Earnings Call: Q1 2016

May 13, 2016

Good morning, ladies and gentlemen, and welcome to the Equitable Group 2016 first quarter conference call. Before we begin, we would like to remind you that certain forward-looking statements may be made on this call, including statements regarding possible future business and growth prospects. You are cautioned that such forward-looking statements involve risks and uncertainties detailed in the company's periodic filings with Canadian regulatory authorities. Many factors could cause actual results or performance to be different from those expressed by such forward-looking statements. Equitable does not undertake to update any forward-looking statements made by itself or on its behalf, except in accordance with applicable securities laws. This call is being recorded on May 13, 2016, at 10:00 A.M. Eastern for replay purposes. It's now my pleasure to turn the call over to Andrew Moor, President and CEO of Equitable Group and Equitable Bank. Please go ahead, Mr. Moor. Thank you, Nick, and good morning, everyone. Joining me is Tim Wilson, Chief Financial Officer of the bank and Equitable Group. As a reminder, a slide deck accompanies our remarks and is available at eqbank.ca. The first quarter was transformational for Equitable in that it marked the very successful launch of EQ Bank, our state-of-the-art digital platform. Beyond giving us another source of funding, itself an important objective, EQ Bank serves as a new channel for us to reach Canadians and give them a purpose-built and completely mobile banking experience that is differentiated, and more importantly, many of our customers think very valuable. EQ and the Savings Plus account, the first product on our new platform, changed the way Canadians can grow their savings, and in a functionality sense, tear down the artificial barrier between checking and savings through easy-to-use features such as free electronics bill payments and e-transfers from the interest-bearing account. Based on some numbers I'll share with you in a few minutes, many Canadians have taken notice of EQ and have made its debut far and away more successful than we thought possible. We had some challenges with service levels at the time of launch, and we're disappointed with our miss on delivering exceptional service in the early going. But we made the necessary adjustments and are pleased with where we are today. Of course, it took a sizable investment to make this happen, and that investment did weigh on our first quarter performance. Looking at our results at CAD 28 million, or an EPS of CAD 1.71 per diluted share, first quarter earnings were solid. The EPS results reflected the impact of CAD 2.6 million, or about CAD 0.12 per share of costs incurred to advertise the launch of the digital bank. We also incurred other EQ Bank costs that were not present a year ago of CAD 2.4 million or CAD 0.11 per share. This is a price worth paying given the transformational nature of the EQ platform on our status as a branchless bank and the advantages it creates for us, our savings business. Also affecting Q1 was a CAD 1.2 million hedge loss related to securitization, which reduced first-quarter earnings by CAD 0.06. It's important to note that this is an accounting, not an economic loss. Our hedging programs work well, so there is an offsetting gain that will flow through our income statement over time by way of reduced funding costs, or put another way, through higher spreads. Another factor that affected our performance versus expectations was our decision not to execute any IO strip sales transactions to generate gain on sale income. Recall that we have been suggesting for several quarters that we expected these volumes to increase and to largely offset the cost of our strategic initiatives such as digital banking. We changed our approach after considering the implications on our leverage ratio. There is definitely an element of longer-term thinking about creating value for shareholders with this decision at the expense of short-term earnings. The bottom line, reported EPS was CAD 0.10 below the first quarter last year, but adjusted just for the advertising spend and hedge loss, EPS would have been CAD 1.89 or CAD 0.08 higher than last year on substantial growth in assets. As a result of slightly lower earnings, the bank produced a first quarter ROE of 14.7%. This is below our five-year average of 17.7%. We pride ourselves on delivering consistently high returns. So while this ROE performance is undesirable in the context of first quarter spending, it is understandable rather in the context of first quarter spending. We very much aim to get back on track in future periods. Book value increased 13% or CAD 5.68 per share year-over-year, which underscores the enduring advantage of our branchless bank business model and value creation strategies. On still strong earnings and a positive outlook, our board declared a quarterly common share dividend of CAD 0.21 for holders of record on June 15th, payable on July 7th. This is an 11% increase over the dividend declared at this time last year. Yet again, even with a higher dividend payment, our earnings retention rate was high, and our CET1 ratio was strong. We believe retaining earnings continues to