll be a key part of leading that. And, again, our goal is to get a pilot up and running at some point next year. Clearly, given our robust organic growth, we're not in a urgent rush to have to get that product to fuel growth. So we're much more apt to take our time, be very careful, methodical, test, learn. It's early days, though, and, you know, not much insight yet to share. But I'd say as we get into next year, we'll start to have some learnings and some thoughts around we can share about more specifically how we've designed the product.

Okay, perfect. Those are my questions. Thank you.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by the number one on your touchtone phone. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your next question comes from the line of Stephen Boland from Raymond James. Please go ahead.

Good morning. Just one question. Every quarter we see your auto lending. you know, record originations, continue to add dealers. I'm just, I mean, it's such a competitive space. I'm just curious what you're doing maybe differently than your competitors in terms of, you know, winning business and adding dealers because it has been a saturated market for many years. So I wonder if you just, you know, why are you winning so much in that space?

Yeah, great question. So if you look at the competitive landscape by product category, it's probably been the one that has had the most competitive disruption. There are a handful, and we won't sort of name names, but there are a handful of of particularly smaller scale auto lenders that had been in that market for some time represented that kind of call it more competitive, robust competitive environment. You noted that over the last several years have retrenched, pulled out, scaled back At least two of the handful I'm referring to are public companies. So you can kind of reference those. And there's a few other private ones as well. So if anything, we've actually seen less competitive tension there than we would have in the past. You really have, again, the major banks, TD and Scotia, that are doing non-prime. You then have the two large-scale businesses, Santander and IA, the insurance business. And then outside of those four, the next year is really ourselves and Bearstone through their Eden Park brand. And so to kind of think of it as the banks as the sort of highest echelon of credit, the very, very near prime population, and then IA, Santander, Fairstone, and ourselves are kind of capturing the balance. And when you consider the fact that it's the single largest product category at $60 billion of the $200 billion, even to generate – 100 million of originations, a quarter, 400 million to 500 million per year, like that's a good and really solid amount of market share. But relative to the size of the market, it may be only having four or five million companies you're competing with. It's pretty reasonable and logical.

Okay. That's all I have. Thanks very much, guys. Thank you.

Your next question comes from the line of Jeff Kwan from RBC Capital. Please go ahead.

Hi. Sorry it was late to join in the call. And it may be somewhat similar to Steve's question, but looking at it as far on the point of sale and the pipeline there, just wanted to get a sense on, you know, kind of where you see the pipeline and the depth of that pipeline of adding more of the point of sale merchants.

Yeah, still a fairly early stage for us.

I would say if you go by kind of product category, power sports and recreational vehicle financing is a more mature vertical. So there's still room for expansion and new partners, but it's more limited. Auto, we're at 3,600 dealers. We think the target number over time that we would pursue is 8,000 to 9,000. So we won't, of course, necessarily capture or sign up all of them, but I would assume that the dealer network can probably double over the next five years as we pursue growth in auto. And then once you get to the non-auto, non-powersports world, retail, healthcare, there we still have a ton of runway. Yes, we have thousands of partners today. But you're talking about a marketplace across all retail and all healthcare that has tens and tens of thousands of potential point-of-sale distributors to partner with.

So, you know, that opportunity still remains a key part of our growth outlook and our growth strategy.

Okay.

Thank you.

Our next question comes from the line of Jamie Loin from National Bank Financial. Your line is now open.

Yeah, I just wanted to follow up and go back to the credit underwriting enhancements and maybe what you're seeing from an application flow perspective. Maybe not for the more recent changes in Q3, but going back the last few quarters, can you sort of refresh? What have you seen from approval rate standpoint? Is that something that's trending much lower now? Is this more prospective, or have you been seeing applications that have just been coming in that are, you know, far too distant from what you'd like to underwrite? Like, what else can you add to these enhancements, and how has it affected, let's say, the growth profile?

