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Edited Transcript of HCG.TO earnings conference call or presentation 22-Feb-19 1:00pm GMT

Q4 2018 Home Capital Group Inc Earnings Call

TORONTO Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Home Capital Group Inc earnings conference call or presentation Friday, February 22, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin Katchen

Home Capital Group Inc. - Chief Digital & Strategy Officer

* Bradley William Kotush

Home Capital Group Inc. - Executive VP & CFO

* Jill MacRae

Home Capital Group Inc. - Director of IR

* Yousry Bissada

Home Capital Group Inc. - President, CEO & Director

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Conference Call Participants

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* Brenna Phelan

Raymond James Ltd., Research Division - Equity Analyst

* Edward Friedman

* Geoffrey Kwan

RBC Capital Markets, LLC, Research Division - Analyst

* Graham Ryding

TD Securities Equity Research - Research Analyst of Financial Services

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Marco Giurleo

CIBC Capital Markets, Research Division - Associate

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, my name is Carol, and I will be your operator today. At this time, I would like to welcome everyone to the Home Capital Group Fourth Quarter Financial Results Conference Call. (Operator Instructions) At this time, I would like to turn the call over to Jill MacRae, Head of Investor Relations.

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Jill MacRae, Home Capital Group Inc. - Director of IR [2]

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Thank you, Carol. Good morning, everybody, and thank you for joining us today. We'll begin the call with remarks from Yousry Bissada, President and Chief Executive Officer, following a -- followed by a review of our financials by Brad Kotush, Chief Financial Officer. After the presentation, we'll have a question-and-answer session for analysts and investors. With us on the call to answer your questions are several members of our management team.

Before we begin, I'd like to caution listeners that this conference call may provide management the opportunity to discuss financial performance and conditions of Home Capital. And as such, comments may contain forward-looking information about strategies and expected financial results. Various factors could cause actual results to differ materially from results projected in forward-looking statements. Accordingly, the audience is cautioned against undue reliance on these remarks. Finally, a link to the slides accompanying this live webcast is available on our website at homecapital.com.

With that, I'll turn it over to Yousry Bissada.

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [3]

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Thank you, and good morning. Thank you for joining us today, as we present our financial results for the fourth quarter and full year 2018.

2018 was a year of progress for Home Capital. At the beginning of the year, with a new leadership team in place, we knew we had some work to do. We got down to business with a view to building for the long term. We reviewed every area of our operations. We put in place new standards and operating guidelines to implement best practices throughout the organization while establishing a sustainable risk culture as a foundation for decision-making. We were working to rebuild Home Capital's business. The industry experienced -- while we were working to build Home Capital's business, the industry experienced challenges in 2018. The combined impacts of new regulatory initiatives and higher interest rates caused a material reduction in home sale volumes in all our major markets. We responded by investing in relationships with emphasis on becoming a partner of choice for our brokers. We dedicated resources to focus on our renewal business and grew unincurred residential mortgage underwriting as well as our commercial underwriting. We saw benefits in the form of higher Net Promoter Scores from our broker partners and our customers. People want to do business with us. This translated into significantly improved financial results as well.

In Q4, Home Capital delivered increases in earnings per share, book value per share and return on equity both on a sequential and on a year-over-year basis.

Once again, we reported sequential growth in origination volumes. This is our fifth consecutive quarter of higher volumes with meaningful increases in both our residential and commercial books. Our double-digit increase in originations for 2018 is confirmation of our belief that strong growth is compatible with our sustainable risk culture.

The credit quality of our loan book is still well within our internal risk tolerance. Provisions are flat with the prior quarter. More importantly, realized losses on the portfolio are very low as a percentage of gross loans.

Oaken Financial continues to grow to provide a strong contribution to our funding. And we have significantly reduced our reliance on demand deposits.

Other notable achievements in 2018 include, completed the sales of noncore businesses, paid off our remaining $300 million institutional deposit note, replaced our $2 billion credit facility with a $500 million credit facility, more in line with our current and forecasted business needs.

Returning capital to shareholders through a successful $300 million substantial issuer bid and received approval for a normal course issuer bid in 2019.

After completing a successful SIB in 2018, we considered several options for deployment of capital, with the stock trading significantly below book value, buying back shares at a discount is currently an effective option for generating shareholder value. We will continue our regular review of all options for returning capital to shareholders.