make economic sense as we are finding very productive ways to deploy shareholders' capital for high returns. Looking at the lending side of the bank, our fundamentals remain very strong. Mortgages under management grew 22% year-over-year to a record CAD 17.7 billion at March 31st. Once again, alternative single family was a significant driver. Mortgage principal increased 19% to a record CAD 6.8 billion at March 31st and was ahead 5% during the quarter itself. This increase is attributed to our good and continually improving reputation for outstanding customer service. First quarter alternative single family originations were very strong, amounting to CAD 674 million, also 19% higher than in the opening quarter of 2015. This growth was achieved despite a 17% decrease in originations in Alberta and Saskatchewan. From what we can see today in our markets, we would expect alternative single-family lending assets to continue to grow at mid to high teen rates throughout the rest of 2016. At CAD 2.3 billion, commercial mortgage principal was 4% higher than at year-end, and pretty much unchanged from a year ago. Commercial originations were CAD 202 million in the quarter, slightly lower than a year ago. This performance was in line with our expectations and reflected the pricing and risk management discipline we've employed in the last couple of years to sustain the high returns our bank generates in our commercial businesses. We've made changes that we hope will sharpen our focus on the market. Our commercial team is working to broaden and deepen our partnerships and broker relationships as a means of increasing our access to high-quality lending opportunities. We'll take time to realize significant results from our actions, but we're already seeing some early wins and believe that commercial originations will increase from Q1 levels as we move through 2016. In the very near term, we expect the bank's commercial loan portfolio to remain flat as higher originations are offset by the runoff of maturing construction loans funded in prior years and by the impact of reduced activity in Alberta. The other significant driver of asset growth was securitization funding, financing where mortgages under management were up 34% year-over-year and 7% since the end of 2015, driven by the ongoing development of our prime mortgage business. We originate prime loans internally and through third-party agents, and then securitize those mortgages through the CMHC MBS program. During the quarter, we funded CAD 444 million of prime loans, more than double the amount funded last year at this time. As a result, prime single-family mortgages under management stood at CAD 2.5 billion at quarter end, almost three times higher than a year ago. In context, we're in the early stages of building broker relationships on the prime side and expanding geographic coverage. I'm happy with our progress so far, and I'm seeing signs of more momentum every month. Prime mortgages are a competitive market and gaining meaningful share with our internally generated business will take time. We've got a great team with a lot of energy, great ideas, and the passion to succeed, and I'm confident they will deliver the results. There was no change in the bank's credit performance during the first quarter, which is to say it remains best in class amongst Canada's Schedule I banks. Our provision for credit losses was one basis point to mortgage principal outstanding in the quarter, down from three basis points last quarter and last year. This performance attests to the quality of our books. I said on our last call that we would review our loan loss provisioning in light of the fact that Equitable uses a much more conservative approach than most of Canada's other banks and have steadily built a collective allowance that we consider to be sufficient. We undertook that review leveraging the sophisticated data models that we have built for our AIRB exploration and our long-term loss experience, and determined that further additions to our collective allowance were unnecessary this quarter. Given current economic forecasts, we expect our single-family arrears rates and credit provisions to remain low throughout 2016. Although given deteriorating conditions in Alberta and Saskatchewan, the exceptionally low loss and arrears rates of the past few years may give way to more normal levels. As expected, we are starting to see arrears increase out west with impaired loan balances in Alberta and Saskatchewan up by CAD 2 million during the quarter and early arrears up by CAD 9 million. In the interest of transparency, we have begun to disclose those specific figures in our MD&A, and we are monitoring the situation closely. Looking at our lending portfolios in these two energy-driven provinces for a moment, as of March 31st, 18% of our total mortgage principal was in Alberta and Saskatchewan. More than half of those assets are insured. Of the uninsured portion, 84% was in Calgary and Edmonton, which have more diversified economies and employment sources, and the other 8% was in Regina and Saskatoon, both urban centers with relatively more economic stability. Average LTV on our uninsured book in those provinces was 69%. These portfolio stats, along with the proactive