Yeah, so, I mean, the advantage that we have right now is that when you have –

robust, healthy consumer demand, and slightly less competition, as we've talked about a few times, we're basically just being a lot more selective. I think in our earnings deck, we quote that we only funded about 12% of all the new applications for credit. So, you know, I think that's a pretty, you know, kind of stark sense of how much filter is being applied. Now, of course, you have in there customers that don't fulfill their application or you can't get a hold of or drop off or all those different typical sales funnel elements. But a very, very big part of that is the customers that are getting knocked out due to either credit or due to affordability and we're just being more selective about. So you may recall the past, that number, percentage of funding of new customers historically, if you go kind of before the last two years of concerns around economic environment was 15% to 20%. So it's down pretty meaningfully. And so even though we're seeing this great top of funnel in terms of applicant volume, and it's more than enough to generate still very meaningful growth, we're being, you know, highly critical, I guess, of the applicants and the loans that we're running at this point. And every time we tighten credit, that just continues to reduce the approval rate. But we're fortunate that the market's big enough We can be that selective and still generate pretty attractive growth. And a lot of those leads, too, like we'll spend the marketing dollars or the merchant relationships to get those leads. Those can and will become customers in the future. We maintain an active database of every applicant. Those customers that we reject provide consent to pull their credit reports for up to one additional year past their application. So we can go back. and reauthorize and re-approve them with pre-approved loan offers in the future. So if six months from now the economic conditions are better, there might be thousands of customers that we've rejected recently that we could go back at and make offers to if we feel better about the conditions and want to change course on credit tolerance.

So that's kind of what we're seeing and experiencing today.

Okay, great. Separate topic on the growth side. The mobile app has been in customers' hands now for a few months. What can you tell us in terms of loan production and credit quality from that channel?

It's going well.

I think we're at 150,000 or so users of the app. So at roughly almost more than 1,000 active customers. You know, we're kind of about a third or just thereabouts of the total customer base are active users. We still have not done a lot of marketing and promotion around the app. We've gotten the benefit of, again, very robust organic growth. So Given, of course, there are all these limitations on leverage and capital and all of these factors, operational capacity, you know, we've always talked about how we're very happy with the rate of growth and there's certainly a limit as to how much faster you would want to grow. So we're not necessarily doing all of the things that are available to us to try to push and drive growth even further. We're sort of very comfortable at today's growth levels. But if I do look at the app, we've had over 30,000 customers start applications for credit through the mobile app. That's pretty meaningful. We've funded several thousand loans that have been from customers that applied through the mobile app. So very, very happy with the performance, very happy with the data. But we just know that that is an opportunity that's still very untapped. We have still not gone ahead and advertised and marketed and promoted to the public that mobile app and that solution. It's been purely available to a customer after they've kind of onboarded with one of our Go Easy products. And we have still not generated all of the potential cross-sell offers that are available to our existing customers. We have a very big queue of offers that we've assessed for credit on existing customers to cross-sell existing products that we have not made yet. Those continue to be building in the queue for the future growth. When you have a quarter of 48,000 brand-new customers, you know, you don't need to go out and push the envelope on expending credit to existing customers with as much ambition. So there's a pretty big queue of opportunity building around the use of the mobile app in the future. I'd also add that once you have a product like a credit card, this sort of speaks to some of the strategic benefits of a product like a card. A card, much like a bank account, is like a never-ending, ongoing, revolving account. It gives you a very sticky reason to get customers to come back and use your mobile app. And so that's another milestone, I think, that will be a kind of, you know, key event, I suppose, in terms of the benefits of the mobile app to our customers, because they'll have even more reasons to be using it and checking it on a regular basis.

Thanks for that comment.

There are no further questions at this time, so I'd like to turn the call over to GoEasy for closing remarks. Please go ahead.

Thank you, everyone, for joining today.

Since there's no more questions, we appreciate your participation and look forward to updating everyone at the next quarterly call in November.

Have a fantastic rest of your day and a great weekend. Thanks, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation.