Gerald Soloway - CEO Rob Morton - EVP & CFO Pino Decina - EVP, Residential Mortgage Lending Martin Reid - President

Dylan Stewart - Industrial Alliance Securities Geoff Kwan - RBC Capital Graham Ryding - TD Securities Jordan Hymowitz - Philadelphia Financial Rick Durst - Private Investor Stephen Boland - GMP Securities Brian Horey - Aurelian Management Edward Friedman - McLean & Partners Jaeme Gloyn - National Bank Financial

Thank you, operator. Good morning, ladies and gentlemen, and fellow shareholders.

Welcome to Home Capital's first quarter 2016 conference call. As most of you will know this will be my last conference call as Chief Executive Officer as I will be retiring after Home Capital's upcoming annual meeting on May 11.

For that reason I'd like to thank all of you for your very kind support over the past 30 years. I personally have enjoyed our quarterly conference call and having had the opportunity to talk to you about the company's progress on quarter-by-quarter basis.

That said shareholders are in strong and capable hands with Martin Reid, our President who will be taking over as CEO next week after our annual general meeting. I have worked closely with Martin over the last nine years.

And we work closely on the transition since announcing my retirement in late February. Martin is ready to take over Home and I am ready to retire.

So I think there is a good connection there and I am sure it's going to move forward very smoothly. He is already pushing the company forward building on our long held strategic vision and making progress on some of our priorities.

Such as ensuring that we have the right people, always important have the right people and processes in place to manage our risk and drive our growth for the next decade. I am sure you are all looking forward to hear from Martin about his plans.

So unlike past calls when I have done all the talking prior to the question period, I'll soon hand this call over to Martin so that he can discuss some key things going forward. This quarter shows that our efforts to deal with the issues of 2015 are bearing real fruit.

Our total originations in quarter one 2016 were $1.78 billion, an increase of almost 29% from the last year's $1.38 billion, that was in the first quarter of 2015. In addition, going back another year, 2014 was the largest year ever for originations for Home.

And in the first quarter of 2016 we not only exceeded the comparable period or comparable quarter in 2015 by 29%, but we also exceeded quarter one 2014 by 7%. A very good start to the year for [Technical Difficulty] We achieved this by redoubling our efforts on customer service, working hard with our trusted brokers and by innovating with new products and offerings.

Many, many people here at Home Capital put a lot of effort into ensuring we got originations back on track and I am very pleased to see these results. Some other highlights from the quarter.

Our adjusted return on equity was 16.4%. Our credit performance was extremely strong yet again with net nonperforming loans as a percentage of gross loans at 0.34 of 1% compared to 0.25% of the end quarter one 2015.

Included in the quarter one 2016 nonperforming loans are non-residential and residential commercial loans that became nonperforming during the quarter. The two loans that I mentioned have very high collateral and we expect to be paid out in the next couple quarters on both of those loans.

And in the absence of these loans, the nonperforming loan would have been 0.29%, quite comparable to last year. Since I have been asked this question which is somewhat related to arrears, I am going to state categorically Home Trust has no exposure to Urban Corporation.

A condo builder with over 20 active condo projects in the metropolitan Toronto area and in that Urban Corp has recently been in the media as having financial difficulties. Well, again I say we have no exposure whatsoever Urban Corp.

We continue to observe strong credit profile and stable loan to value ratios across the portfolio which continues to support low delinquency, low non performing rate and ultimately the key low net write offs. In fact, net write offs were $1.6 million in the quarter representing 0.04% of gross loans on the quarter and that number is consistent with quarter one, 2015.

And our balance sheet is very solid as always with our common equity tier 1 capital standing at 18.28% and our total capital ratio at 20.63%. There are few things of note as you look at the earnings number in particular that I would like to point out.

And although diluted earnings per share were $0.92, there was another $0.11 in expenses which we believe are not reflective of ongoing operations. And we don't expect these expenses which I am going to itemize now to be indicative of the company's ongoing cost base.