measures we have taken in these provinces since late 2014 to adjust our lending criteria and the stress testing we perform, make us comfortable with our current position. We believe that any losses, even under a severely stressed scenario, will be manageable. Turning to our savings businesses, the first quarter was a period of ongoing strategic advancement, not only as a result of EQ Bank, but with our brokered deposits. We are very pleased to report that balances on our brokered HISA at quarter end surpassed CAD 1.1 billion, proving this is a product professional advisors are highly recommending. In terms of the EQ Bank platform and the EQ Bank Savings Plus account, the response to this product has been overwhelming. In less than three months, Canadians deposited CAD 794 million in over 17,000 Savings Plus accounts. We thought our offering would capture interest given the combination of great payment features, helpful savings tools, and an intuitive app from an account with a great interest rate, but it is even more popular than we anticipated. In order to manage future account growth and sustain our high levels of service, we reduced the interest rate in mid-April to a still very competitive 2.25%. We continue to sign up new customers and add balances at this interest rate, and the feedback from our customers on our service is good. As Tim Wilson will tell you, we have reduced our EQ Bank advertising budget this year because of the success we have had with our go-to-market strategy. Those marketing savings will be redeployed into our service initiatives and to help offset the higher interest expense on this account. With that, Tim Wilson will now provide his report. Thanks, Andrew. First quarter net interest income grew 13% year-over-year. This growth reflected an increase in our average asset balances in both core lending and securitization financing, which in aggregate were up 21% year-over-year. As I noted last quarter, we expected NIM to decline throughout 2016. NIM dropped a little more than expected in the first quarter, being down 10 basis points year-over-year. Looking at that year-over-year change, the very successful growth of the EQ Bank Savings Plus account was a significant weight on core lending NIM. Growth in EQ Bank deposits caused us to hold excess liquidity through parts of the quarter, with liquid assets having a negative margin and thereby pressuring NIM. Comparing Q1 to Q4, overall NIM was down seven basis points and core NIM down 13, with EQ Bank growth being a factor again. A substantial decline in core lending prepayment income also reduced our core lending margins. Looking to the remainder of 2016, our outlook for net interest income is relatively unchanged from the view we expressed in our last quarterly call. That is, we expect that it will increase at low to mid-teen rates as the bank continues to grow its assets by meeting the needs of Canadian borrowers across a wide range of mortgage products. Factoring in both core lending and securitization financing expectations on NIM, which are discussed in detail in our MD&A, we believe that overall NIM will trend a bit lower over the course of 2016, possibly up to 5 basis points lower. This reflects mainly the high growth of our lower-margin securitization financing business and the resulting mix shift towards it, and also the continued growth of EQ Bank balances. Moving on, Andrew mentioned the impact of strategic investments on first quarter EPS. As you will note in Table 6 of our MD&A, we separate investments in our future from non-interest costs related to normal course growth. In terms of normal course costs, non-interest expenses amounted to CAD 23.6 million, about CAD 5 million or 27% higher than last year. This reflects the costs associated with growing our assets under management by 23% year-over-year. Higher FTE was the main driver of the increase, being up 25% year-over-year and 5% sequentially. We also incurred costs for an office expansion to accommodate our growing staffing complement. But rest assured, we still remain proudly branchless. Total investments in our future amounted to CAD 5.7 million, more than five times higher than a year ago. The main item, as Andrew pointed out, was a CAD 2.6 million advertising expense to support the launch of EQ Bank. Beyond advertising and relative to Q1 of last year, we invested an incremental CAD 700,000 to add to our digital banking team and CAD 600,000 more to support our digital banking systems. For the first time, we also began to amortize the cost of previously capitalized digital banking investments this quarter. This resulted in CAD 600,000 of amortization expense. We are generally amortizing those costs over a 10-year period, and they will be a regular expense item going forward. The overall increase in strategic investments accounted for almost half of the year-over-year expense growth in the quarter. Without this investment, our adjusted efficiency ratio in Q1 2016 would have been 35% instead of 43.2% as reported. The initial success with our marketing campaign has allowed us to reduce planned spending in support of EQ Bank for the remainder of the year. Our current plan is to spend approximately CAD 1 million in Q2 through Q4 versus our original plan to spend