We have spoken in past conference calls about our digital strategy. With our management team in place and our sustainable risk culture firmly established throughout the organization, I'm confident that now is the right time to move forward with that investment.

Today, we're announcing the start of a multi-year plan of technology investment that will improve our operating efficiency, offer our clients more flexibility in how they engage with us, and increase the level of service to our brokers, borrowers and the depositors. You'll be hearing more of this initiative in the quarters to come. Brad's presentation will give you more details on the expected financial impact of this investment. In conclusion, our results today are evidence of the success of our strategy of building for the long term through focus on service and prudent risk management. I'm proud of the efforts of our people and look forward to 2019.

I'll now turn it over to Brad, to discuss the financial results.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [4]

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Thank you, Yousry, and good morning, everyone. With our financial results of Q4 2018, Home Capital is continuing on the path of improvement that we began at the beginning of the year. We reported growth in income, assets, and our direct funding channel focus. We completed the substantial issuer bid returning $300 million of capital to shareholders in a highly active transaction and we received approval for a normal course issuer bid in 2019.

Turning to Slide 7 of the presentation. Home Capital reported earnings of $35.8 million in the fourth quarter of 2018 or $0.46 per share. This compares to $30.6 million or $0.38 per share in the fourth quarter of 2017. We completed the substantial issuer bid at the end of the fourth quarter, so the effect on earnings per share is minimal for that quarter and year. For the full year 2018, net earnings were $132.6 million or $1.66 per share compared with $7.5 million or $0.10 per share in 2017.

Originations, as shown on Slide 8, continue to show momentum. Originations increased by 12.4% from Q3 led by 14.2% increase in our single-family residential products. Commercial originations grew 8.2%. For the full year, single-family residential originations grew 19.5% with commercial growth at 4.8% and total originations up 15.2%.

Slide 10 shows origination growth by loan category.

Turning to Slide 11. Our net interest margin was 1.99% for the quarter, down slightly from the 2.03%, we reported in Q3. Margins in Q4 were helped by higher yields on our mortgage loans offset by our funding requirements during the quarter.

Slide 13, shows the conservatism in our underwriting practices. Our loan-to-value on new originations was around 70% and the loan-to-value of the total portfolio was 59% as of year-end.

Slide 14, shows our net non-performing loans rose sequentially to 0.47% from 0.34% of gross loans. This is within our acceptable risk tolerance level.

Slide 15 shows provision for credit losses on an annualized basis for the past 8 quarters. Provisions were 10 basis point of gross loans for the quarter and 13 basis points for the year and 5 basis points in 2017. The actual loss experienced in the portfolio came in at 6 basis points for both the 2018 and 2017.

Turning to the funding side. On Slide 15, you can see our Oaken channel continues to demonstrate positive results. Oaken insurance deposits grew 30% from year-end 2017 to about $2.7 billion. Growing our Oaken channel is the key strategic focus for us at Home Capital. Our investments in technology will create more opportunities to improve the client experience. We have diversified our funding mix away from demand deposits in favor of fixed-term GICs. Demand deposits were below $500 million at the end of the year compared with nearly $1.3 billion in liquid assets, shown on Slide 17.

Management of our liquidity profile is a critical element in our sustainable risk culture. Our demand deposits and maturing GICs are well covered by our liquid asset portfolio.

In December 2018, we completed our substantial issuer bid to purchase approximately 18.2 million common shares or 22.7% of shares outstanding at $16.50 a share. The transaction was accretive to book value, earnings, and return on equity.

In 2019, we began to repurchase shares under normal course issuer bid. Home has approved the purchase of approximately 4.75 million shares. To date, we have purchased 735,050 shares. We are committed to return capital to shareholders in ways that are accretive and value-added. While our shares are trading significantly below book value, repurchases are the most effective option for creating value. Our board continues to review other options for returning capital to shareholders.

After completing the SIB, our common equity Tier 1 was at 18.94% at the end of 2018, down from 23.17% in 2017 still well within our operating requirements and at the high end of the industry.

Finally, I would like to discuss the IT road map that Yousry remarked on earlier. As Yousry said, after seeing our results for the past year the growth we have demonstrated with respect to our sustainable risk culture, we're confident that this is the right time to make the investments to position our success into the future. This project is a multi-year upgrade of our core banking system, along with implementing new digital tools. The investment rollout over 3 years with majority of benefits at the end of full implementation.