They are as follows. 5% after tax related to severance and other related costs.

To be clear and to answer a question that was asked none of these expenses relate to myself or my retirement, zero. These are all other individuals and other related expenses.

$0.02 from the continuing operation of CFF Bank. The integration of CFF Bank is going according to plan, but we are still running some system side by side.

And that's having cost. We expect to decommission all redundant systems which will reduce the connected cost by the end of the year.

There was an additional $0.04 for derivative losses relating to the senior debt. We didn't adjust for it, but I should note that we don't expect to see this issue again.

With the exception of a small amount booked at the beginning of the second quarter. And the amount that was booked was approximately $0.01.

These amounts were offset by $0.01 favorable adjustment to the gain recognized on acquisition of CFF Bank. So although we wrote off $0.11,we picked up $0.01 a net to normalize the earnings, it's about $0.10 over the 92, so in a way we look at the business, our ongoing operating earnings would have been a $1.02 excluding these items.

And we look at that as a base on a going forward basis. Finally, our strong capital position allowed us to do some things that will support earnings per share and shareholder returns as we look further out.

After the quarter ended, we closed our $150 million share buyback which was oversubscribed allowing us to reduce the outstanding shares by 4 million shares of almost 1 million shares or about 5.7% of our outstanding shares. The Company also intends to utilize its normal course issuer bid to purchase additional shares when appropriate going forward.

In addition, we are delighted to say that yesterday we retired $150 million of senior debt which will save us $1.8 million per quarter in interest expense. And we were able to do that without raising any additional debt that came out of our large capital reserves.

This is a good place to also reiterate that Home Capital expects to meet all of its three to five year mid range targets. That is a reflection of the strength and resilience of our overall business.

And our diverse sources of growth. I'd now like to turn the meeting or the call over to Martin.

Martin?

Thank you very much, Gerry. I just like to clarify Gerry's comments with regard to nonperforming.

There are two types of loans in that group. There is non-res and residential commercial.

And in total they are fewer than 10 loans in the related nonperforming total to $9.3 million. They are very well collateralized with very, very low loan to values.

And we don't anticipate any losses from those.

Okay. Thank you, Martin.

I guess he is ready to retire. [Multi Speakers]

I'd like to come back and talk a little bit about originations. As you know, we spent a good part of 2015 and 2016 rebuilding our originations pipeline, changing processes, improving technology and trying to rebuild existing relationships and add new relationships.

And as Gerry said, this quarter we saw that paying off with total originations up 29%. Our traditional loan insured single family residential originations up 11%.

And accelerator originations more than doubling over the same period last year. But we are not stopping there.

We are only partway through our rebuild process and we are happy with the results. As Gerry mentioned, we don't look to 2015 as the year to be but rather 2014 as the benchmark.

The year when we had record originations. In the first quarter of 2016 surpass the first quarter of 2014.

We believe we have some products and services that will continue to feed originations over the remainder of 2016 and beyond. And these would include Loft and Spire two new technologies and to strengthening our relationships with our broker partners.

Loft is our broker portal which really makes us easier to deal with. For examples, brokers can get time stamp documents real time updates on the status of deal and the attributes of those deals.

We've completed a pilot with one broker chosen and started to relate to another. We'll continue to rollout Loft and should have it substantially rolled out by the end of the summer to all of our broker partners.

And so far the feedback has been excellent regarding the functionality and the ability of brokers to manage their business. The second new technology Spire, our broker loyalty program.

And we launched this on April 1, 2016 to all of our broker partners. And this is designed to reward brokers who bring us business but it's much more than that, it rewards brokers who bring us the right kind of business.

Deals that match our risk appetite, high quality deals that we are very comfortable with. We've also talked about the fact that regulation is creating a whole new class of customers for us.

And these customers are very close to qualifying for a prime insured mortgage but they just barely miss on one of the criteria. And for these borrowers we had created a new product called Ace Plus, and this fits in between our tradition mortgage product and our accelerator product with a risk profile and rate to match.