CAD 5 million. This expense reduction will be partly reinvested in service and will also help to offset the interest expenses resulting from high balance growth. Our other strategic investments will continue, too. We plan to continue building our prime single-family team and exploring a migration to AIRB. Over time, the cost of all these strategic initiatives should be partially offset by the incremental gain on sale revenues generated from securitized mortgages. I use the word partially very deliberately. That expectation varies from what we said last quarter, at which point we had expected almost a full offset. We recently updated our plans regarding our derecognition activity for the reasons Andrew stated earlier. Beyond these initiative investments, we anticipate that over the next five quarters, all other non-interest expenses will increase at rates in line with the growth of the overall business. We expect that our efficiency ratio will decrease beginning in Q2, although it will remain in the mid to high 30% range through the balance of 2016. Even at these levels, Equitable would remain Canada's most efficient publicly traded Schedule I bank. Our capital ratios at quarter end all continue to surpass minimum regulatory standards and most industry comparables, and we expect to continue operating above these benchmarks as we grow. Now, back to Andrew. Thanks, Tim. We've definitely invested more in the business than ever, and I can assure you that we expect results from all of our activities. Overall, we're pleased with the consumer receptivity to our latest products and service offerings. Of course, not all come out of the gate as strong as EQ Bank or our broker, HISA. But then again, the objective with all our offerings isn't short-term in nature. It's to delight our customers, build a market position, create a brand that will sustain long-term growth, and generate high ROEs for the business. A great example of that is the work done over the past 10 years in our alternative single-family lending business. Through constant effort, we really hit stride, and our bank now has a unique position in the market with mortgage brokers who value our service quality and products. That's not to suggest our work is done. We have more to give and more opportunity for growth in all of the new regional markets we've entered and the products we've launched over the past five years. We're building those positions cautiously in a way that is entirely consistent with our conservative underwriting standards and risk management disciplines. But the point is, we're building them, and they offer good prospects for the long run. One of the key elements of success when launching a new product or service is a willingness to patiently fine-tune it so that it finds its niche. This is what we've been doing with our Equitable Bank Home Equity Line of Credit. We launched our HELOC in 2014. Since then, by listening to the market and adjusting the product while still adhering to our risk management practices, we've been able to double HELOC balances over the past year to about CAD 22 million at the end of Q1. Again, there is substantial runway for growth, and we think we've got a product that works. Our outlook is well explained in our first quarter MD&A, so I'd invite you to review it in more detail. For a comprehensive review of our value creation model, please see the shareholders' letter in our annual report. To summarize, the bank's fundamentals are strong and solid asset growth continues. Our digital platform has already proven to be incredibly popular with Canadian savers who are making Equitable their digital bank of choice. And as our costs decline in relative terms following this period of heavy investment, we will show good earnings increases. That concludes our prepared remarks. Now we'd like to invite the questions. Nick, could you please open the lines to our callers? Thank you. We will now conduct a question and answer session. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will take our first question from the line of Jeff Fenwick at Cormark Securities. Please go ahead. Hi. Good morning. I just wanted to start my questioning off with the EQ Bank deposit growth. You'd mentioned you'd lowered the rate there. Obviously, the early response was a lot higher than you would have expected, which I guess you'd certainly view that as a success, but it did weigh on the NIM. I guess the go-forward outlook from here, do you think with that lower rate, you're better able to pace the growth of deposits, and we're not going to see this NIM pressure perhaps get worse over the course of the year? I'll let Tim sort of give the financial. Thanks, Jeff, on that question. I'll let Tim sort of deal with the math on what that means to NIM, just to give you some sense of what happened when we changed the rates. We did see some early runoff of the accounts. Some people that had been looking for that higher rate did leave us in the initial going. At the time, we had a large number of customers on a kind of wait list, waiting to be onboarded because we want to make sure as they became onboarded, they had a great customer experience. We've been opening up that queue. I think we had about 10,000 people in the queue at one point. We're