The investment will take the form of moderately higher than normal system spend, the bulk of which we expect to be capitalized. The impact on our reported financial statements in the near term will arise from the accelerated amortization as we retire our various legacy systems. This will be called out as an item of note when we report future earnings and we will work to give you meaningful metrics on cost-to-benefit that are repaid to the program. The benefits will take the form of reduced operating expense, reduced capital expenditure, with the potential for revenue synergies. The benefit to certain stakeholders will include better experience for our customers, faster introduction of new products, improved productivity and engagement for our employees. This initiative will transform many aspects of the way we do business and we are eager to take this next step in the development of Home Capital.

With that, I will turn it back to Yousry, for concluding remarks.

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [5]

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While we're pleased with our progress in 2018, we know we still have more to do. We are investing in the future of Home Capital to build on the work we have done to date. Developing an industry-leading organization, delivering on great customer service and creating long-term shareholder value.

With that, I'll turn it over to the operator, to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Nik Priebe from BMO Capital Markets.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [2]

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Looks like another quarter of solid origination activity and good momentum, particularly in the context of a slower seasonal period for real estate activity. Can you just -- can just kind of speak generally to the competitive conditions that you're seeing in the market for single-family and commercial assets. Like how are your competitors reacting to your market share gains? Have they become -- have you seen evidence of them becoming a little more aggressive on pricing. Are you seeing more or less competition from non-federally regulated institutions? Just some insight on what you are seeing on the competitive landscape would be helpful.

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [3]

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It's Yousry here. We are seeing competition from new entrants as well as from non-OSFI regulated financial institutions, such as private lenders at the low end of the beacon as well as credit unions and other modern lines that are not OSFI regulated. Having said that, as we've shown our numbers have gone up and we believe that we are providing value to brokers through good service and having quality mortgages. So it has not become a price war, it's more about offering the right service to people. And for us, it's about identifying that within B-20 confines there's still a lot more business we could do. And that it would not necessarily have to be pushed to private lenders. So that is going to be one of our focuses going forward.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [4]

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Okay. Got it. And just a question on noninterest expenses. It looks like they were held flat for a second consecutive quarter, which contributed to bit of an improvement in the efficiency ratio there. I think, in the outlook section, you kind of, you alluded to some of the elevated salaries and benefits expense that you would expect until the conclusion of the IT upgrade initiative. Are you able to give a sense of what sort of incremental impact to the cost structure that might reflect? And I realize that the majority of those expenses will be capitalized. But I think, last quarter, you suggested that salaries and benefits could trend upwards to $23 million to $24 million over time. I guess, I'm just wondering whether that would be inclusive of hirings related to the IT upgrade or would it be incremental to that?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [5]

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It should be around that level, Nik. I think we're within forecast. I think that $23 million number is maybe slightly higher. As we go through, we had some reductions in relation to some of our stock-based comp because of the variation in the share price, so that's one of the things that has a little bit of a movement. But we are focused on keeping expenses as low as possible, so that $23 million is not a bad number for salaries and benefits. Looking forward, again, we anticipate that in terms of seasonality, because the employee benefits are generally in the first quarter that tends to be a higher period of salary benefit expense.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [6]

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Okay. And one last one from me. Just on net interest margins. There was a comment regarding prepayment income that was earned in the fourth quarter on the consumer retail loans portfolio. Can you tell us how much that was?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [7]

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It was in the order of $600,000, I think.

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Operator [8]

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Our next question comes from Geoff Kwan from RBC Capital Markets.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [9]

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First question I had was on the OSFI, call it I guess proposals on deposit rules, wondering if you have any comments from that document as to the potential impacts. And maybe you can talk about whether or not from a liquidity perspective, ultimately EPS perspective, and any, some of the puts and takes whether or not it's NIM yields and funding costs and OpEx?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [10]

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We've -- I think, based on our review of the proposal, we don't think there's going to be any impact on our business. We've removed the length in our liquidity levels, reduced our demand deposits and are focused on developing our own channel Oaken, which we mentioned in our earlier remarks. So we're very comfortable in our ability to comply and absorb these changes without any impact on our business.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [11]