And we anticipate that originations of this product to be strong in the coming year. As part of the transition in 2015, an area of weakness that we identified was in retention of customers looking for early renewal.

This was part of why despite growth in originations our portfolio shrinks. We've added resources to our retention team with the focus on retaining these customers with increased originations and retaining more of our existing clients, we should start to see the overall portfolio growing quite nicely.

This is where our one-stop strategy also comes into play. Take for example customer who came to us for traditional mortgage because they didn't have credit history.

Also few years on they have been good borrower, now they have their credit history. They now have a few more options with Home Capital.

They are our prime borrower, we have our accelerator product. If they aren't quite there yet, but have improved credit standing, we have our Ace Plus product.

So we want to really showcase these options to our customers and ensure they know that they can continue deal with us regardless of their credit situation. Of course the other thing that really affects our growth is the housing market.

And we expect that supply and demand in Home's key established real estate market will remain relatively balanced in 2016 with stable prices and sales volumes. On a national basis, it's really the tale of two cities with Toronto and Vancouver showing what we would characterize as unsustainable strength.

That doesn't mean these markets come off, but we don't see the high single digit or double digit price increases in the long term. Other parts of the country are exhibiting more normal price and sales activity with Alberta showing some anticipated signs of weakness.

I'd add however that we do not see a major crisis in the Alberta market. Overall, we see a healthy market.

I'd stress here that we are going to be prudent as we grow our traditional business. We don't want to go beyond our risk appetite or compromise the quality of the business we are bringing in.

It's disciplined around risk management that has made this company successful for close to 30 years. And helped us deliver the kind of credit performance that Gerry spoke out earlier.

Outside of the mortgage business, we continue to see opportunities in credit cards and commercial lending as well as retail lending. But once again, I'd stress that we are going to be prudent and mindful of the risk in these products.

And originations in these products were quite strong in the quarter. As many of you know, a big priority for me in ensuring that we have the skills and tools to manage the risk.

We are Canada's largest alternative lender and deposit taking institution. And we need people and infrastructure to support that.

There are some expenses that come with that, which puts upward pressure on our noninterest expenses, which was elevated in this quarter. We continue to balance expenses with cost management and efficiency programs.

And we expect noninterest expenses to continue to be elevated through most of 2016. We are focused on expense containment and reduction and we will push to ensure that long term the efficiencies from technology spent are realized.

2015 and early 2016 saw increased expenses related to building a stronger organization for the future. However, we firmly believe investing in risk management and other areas to support our business is the right path forward to ensure risk are managed effectively and stay well within our risk appetite.

Net interest margins narrowed during the quarter due a number of factors. With increased liquidity being carried toward the latter part of the quarter for the payment of our substantial issuer bid, as well as the maturity of our debenture, $150 million debenture on May 4.

We've also seen a run off of older higher margin business and new business and particular Ace Plus type business coming on at lower margins but a much, much higher credit quality. On an overall basis, there is also been slight change in the mix with an increased proportion of lower margin insured business.

If there is one thing that stood Home Capital in good stead for almost 30 years is that we think about the long term. And I am going to ensure that we continue to do that.

I'd now like to ask the operator to open the line for questions.

Good morning, guys. Quick question on the commercial mortgages that you identify that just went non-performing in this quarter, the $9 million.

I know you talked about low loan-to-value. Can you give us a rough estimate what the average loan-to-value is on those properties?

We are just confirming to make sure I don't give you the wrong answer here.

Dylan, it is Rob Morton here. They actually range -- they go from low 30% up wouldn't be higher than high 60s but average in around 60%

And a couple of them been sold, it is matter of waiting for closing. We've examine them all carefully.

They are sort of individual circumstances related to them. There is -- I'd very quick to tell you if there is anything that I was concerned about.

They are not concern, they are individual situations. And I think they will all work out fine.

Okay. Perfect.