slowly working through that backlog, and over the next couple of weeks, we expect to be through that backlog. We are slowly adding balances. It's running at about CAD 1 million a day as we speak. We saw that early runoff, and now we're slowly adding to the deposit base and adding more customers at a good, steady clip. Jeff, just to comment on the impact on NIM. I think it will continue to have an impact, but not as noticeable as we saw in the first quarter. Even at 2.25%, that rate is higher than what we pay on our other alternative sources of funding. Obviously there is a bit of a negative impact, but again, it won't be as substantial going forward. I guess it's fair to say at this point, given that you're so early on, it's a little bit difficult to gauge the sensitivity around those interest rate levels that you're offering as well. Is that fair in terms of people moving in and out of the business? Yeah, I think it's fair to say that every day we're learning more about running this business. When we launched, we knew we weren't in the business. Now we do. Also seeing how competitors might respond to our rate changes. I think we're not just a silent actor that can move our rates and not see other people respond to it, given the level of response we've had. I think we're sort of slowly seeing how that all shakes out. With respect to the securitization guidance you've given us in terms of retaining a bit more on the balance sheet versus moving them off, is Q1 then roughly indicative of what you would think the level that would be flowing through in terms of gains would be and the level of sales for the rest of the year here then? Jeff, it's Tim. No, I would expect as we move forward, and when I say forward, I mean over the course of the next year or two, that those gains will start to increase. The way we think about derecognition is really based on our capital ratios, and we're not at a point with our leverage ratio where we needed to sell strips in any sort of volume in the first quarter. I think with continued growth of our assets, we will get there a couple quarters down the road. But for now, we weren't. The only gains that we recognized in Q1 were related to securitization of non-prepayable multi-unit residential pools. Those are automatically derecognized without us executing any transactions to cause the derecognition. But again, that picture is going to change going forward, and I expect those gains will. We start selling IO strips, and those gains will increase. I hope you made it clear, Jeff, that the way we think about this is trying to maximize the net present value of cash flows to the shareholders. So the discount rates that we give up on those derecognition strip sale are reasonably significant. Now, it's still going to make sense for us if it keeps us under the right leverage ratio. But we're better, if you like, releasing that into earnings later down the road when we have a little more pressure on the leverage ratio. I appreciate that color. Maybe just one last one here. Thanks for that detail on the Alberta and Saskatchewan markets there. So interesting, you are seeing some of the impairments begin to move higher. But overall for Equitable, the loss provision in the quarter was actually quite small. So when you think about your allowance that you've got there on the balance sheet today, it's in the context of feeling like you're very comfortable with any movement you're getting out of Alberta, and you don't necessarily need to add a lot here in the near term to accommodate that. That's certainly our feeling. Obviously, if we felt we should be adding some, we would've done. I did actually sit down with the, we've got a very good man who runs the collections in our Alberta office. Ron Tratch and I walked through, Ron Tratch being the Chief Risk Officer, walked through every account that he's looking at at early-stage delinquency, so that's over 30 days. It is clear that some of our customers are having a harder time. Some of them might be subcontractors to larger entities where they're owed money, and those entities are paying them a little bit later. So that's causing some of the delinquency. I think that's why we want to give a little bit of the color there. People are struggling a bit in the patch, for sure. We're trying to be helpful where we can. Most of our customers are working hard with us, and we are working hard in response to that. They're a very sort of resilient group, and we really want to help where we can. But it's definitely tougher times. That's all I had. Thank you. Over to you. Thanks, Jeff. Our next question comes from the line of Graham Ryding at TD Securities. Please go ahead. Morning, gentlemen. Jumping back to just the derecognition. It sounds like your decision not to derecognize this quarter and possibly next is really about your leverage ratio, and it is not anything to do with the economics that are currently out there or just the demand for interest-only strips not being what you would like. Is that accurate? That is absolutely right. I think we know that the most cost-effective transaction, we can move more than CAD 2 billion off. We could get CAD 2 billion recognized in very short order through the non-IO strip sale approach. We have a whole bunch