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And then the second question I had is, as you guys are, I guess, getting back to where you were beforehand, can you maybe talk about even if it's just kind of ballpark figure, key lending segment, call it, non-prime residential, prime residential, and on the commercial side. Like, if you were to say what percentage of where you think normal would be given where we are in the environment today, like where would that be. In other words, just like on the non-prime residential, do you think you are at 75% of where you would normally like to be. Again, take into account where are we with the lending and mortgage environment is today?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [12]

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Jeff, it's Yousry. The number we like to measure is the market share. Because some of the numbers we reported in 2016 and 2015, the market was much larger. The addressable market was much larger. So we like to be more measured that we are getting our fair share of market share and we stated openly that our goal is to be the #1 lender in this space, which we accomplished. So that's the key for us, is to lend one at a time. On a sustainable risk basis, we know how to look at every deal and price it accordingly and to get our market share. We don't have absolute targets, we have market share targets.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [13]

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And so then on the non-prime side is that as an example, you've got #1 market share. Is part of that aspiration to staying at where it is or presumably you'd probably want to try and increase the gap between yourselves and the rest of the competition, and how you think about that?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [14]

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Yes, I think -- I don't think there's a CEO that wouldn't say they want to increase it, but we are not going to increase it by taking more risks. We are not going to increase it by pricing gains. We're going to do it intelligently within our risk models. And wherever that results is where it will be and we think we can combine being #1 with those 2 attributes as well.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Okay. And just the other question I had, maybe more so for Brad, going back to the IT spend. Is there anything you can give in terms of what the total spend would be. And then, as mentioned, most of it's going to be capitalized, but what that rough mix might look like over the next few years?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [16]

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When we are talking about the items of note, we were anticipating that it would be approximately $0.04 a quarter, $0.16 on a year. So that would touch around $10 million of items of note.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [17]

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So the total spend is $10 million?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [18]

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No, I just talked -- that's the accelerated amortization that I discussed in my comments of being items of note. Total spend, we -- including capital and operating is estimated to be, in the first year, in the order of $25 million to $30 million depending on the acceleration of our ability to execute on the plan. We had -- that's an opportunity above -- is above what our ordinary course there, expected IT and infrastructure spending would be, which was ordinarily around $20 million in the order of magnitude. So we continue to spend on our long-term platform, but it's not orders of magnitude above what our ordinary spend would have been.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Okay. Sorry, just I want to make sure I understand this. So you normally are spending $20 million-ish a year. This spend here is $25 million to $30 million, including that. So it's then incremental $5 million to $10 million?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [20]

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That's correct.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Okay. And you are just upgrading. You are not replacing the SAP system?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [22]

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It is an upgrade that would take place over the course of 3 years.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Okay. So upgrade on the same system though as opposed to replacement?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [24]

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It will be a substantial improvement.

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Operator [25]

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Our next question comes from Marco Giurleo with CIBC.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [26]

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I just wanted to follow-up on Geoff's question with respect to the OSFI, newly proposed liquidity requirements. Brad, I think, you mentioned that you didn't foresee a material impact on -- to the firm with respect to these changes or these proposed changes. I'm wondering is that because the firm has, in your view, adequate liquid assets to -- on the balance sheet right now to comply with the newly proposed rules, or is it because you have other levers to offset higher liquidity requirements.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [27]

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I think based on our analysis, yes, our liquid assets, in addition we lengthened our liquidity to rise in substantially in terms of our term on GICs, and our models were quite conservative already in terms of how we're approaching liquidity.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [28]

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All right. And then, so with -- do these new rules change in any way the way you view the standby facility that you currently have.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [29]

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Not at this time.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [30]

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Okay. All right. And my next question was with respect to credit. There was an uptick this quarter in the -- in your gross impaired and net impaired loans, both on the commercial and residential side, is there anything there that, that you can speak to or point to that's driving the increase?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [31]

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We had one commercial connection that resulted in an increase in nonperforming. We -- currently some part components of that are in CCAA, but we're not anticipating at current the time that we would require any further provisions than what was recorded on December 31.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [32]

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Okay. And then on the residential side, was that concentrated in any region or was it more broad-based?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [33]

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I think it was broad-based.

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Marco Giurleo, CIBC Capital Markets, Research Division - Associate [34]

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All right. And then just one last question from me with respect to capital deployment. You mentioned that buybacks are the most effective way right now of creating value for shareholders, so just wondering, is it your full -- is it your intention to fully utilize the NCIB this year?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [35]

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Yes.