And just on the increased expense line, we saw this quarter I guess sort of clarify that we expect -- you expect increased expenses through 2016. Is that more increased spent due to the new broker initiatives that you guys have rolled out and risk management I guess?

Martin will answer this.

Yes. There are a number of things at work, some of it relates to technology.

The money being spent on the broker side of it, the higher compensation structure but over time as we start to pickup the efficiencies in particular as it relates to the technology spend, we should see that start to moderate.

Okay. And just on the Ace Plus product, is that currently rolling up into the traditional bucket as far as your disclosures right now?

Yes. That's correct.

We will be looking next quarter to split that out. The volume was not sufficient this quarter to really split it.

But we'll start to split that out in terms of originations as well as in the margins.

Okay. Perfect.

And then just one final question. Just given the price increases that we've seen in the GTA in Vancouver, are you finding it a bit more difficult with your traditional product?

Are people in your traditional clientele getting priced out of the market a little bit in the areas that you guys have historically focused on? Or still seeing solid demand?

Rates are still low and whether they needed for their business or refinance or they are buying house. People are still affording reluctantly they can afford the houses or paying for the mortgage, and we haven't really seen any difference in credit quality.

If anything, the credit quality sort of uptick year-over-year when we do all the analysis. As funny as it sounds, people are basically coming with larger down payments and better Beacon scores.

Okay, thanks Dylan, on to the next one, thanks.

Hi. Good morning.

Good morning, Geoff. How are you at RBC?

Things are going pretty well.

We read a lot about your housing market.

It's a little pricey. My first question just may be tagging on to the question around the expenses.

I just was wanting to get a sense of how you guys are looking at it. Obviously you've got elevated this year, but kind of thinking of going forward, how much of it is from a personnel standpoint?

I mean do you feel you've got the people in the right places? Are there certain parts of the organization where you need to kind of increase?

And also maybe from a systems, it's given it seems a lot of companies in the sector are having to spend more on compliance regulatory, even stuff like cyber risk, that sort of thing.

Well, first of all, the last part of which I said everyone spending more on risk and technology safeguards absolutely so but let me give you from -- I'll answer the first part of it then pass it on to Martin. What we clearly have done is as a company and a board we've said we see quite a nice path in all the things we are doing going forward like this we are -- we may be the largest non prime lender in the country.

We see a lot of opportunities. We are getting opportunities and what we decided that we had to do is to build out the control group before we added a lot of volume.

So we have really a very first class risk compliance internal audit all of those have built out with experience people. Making whatever changes we needed, added staff and that's expensive.

It doesn't come with nothing. But you can't take on major growth without all your control groups and credit that gets added in there without going forward.

So I think Martin gave you a pretty good guidance. And I am going to turn it back to him when he talked about.

It's not going to disappear. It's not going to be like it was five years ago.

There is no regulator in the company, in the country that's operating with same levels of internal audit, risk, compliance, credit. They can't operate as they did five years ago or they are not in business.

And I am just telling you that will be just one of the facts of life that we will see cost. But it's up to us and is up to the next generation of management here and Home to figure out how to use technology to over come that.

Given your broad question but Martin will continue with the second answer for that.

Yes. Hi, Geoff.

Gerry said there has been a lot of money spent on the control functions. And a lot of that will level off a little bit as scale continues to start grow.

We won't be increasing the spend on that side of things as much as we have. Where the long term reduction and expenses will come as it -- we are in a bit of transition and we are spending money on technology but not yet getting the benefit out of that technology.

So you typically have little bit more headcount than you otherwise would until you sort of transition with that technology. So I would say the headcount that we've got today will do us for a long term growth for a while.

And as we get the benefits of that technology and the efficiencies out of that. These are major efforts within organization to really sort of digitize this business.

We do a lot of paper, lot of things that have been done manually, and it's really sort of digitizing that. But the benefits of that are really going to start toward the end of 2016.

But the spend is happening now.

Okay. Thanks.

And just the other question I had is with your new -- the broker portal, the loyalty program, as well as the marketing materials service. Other players in the broker channel have typically one or more of these things that you've got now.