of IO strips that could be sold, and we believe there is demand for those, too. Any context for what sort of demand you see out there for the IO strips if you wanted to relieve some pressure on your leverage ratio? I think at the extreme, Graeme, that we could derecognize every securitized asset that we have on our balance sheet. There is that much demand and more. I do not think demand enters into this equation at all. This was really about long-term shareholder value. If our capital is such that we do not need to derecognize any assets to keep on growing, it is a much better decision for us to retain those assets on balance sheet than sell the IO strips. Sure the IO strips would generate current period income. It would help offset some of the lumpy expenses we have, but it was not the right decision for the long term, hence we held off. The capital that Tim talks of is simply the leverage ratio, which is the total assets on Tier 1. So it is not a kind of fundamental CET1 ratio that is impacted here. Yep. I appreciate that. I appreciate the stress testing you provided around the residential book in Alberta, Saskatchewan. Have you done any stress testing on your commercial book? I think it is 300 million. Is there any color you can provide on what sort of losses you potentially could see there under a stressed environment? Yeah. At a CAD 300 million sort of individual asset type approach, we haven't done the kind of aggregate stress test. We've simply looked at them loan by loan and kind of walked through the loan book on that basis and don't see any reasonable sort of prospects for significant losses there. As we always talk about in commercial, strange things can happen. A single loan could create a sort of single largish loss. But we have been through that book in detail and don't see much possibility of that at this point. What's the average loan to value on that commercial book, uninsured? I'm sure we can get back to you with that data point. I don't have it, though, and wouldn't want to guess it. Okay. No problem. Lastly, if I could just, you've obviously attracted a lot of customers to your EQ Bank. At what point do you start looking at these customers and potentially looking beyond the high interest savings account and potentially launching some other products that you could maybe cross-sell to this target audience? I think that's a year or two out. We already believe that we've got some sort of industry-leading customer experience. I do encourage you all to try and sign up for an account or to sign up for an account and give it a go. What we really want to be focused on is extending that lead of customer experience with some more functionality. Rather than adding more products, which would be the conventional mindset, we really want to make this a great solution for our customer base. We're pushing on that and want to invest in that area so that we can be unapologetic about having the leading digital banking experience in Canada. I think we might already be there. I frankly do all of my banking pretty much out of my EQ Bank account. I think we obviously got a lot to do to convince people that's a general solution for everybody. What I mean by that, we don't offer joint accounts yet. We don't have a TFSA. There's some simple products that people need as part of that solution. There's more we can do in making our payment solution slicker, making it slicker to add additional bank accounts into third parties. I think you'll expect to see that over the next year or two as being the major thrust for us. Thank you. Our next question comes from the line of Jaeme Gloyn at National Bank. Please go ahead. Yeah, good morning. Morning, Jaeme. Just a question on the delinquency rates jumping up 30 plus days, jumping up. Or sorry, the 30 to 59 days portion jumping up from about 34 basis points to 65 basis points. Can you just give us a little bit more color on what was driving that? I mean, that is related to the Alberta exposure. That's where we go with that, and I think as I mentioned, I think we did walk through all of the loans. The senior executive team walked through all the loans to kind of find out what's going on there. I know we have one large commercial loan in Quebec that is actually a great asset. I've walked the asset. It's right in the middle of downtown Montréal. And it was actually delinquent at the end of, was in arrears at the end of the month, end of the period. It's now current, and we're very comfortable with it. It's a great location, but it had a vacant retail frontage on the front of the building and the borrower got into a little bit of a glue there without the cash flow. It is an eminently leaseable space, and that has worked itself out. That is one thing that solves most of the problem, and then the rest is related to Alberta. Right. So the breakdown, would it be half and half between Alberta and the commercial or more towards Alberta? Just to get a- About half and half. I think half and half is accurate enough. Okay, great. Then just moving to net interest margins. The guidance is for flat NIM in the core lending portfolio for the rest of the year. From the comments and the guidance, it sounds like the EQ Bank Savings Plus account is going to continue to have an impact. So