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Operator [36]

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Our next question comes from Graham Ryding from TD Securities.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [37]

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Maybe I'll just start on the credit side. The increase in the nonperforming loans, is it fairly evenly balanced between the commercial loan that you flagged and the residential, or is it weighted more to one bucket over the other?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [38]

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It's evenly weighted.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [39]

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And the -- you've got -- allowance for losses of, I think, 54% of your nonperforming loans, it's lower than where it's been trending over the last year, just any color on sort of why that number is -- why you're comfortable with that number being lower than where it has been in the last couple of years?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [40]

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We analyze the portfolio, and we run our models, and we're comfortable with the current provisioning and levels that we have. And IFRS 9 is a little more volatile. So you're going to see some of those changes as it's more model-driven in the future forecasts as opposed to backward-looking.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [41]

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All right. Okay. And is that why then, I guess, your PCLs actually were down slightly this quarter for where they have been trending on average over the past year, but your nonperforming ratio has gone up slightly. So is this a IFRS 9 dynamic or how do we sort of connect those 2 diverging themes?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [42]

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I will point you back to IFRS 9. And I think, we've been pretty consistent in saying that you will see more volatility in some of those numbers quarter-to-quarter because of the predictive impact on the models. For example, right now, some of those predictive models are saying that there is going to be a more benign economic environment in the future, which would probably then lead to models to come up with a lower overall level of provisioning.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [43]

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Okay. Understood. Your language in the MD&A around your net interest margin for 2019, I think it suggests that you see some pressure in your NIM in 2019. Am I interpreting that right and to what sort of degree are you expecting?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [44]

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Well, I think we're thinking we're going to be reasonably consistent with where we ended up in Q4. And just to give you an anecdotal example, in Q4, there was quite a bit of competition for deposits and deposit rates went up. And we're in -- so far, we've been able to raise money at lower rates in this quarter, but at approximately the same daily volume. So there are a number of competitive factors that do come into play, but they are difficult to predict, and we will deal with them as best we can. And we will do our best to maintain the margins on the asset side.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [45]

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Understood. And then, my last question would just be the expense guidance, I think, last quarter you had suggested that $60 million a quarter overall was a realistic range, give or take on a quarterly basis for 2019, is that guidance still reasonable?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [46]

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Yes.

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Operator [47]

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Our next question comes from Edward Friedman from McLean & Partners.

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Edward Friedman, [48]

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With the pressure on your net interest margin as highlighted in your report, especially from the deposit side, and your desire to keep relatively high CET1 I think in the area of about 16% to 17%, can you highlight how you plan on achieving industry equivalent ROE, which is around 15%? And also in your proxy from last year, it was stated that ROE is a target for executive comp plan, whoever the target is not disclosed. I was just wondering why this was not disclosed and will it be disclosed in your upcoming proxy.

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [49]

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We would expect over the course of next year, 3 years to come close to mid-teens ROEs. And that's going to be through a combination of earnings and strategies to return capital to shareholders. And we are currently preparing our proxy circular for the upcoming AGM, and we will consider your comment in disclosing the ROE target.

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Edward Friedman, [50]

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When I did my calculations, based on your interest margin, and desired CET1 ratio, it's very difficult to get 16% with the targets that you are mentioning in terms of noninterest expense and what is expected to be a fairly pressurized NIM environment. Can you provide a little bit more detail on how are you planning to get to that industry equivalent ROE?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [51]

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Well, other than working towards improving our margins, the reduction in expenses, the implementation of our IT road map, the improvements in efficiencies that we will get are scenarios to return on capital that we could employ over the course of the next 36 months, there are a number of factors that we would utilize to get close to or achieve that mid-teens ROE.

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Operator [52]

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(Operator Instructions) Our next question comes from Jaeme Gloyn from National Bank Financial.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [53]

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First question is around the loan loss provisions and the -- what appeared to be a reserve release in single-family residential. I am just wondering if you can just talk about why the reserve release there and it seems to be coming from change in risk parameters and models and what happened there to drive that release.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [54]

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We released -- we had looked across our portfolio and we released some provisions related to our shared portfolio, due to loan loss constraints.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [55]

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Okay. And so if you were to maybe just give us a little bit more color and breakout the near prime portfolio, the Alt-A portfolio, can you give us some sort of commentary around what happened there?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [56]

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You're referring to the single-family residential mortgage?