Just wanted to understand from your perspective where you think where you have something different in terms of the value proposition with the brokers to be able to drive more business.

Let Pino answer this.

Hi. Geoff.

Yes. That's a great point.

There is in all fronts whether be the portal, the marketing material or the partnership programs. There is version of each in the marketplace.

What we did was we obviously catered something that fits for Home and fits for our broker partners. So I'll touch on the portal first.

That one really redefines broker portals and the industry from the standpoint that literally we do not cut off the view of a broker at any point in the cycle. So there are different versions of it currently in the market place.

You are correct. However, ours is literally end-to-end, so throughout the entire originations process of a mortgage, a broker can see exactly as Martin mentioned what the status is of their new application, of their pending mortgage, outstanding commitments all the way through the funding, so that sort of makes ours different from anything else in the marketplace.

From the standpoint of our partnership program, again this one really has three aspects to it. And that is compensating brokers on new application.

That compensation is based on the partnership they have with us through volumes, through quality, through behavior. And then aggregating those numbers into annual amount and that should constitute any volume bonus that is being paid to brokers.

And then it also gives us the opportunity to monitor brokers on an annual basis and report accordingly. So if there is thing that needs to be looking at in their business and their marketplace, we can share with them that Intel and they find that very informative.

I'm just wondering on the net interest margin side are you seeing any higher competition on the pricing side of your business. Or what are the factors that are driving the lower average rate that you saw, and particularly on the non-securitized book?

Okay. I'll start off Graham; Gerry is all the way here.

As the mortgage market remains quite competitive especially at the high credit quality end of the business. There has been a little tightening of spreads, but we've also been able to do acquisition funds that were a little more reasonable.

We've found that our funds that we raised directly are cheaper on the whole than what we raised through the broker portal. We are continuing to work on that and the new CFF Bank.

We will relaunch renewed direct to consumer program of that over the rest of the year. And we now collect about 30% of our deposits come direct from -- directly not through the broker network.

All of which is very good. But I don't see any -- I don't foresee a big widening but I think we can maintain this and probably increase a bit.

We had to keep a bit of extra liquidity because there were really three things that have come together fairly quickly. The $150 million for the buyback of our stock.

The $150 million to payoff some debt program, that's $300 million and there was something like a $175 million in term notes that we've decided not to renew, we are able to raise money cheaper on the sort of through the deposit network and other sources. We haven't given up.

The commercial term note was very good. They were wonderful when we needed them.

They did come in at that point a little less from what we could raise. And they will be one of the tools in our toolbox when we -- but it is not like depositors who you write a check to 50 and 100, this is something where you have to be ready write a check for $175 million.

And we are still at a size a kind of stockpile the money up is like, for us to have $475 million besides normal funding go out in a month or so we probably had a little higher liquidity for the money was in very short term or next to nothing. But I think we can balance off the -- the balances we have I think the spread should creep up a little bit.

I don't see a running away with itself.

Yes. In the prime insurance space it is definitely very competitive margins, a little bit lower there.

As Gerry mentioned on the better quality part of our traditional business, it is a little bit more competitive there. And margins baked in a little bit.

Gerry mentioned I think we should be able to sustain or maybe improve them over time.

That's helpful. Jumping just to the credit side.

Your impairment loans, they did tick up. I appreciate it's from this commercial -- large use commercial loans.

I'm just -- your allowance for credit losses and your PCLs in the quarter were quite low. I'm just wondering if you could sort of walk us through how you get there.

We will turn it over Chief Financial Officer.

Sure. Thanks.

Graham so I mean it's really based on two things. And so we have specific allowances and those are actually impairments identified on a loan by loan basis in accordance with our judgment of the creditworthiness of those borrowers so that's a one component.

And the other is the collective allowance. That's really established to cover our estimated credit losses that are in our loan portfolio but haven't actually been specifically identified as impaired.

And be able to do that we actually have to take our historical experience and apply that to our portfolio. And because our actual experience is low that's what drives that.