is the shift towards single-family homes. So what gives you, or single-family mortgages, what gives you confidence that it is going to be flat through 2016 from Q1 levels? Jamie, it's Tim. I think our best view at the moment is that it is going to stay flat. There are always a bunch of puts and takes in there. As you notice in our disclosures, prepayment income, which is inherently a volatile line item tends to cause a lot of fluctuations in NIM. If you look Q4 to Q1, it is a 9 basis point impact, quite substantial. When we look at the different puts and takes, so the factors you mentioned, along with prepayment income and some other factors, right now, given the visibility we have and our estimates around the way EQ Bank accounts are going to grow, flat is the conclusion that we arrive at. I think one of the points we may not have mentioned was that in our HISA in the Fundserv channel, so the EQB 200 channel, we did actually drop rates in the middle of the first quarter. That will reflect as lower interest expense in subsequent quarters. Yeah. Okay, great. Just again on the. No, sorry, actually, that was already covered. Thanks. That was it for me. Thanks, Jamie. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your touchtone phone. Our next question comes from the line of Brian Horey at Aurelian Management. Please go ahead. Thanks for taking my question. A couple questions on Alberta to start. Are you at the point where you are starting to make modifications in the loans with your borrowers that are stressed out there? We make relatively few modifications. We do make what we would call an arrangement. The odd time, the guy will say the payment is due on Friday, and he will say, "Well, I am due to get a check," or whatever, "next week," or, "I am doing something else to get the cash flow." People can work with us on that basis. We will make those kinds of deals. Generally speaking, there is very little in the way of loan. It is not what we would consider to be traditional loan modification when you think about it in the U.S., where it sort of turns something that really is in arrears into a current loan. There is little to none of that going on. Okay. In your stress testing that you highlighted in the MD&A, what kind of severity are you all assuming in that scenario? Do we know? I think we provide those assumptions in the outlook. It is really unemployment escalating to about 10.5% and house prices dropping 30%. It is quite significant stress on the Alberta market. Right. What kind of severity in terms of loss on the loans are you assuming in that? Well, the severity calculation depends on the. We go through the entire book, and then we will figure out the severity based on that assumption on house price change rate. We mark down the underlying value of the asset, take the assumed cost of collections and so forth based on a historic history to figure out what the LGDs are going to be. The severity is really loan dependent, depending on the LTV and other factors. Okay. I had a third question. Just thinking about the major growth factors in the business at this point, which is the single-family securitization on the asset side and the bank deposit growth and liability side. What kind of incremental NIM or incremental margin do you all see on that combination of asset growth and funding increase? Sorry, are we talking NII as in net interest income rather than NIM, rather than the spread? Are you looking for nominal dollar type increases over here? Well, I was looking more for the spread on that business given a cost of funds and the yield on those kinds of assets. Certainly in the securitization business, we do not fund those with deposits, right? They would be funded through MBS. That, as we have always talked about, can be slightly volatile. Spreads are okay right now. It is a spread between prime mortgages and the MBS yields in the marketplace. It is all in the CMHC program. It does not really relate to the deposits coming in from the digital bank, which we use to fund conventional mortgages we keep on our balance sheet. What are the trends? I think just Yeah, go ahead. I was going to say, I think we've laid out our expectations around both the dollar net interest income growth and our margin trends quite clearly if you reference page 8 of our MD&A, the outlook section. We've listed all the different puts and takes and our expectations for NIM there. Okay. Are you seeing much in the way of a change in the profitability of the business you're doing with CMHC at this point? No. It's the bottom line. It's broadly stable. That can change quite quickly. Let's not forget that we're a small bank and there are five big banks that provide the pricing, effectively drive the pricing, and we have to match that pricing. They're funding off a slightly different base than us. The way we think about this is that a good chunk of those mortgages are actually going to be funded through the deposit note market of the big five banks. We spend a lot of time looking at their cost of funds and the spread that they're getting, where the spread that we're more concerned about is the mortgage spread against the MBS spread. We can look at five-year newly issued NHA MBS and look at that spread. In the beginning part