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [57]

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Yes, that's right. So you mentioned that there was the insured portfolio as what was driving reserve releases, I am just wondering if you could just talk about the uninsured portfolio. And if, what it would have looked like, if we just stripped out the insured portfolio.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [58]

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We released $3 million from the insured portfolio and the uninsured portfolio had some growth. So we adjusted the provisions related to that.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [59]

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Okay. In terms of the capital deployment plan, forgive me, if I'm just missing this. But I don't see any commentary around the dividend, what are the thoughts around instituting a dividend and the timing around that?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [60]

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The board is reviewing strategies for return on capital in every meeting as part of a larger capital plan. At the current time the thinking is to focus on the current discount to flow to realized and work through the NCIB. The NCIB at current market based on the shares would result in returning about $80 million to shareholders this year, which is a substantial amount and we recognize that we do have further capital to deploy, but we're also looking at other investments that are there and we will keep on doing that on a quarterly basis.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [61]

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Okay. And related to the net interest margin, looking at the net interest spread disclosure you have, still declining in to Q4, obviously that's directionally negative for the NIM going into 2019. Can you talk about that spread in Q1, you mentioned, and we can see it in the data the deposit rates have come down, but what's going on with mortgage rates and the competitive environment there? Is it also coming down in sympathy, and so that net interest spread is staying flat or you're getting some improvement?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [62]

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It's Yousry here, Jaeme. There is a mean reversion to all these spreads that you're talking about, the mortgage to deposit rate, the canvas to deposit rate. And right now, it doesn't look like there's a need to bring down mortgage rates based on mean reversion. At the same time, if everything stood still, the deposits are pressured downwards now on a relative to Canada basis and at some point that would revert to a change to the mortgage rates as well, but right now, we're pretty close to our standard spreads between deposit and mortgages.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [63]

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And by standards, you mean, like sort of pre-2017 levels of like 3% or standardizing more like 2018 average of 2.40%, 2.5%?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [64]

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Yes, the latter, the new world of spread.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [65]

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Right. Okay. And in terms of the organizations, just want to get a clear picture here, $1 billion for Q4 is a pretty good number for the core near prime or the traditional product, kind of in line with 2016 levels where you're more in a normal course operations at that point in a different market, I am just wondering how much can you attribute it, is there a rate competition here, is it aggressive in terms of lending standards? What kind of tweaks were maybe made in Q4 to drive such a strong number on originations?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [66]

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Just continuing the ball rolling on what we started here. It's not price competition, it is service competition. It is getting out the products that the market needs. It's easing our process as best we can. And it's just repeat, repeat, repeat, without adding to our risk parameters. We are very careful on that. We want to build for the long term. I think, I said in an earlier question is that our goal is one mortgage at a time and we look for market share as opposed to the absolute amounts that we view. And it has worked for us. And we continue to also focus on brokers that give us regular business just so we can serve them better as opposed to brokers that might send us a deal once every year or once every 2 years, they're not entirely for it. So by focusing on people that understand our model and by training them on our model, it has shown some efficiencies.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [67]

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Okay. And in terms of that, staying within the sandbox or within the not increasing credit risk. If I look at the LTVs of uninsured mortgages originated in Q4 '18 versus let's say Q4 '17 for example, there's a tick up there in the weighted average LTVs and, in particular, like BC and Alberta, modest in Ontario or probably negligible, so I am just wondering like is there a greater risk appetite in BC and Alberta or is that you're just kind of playing along with the games going on there, given the headwinds in the real estate prices?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [68]

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There isn't a greater risk appetite. It's just looking at 1 deal at a time and making sure we are satisfied that we are properly protected. And as you said, the numbers are close from year to year. But there isn't an expansion of our risk appetite by any means.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [69]

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Okay. Couple more questions. Just first, we talked about the CET ratio or another question was around the CET ratio kind of being around the 16%, 17% level, I just want to confirm, that is where your comfort level resides on that front. And then if you can make a comment as well around the leverage ratio in the 7% range, obviously lower than last year, just given the capital position, but more in line with where we were in 2016, and prior to the crisis, is 7% on the leverage level about where you are comfortable as well? And I think you can sort of comment on that.