We are not allowed to actually look and set provisions based on what we might see going forward. So it's really based on that.

That's going to change in 2017 when IFRS 9 comes in but right now that's how we set our provision. So should we see changes and actually what's becoming our loss history our provision are changed to reflect that?

But we really don't see any problems and I think you'll see it's not a dramatic increase. And based on historic numbers if you go back a few years, so we made full and complete disclosure about it and we've got it all there.

But I don't think it's anything to worry about.

So and Graham, I should add because I have got IFRS 9 on the brain, we are running parallel in 2017, it actually comes into play out 2018.

And Graham, it is Pino. Just to add, there are couple of the loans that we talked about earlier were because the loan- to -value was so low there was no provision set up for it.

Yes, I'm sorry. Just to be clear, did you say there were 10 commercial loans that were part of that $9.3 million?

Or what was the number there?

Yes. 10 loans that were part of the $9.3 million.

There were couple of them that were quite large but with very low loan to value where there was no provision set up for it.

Great. And then just lastly if I could.

You talked about improving your retention and adding to your retention team. Can you just give me a bit of context around what exactly you are looking to improve on the retention side?

Or how you're looking to improve it?

Sure. I'll start off and then have Pino jump in.

So this is not your normal renewal. We have a team that's focused on normal renewal.

These are people that you get a request for a mortgage statement and it could come in from the call center, it could come in number of different ways. And sometimes it's just for information purposes that they are looking for, sometimes it is because they are looking at refinancing something else.

So typically what we would do there is we have team focused on that in calling those people back and find out whether they are looking at moving their mortgage, and if they are, trying to either match or beat the rate that they are getting and keep them. So we had added resources to that.

I'll let Pino add any color to that.

Yes. Definitely added the resources.

I think the key to is the resources that we've allocated our -- are going to be more experienced underwriters or originators. So individuals that as Martin said as these customers do call in, looking for either mortgage statements or discharge request of their mortgages, obviously we know they are shopping somewhere else or they are looking to refinance somewhere else.

They will be able to walk thorough with some sort of what they are looking for, find other opportunities, other products and ways to keep them here at Home. So that's a first strategy.

The second is actually built within our Spire partnership program. And really as we onboard brokers onto the program, it's not only about what they are giving us on a monthly basis and new origination, there is a component built within Spire which rewards brokers for keeping clients here long term.

So that renewal or retention component is actually built into that program as well.

So going forward you're paying some broker commissions for renewals?

Yes.

Hey, guys. Good morning.

First of all, Gerry thanks a lot for doing a great job. I mean you've been there a long time and really have done a wonderful job for a very long -- very proud of yourself.

First of all, can you call out in the quarter how much expenses won't be there next year that are kind of transition costs or increased regulatory costs in dollars?

Well, I think we clearly spelled out we think that there $0.11 that we don't expect to see there. But I'll turn it over to Martin because he is the one that you are going to ask, whatever answer he gives you are going to ask him next year why he did it or did not happen.

So, Jordan, I am going to turn you over to Martin Reid.

Yes. Jordan, beyond the $0.11 that Gerry talked about, it's a little bit difficult so there are efficiencies there that -- until we start to realize them, it's going to be hard to quantify.

What we don't see that the expenses should be increasing at a faster rate. So the increase in expenses that we've seen through the end of 2014, 2015, end of 2016, that pace should start to slowdown as we start to scale up the business.

We should start to get efficiencies out of that. Yes, go ahead.

So there's no any additional, so it's $1.02 in the quarter. With CFF lost $2 million, I assume the plan is not to have that lose money, right?

Correct.

So if that's breakeven, that's another $0.02. You've caught out the debt, that's another $0.02 a quarter.

And you've bought back 6% of the float in the quarter right now. So if you annualize just those three numbers, you're to $4.50 Canadian run rate of earnings.

You follow that logic for a minute?

Yes. I am with you.

Reward that out just like you have.