of the year, you did see deposit note spreads increase, which certainly create a favorable backdrop for us. Those spreads have come back in again compared to MBS. The big banks might be slightly more competitive over the next little while. As we sit today, we've gotten good I would say they're sort of at the average. They're where we'd expect them to be. Since the end of the quarter, they've gotten better or worse, would you say? Since the end of the quarter, they've gotten slightly worse, I think. Slightly worse over the last couple, yeah. Sorry. They've rebounded in the last week or two. There's been the expected volatility in those margins, but overall I'd say relative to a longer-term average, they've been relatively stable. Okay, thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one on your touch-tone phone. Our next question comes from the line of Sam Shade at Shade Advisors. Please go ahead. Thanks for taking my question. I have two questions. I'm trying to wrap my head around the impairments going from 45 to, call it 78 December to March, and I'm trying to reconcile that with the one basis point reserve that you're taking. Can you help me with that a little bit? The one basis point reserve, Sam, how we arrive at that number is we actually do a review of every individual loan that's in the impaired category. We update the valuation, we estimate potential foreclosure-related costs, and then we arrive at an estimated loss from there. That estimated loss then drives the amount that we book through the P&L and in our provision for credit losses. So it's a really in-depth loan-by-loan analysis, and we're confident that the allowance that we have on our balance sheet is adequate given all of those factors. If delinquencies are going from 45 to 78 over 90 days, I'm just sort of stumped on one basis point is nothing given a 70% increase. Are you saying these impaireds, they're all 99.9% money good? All right. Sam Shade, which numbers are you referencing? I am looking on your discussions. It says impaired past due, but not classified as impaired are as follows. December 31, 2015, the total is CAD 45.3. March 31, Right. March 31, 2016, CAD 78.0. I think most of that relates to the. I think you are sitting on the P&L there. We have got the MD&A in front of us here. But most of that relates to that conversation we were just having about the one mortgage in Montreal for about CAD 10 million or CAD 11 million bucks that cleaned up post-quarter random was frankly, it was actually cleaned up as we were putting the financial statements together. So we obviously knew that was in good shape. Okay. We are 50% higher. I just don't want to get hit with a pie in the face on a 50% increase. A one basis point reserve, why even bother? Well, I guess, Sam, a couple things. The reserve we typically take, the analysis that I talked about, represents a reserve against mortgages that are impaired. So those are typically the loans that are more than 90 days in arrears. The figures that you're representing are very early arrears, where we might still be in discussion with the mortgagers, with the borrowers. So they missed a payment or two, we're working on payment plans, collections, so forth. While that may be an indicator of future arrears and future losses, as we actually talk about specifically in our MD&A, we're not at the point with those accounts where we're booking losses against them. That said, we've got about CAD 30 million of collective allowance on our balance sheet, which represents an amount set aside for potential future losses that haven't yet been identified on accounts that aren't yet impaired. So I think when you look at that CAD 30 million against the CAD 63 million, we've got pretty good coverage already and didn't see the need for any more reserves. I do have the numbers in front of me now. So the CAD 63 million that you're looking at, actually CAD 6.5 million of that's insured by mortgage impairment insurance. So there's almost no possibility of loss on that or there's no possibility of loss, really. So you got CAD 55 million that could become problematic, or CAD 57 million that could become problematic. Of which, as we mentioned, there's I think CAD 11 million of it cleaned up in Montreal. And we have got some early-stage delinquency though in Alberta that we more fully disclose elsewhere in the MD&A, and that's the conversation we're having about that. Okay. My last question is you are paying right now 2.2% to savers. Is that the number 2.2? 2.25, actually. Yep. The conventional mortgage rate is what right now that you are putting the money out at? Most of our mortgages are being written at around about 4%, plus or minus. Okay. There is still quite a healthy margin in there, even at 2.25%. The conventional mortgages are done at what rate? Right about 4%. Okay. Perfect. Thank you. Great. Thank you for your interest. Mr. Moor, there are no further questions at this time. Back to you. Thanks, Nick. Before concluding, I'd like to invite you to join us for our annual meeting of shareholders next Tuesday, May 17th at Toronto's TMX Broadcast Centre at 10:00 A.M. Eastern. Thanks for listening and goodbye for now. This concludes today's call. Thank you for your participation. You may now disconnect.