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [70]

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Jaeme, I think we're in agreement with all your comments.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [71]

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Okay. So last line of question is just around the risk management section in the MD&A or the outlook or sorry, the annual report here. I noticed that the -- a couple of changes in the -- in sort of the ordering and some of the language here. So first off, I noticed that information, security and privacy risk was bumped up from another factor to a top and emerging risk, just wondering if you can provide some commentary around why that occurred.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [72]

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Well, I think it's just part of the nature of the business. I think you -- cyber is another risk, it's just higher profile in every industry, but in particular financial services, so it's appropriate to induct forward in the risk discussion.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [73]

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So that's more of a general comment around the theme, I guess, of the industry as opposed to any, and in particular with the capital.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [74]

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Yes. That's correct.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [75]

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And then, I also noticed that attracting and retaining talent was removed as a risk, does that mean that you feel any concerns around the talent side is completely eliminated at this point and there is no risk there anymore?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [76]

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Completely would be a very strong word, Jaeme, but, yes, we feel we are in a position now where we can attract talent from anywhere. We have a really, really good strong culture and a strong team that we're just building upon.

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Operator [77]

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Our next question comes from Brenna Phelan from Raymond James.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [78]

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Just looking at the residential mortgage portfolio originations very strong, looking at the discharges as a percentage of opening balances, is that where you want it to be, or do you think there's still work to be done there to sort of converge the origination growth rate with the loan growth rate?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [79]

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We're very pleased with where we are on discharge. The inverse to that is our renewals. We are renewing at very, very positive rates. We have changed a lot of our processes and customer service, and how we interact with the clients, improve our renewal and to offer a mortgage that's suited for their needs. So we're very pleased with where that is, and I think we expect it to continue at the levels we are.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [80]

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So a similar ratio of discharges to opening balance, modeling going forward?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [81]

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Yes.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [82]

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Okay. And then, within the deposit mix, Oaken Financial is a growing contribution. How do you see that trending through 2019 and 2020?

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Yousry Bissada, Home Capital Group Inc. - President, CEO & Director [83]

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We'll let Benji, Benji Katchen, who leads that part of the business, speak to that question.

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Benjamin Katchen, Home Capital Group Inc. - Chief Digital & Strategy Officer [84]

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We will continue to grow Oaken Financial proportionately to deposit funding.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [85]

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Sorry. Can you give like a percentage, how big could it get, how big would you want to see it get?

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Benjamin Katchen, Home Capital Group Inc. - Chief Digital & Strategy Officer [86]

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Oaken, it's like $700 million in 2018. And we're continuing the great work.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [87]

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We expect that range as a minimum, Brenna.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [88]

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Okay. And then within the NIM, looks like some pressure in the commercial book and that was referenced in the MD&A. Can you give us a bit of -- some guidelines on kind of where you see the yields in that asset class trending through 2019, how stiff is the competition there?

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Benjamin Katchen, Home Capital Group Inc. - Chief Digital & Strategy Officer [89]

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There is competition in the commercial world, because they're large deals. It's one deal at a time. We get to price every deal one at a time. We will look at it and our pricing unfortunately will include what we expect to be the risk around it. I think, for the rest of the year, margins are going to be relatively where they are. There is a lot of competition for commercial as other financial institutions try to fill the void of single family with commercial. But we will continue to take care and pricing each one, one at a time.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [90]

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Okay. And then just what was in the interest and fees on the line of credit facilities ticked up in the quarter relative to last quarter?

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [91]

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Hang on, we're just checking.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [92]

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Within interest expense.

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Bradley William Kotush, Home Capital Group Inc. - Executive VP & CFO [93]

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Just 1 second, Brenna.

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Benjamin Katchen, Home Capital Group Inc. - Chief Digital & Strategy Officer [94]

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We added the warehouse line so some of those fees were included there at the new facility that we put through in Q4.

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Operator [95]

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I would now like to turn the call back to Jill MacRae for closing remarks.

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Jill MacRae, Home Capital Group Inc. - Director of IR [96]

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Thank you, everybody, for joining us. Please contact us, if you have any further questions. Looking forward to speaking with you on the Q1 conference call, and wish you all a good day.

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Operator [97]

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This concludes today's conference. You may now disconnect.