So it's $1.02 plus $0.02 plus $0.02 plus 6% less shares times 4. So you get to $4.49.

Right.

And then you've historically said that a double-digit growth rate is not unreasonable. Let's just say it's 10.

That would be a $5 number for 2017. Is that an impossible number?

I mean I know you don't give guidance, but I mean when I use that number, it doesn't seem impossible to me.

I would say that's a fair assumption.

And then if you use that assumption and you do book value, your book value will be about $30 at the end of next year, which means you're basically trading at tangible book at this point for next year for a Company making an upper teens return on equity. Seems like a great short to me.

Yes. Right.

I can't argue with your logic.

Got it. Thanks for your help.

And Gerry also-- in the 20 years I've known you, I mean you've done a phenomenal job and really should be quite proud.

Well, that's very kind Jordon. Thank you very much.

Hello. Good morning to you.

Before I ask my questions I just want to say thanks very much for making me look like smart investor all these years. And I wish --

You are very kind that you know it's investors like you who work with us all this time stayed in touch with the company, we very much appreciate that and we appreciate the fact that the company has done well for the staff, and it's done well for the shareholders and it's not just any small group, everyone is really participated in the growth and the increase from the stock price. So thank you for that Rick.

Okay. And you are very humble.

And quick questions. It appears that the Dutch auction was very, very expensive.

You had printing cost and earnings cost, opinion, fairness opinions, what was the rationale as opposed to just doing normal course bid?

Well, there are a lot of restrictions on how you can do the normal course. There is a lot of Toronto Exchange, you can't buy in a last hour of the day, you can't buy more than a certain percentage, and you can't go over the last price.

Like there is -- I am not critical. This is properly when a company is buying back stock it's usually incidental purchases, not as a big stroke.

We felt that there was some surplus capital. We thought that the price thas was set a fair price compiled with all the legal and regulatory price.

And we were quite pleased. We think the price was good for the company.

It was good for those who wanted to tender. The fact that some of the stocks have taken a little bit financial stocks have beaten up a little bit because of the fear of losses in Alberta and the oil company.

The stocks -- we will see where are after -- we look at as year out. And Martin has a comment.

Yes. Rick, if I can just add it.

It's not -- it wasn't an either horde decision so it's not to say that we won't be involved in a normal course of sure bid in addition to the SIB. And I think as we talked about last quarter, there is a much stronger focus on utilization of capital and I wouldn't be surprised to see us a lot more active in the normal course issue or bid process when it is opportunistic.

Okay. Well, thank you.

And I understand better. So thank you for answering question.

Good morning. Can you just talk about the run off on the mortgages with the cut off brokers?

Are you still on track to get that completed by the end of 2016 because the number didn't really come down that much from Q1 to Q4 -- or Q4 to Q1? Maybe you could just update us on that please.

Sorry Stephen, when you talk about the number you talks about the total of the portfolio?

Yes, the total portfolio. I mean I think it's at$1.4 billion, so it means you're kind of $400 million to $500 million of mortgages have to run off by or be verified, I guess, in the next three quarters.

No, no. Out of the portfolio we are about 75% through that validation process.

So that number could stay flat but as getting through that -- what we are finding is that out of that portfolio, less than 10% we would not be willing to renew. So that portfolio -- that total number that you see should not run down to zero.

Oh, I see. Okay.

So there is mortgages from those cut off brokers that you're renewing and that's why the portfolio would stay were it is.

Exactly. Yes.

So as we go through and go through the validation process, that's what Gerry has talked about more than 90% of it we would renew.

Okay. And maybe you can just go back to follow-up on Graham's question on credit a little bit.

I mean we saw National this morning put out a sectoral provision, Canadian Western Bank. Certainly I know you're not in E&P loans, but I mean when people look at your Alberta exposure, and granted a lot of it is certainly loan-to-value, there is stuff that's insured.

I mean how is it that you cannot put a sectoral provision out there? I mean you mentioned some of the rules, but certainly it seems like other lenders may be doing something different.

Yes. So it is Rob, Stephen.

It is not acceptable under accounting standards to provide for past or future losses inherent in our portfolio. So I think some of these sectoral just come out so I am going to have looked at that little closer but again, we are not seeing it right now.

And our exposure in Alberta isn't that large so I think we will have to revert and get back on that.

Yes. They maybe seeing something in their data that gives them the support to do that.

We are not seeing anything in our portfolio at this point in time that would give us a support to do that. And we are much smaller player in Alberta than lot of those players.

And their investments are different. I mean they are investing in businesses as opposed to what we are investing.

So it's definitely something we are keeping an eye on.

Can you just on those 10 loans that went nonperforming, were they Ontario based or were they Alberta based? Or was consist --

It's almost all Ontario based in the GTA. And as I mention a chunk of it is very, very low loan-to-value.

I think roughly a little more than half of it is get loan-to-value around 35%.

Thanks for taking my question. Good morning.

I was wondering if you could just give us some detail on the severance charge, how many people were involved and what part of the bank was that severance activity focused on?

I am just looking to Rob for the -- there was approximately 10 people involved.

Yes. It is little bit less than 10 people involved in that.

And there are number of things around that. And some of this is part of the transition with Gerry and I.

And so realigning the organization. So again, not anticipated to occur in the future.

Okay. And was there any one part of the organization that was more impacted by that?

No. Let me put it this way which I sort of chat with the people involvement.

As a company grows and you grow year-by-year, sometimes there is a need to changes. Somebody who can operate very well on a 100% company.

The time goes by, they call they are going to be retiring closely shortly anyway. But the ability to fit into 800 or 900 person company with their skill base, it doesn't work so well.

And there is some individuals who we needed at one point but their skills are really not that transferable to when we are much bigger company under a different regulatory regime, different product mix. And so there are some situations that Martin is going to be running at, Martin is going to have a team that sort of shares his outlook.

And there was time to kind of say okay let's try to get a team that work closely with them. It was pretty small considering the 900 odd people that we have on the payroll.

But we think that the changes we made will really set as up for going forward.

Okay. And then just to follow-up.

I notice that preferred securities mark in the OCI account had increased again in the quarter. And given that it's now approaching $1.50 a share, I wondered if you could give us some more transparency on what's in that bucket of holdings and what's generating the marks.

Yes. It's almost entirely made of preferred shares which is heavily retail market may be not one of the more efficient markets.

Strong yields, there is no credit issues, particular on after tax basis very healthy returns.

But you can't give us any more transparency on who the issuers are or the--

Yes. It is largely financials.

They are predominately A to AAA. Almost very little in the BBB plus category.

Yes. And just they are not -- all financials there is also some resource based as well.

And they are good resource, they just went down in value. There is something wrong with the price.

Sorry.

What fraction would be resource based?

I don't know of the top of my head.

Thank you for taking my call. Hello.

I have a few questions. One is about derivative losses.

Can you explain what is, like what did you do there that caused these losses? Because these losses have been going on for two quarters, so there's something related to senior debt.

If you can give a little bit more color, that would be nice.

Hi. Edward.

So the accounting for this derivative and it is not a senior debt calls for charge in. And as you pointed out, this amount isn't much different than we take in the prior quarter.

And really what we highlighted at this quarter because it is done being amortized and Gerry mentioned as of yesterday. And it will be about another $1.5 million charge in the second quarter.

And we really wanted to point out so you would realize that it's not something that's going to go forward. The good news I think is that we have $1.8 million last quarter in interest expense going forward.

And the last question is about the net interest margin. So I understand that you are doing these Ace Plus mortgages, but the decline in the average rate that had on the traditional single family residential mortgage dropped from 4.95% to 4.83%.

You said that Ace Plus mortgages are not very big, yet the decline in the rate is fairly substantial, it's like 12 basis points. I was wondering what does the margin that's implied in this Ace Plus compared to your traditional mortgages.

And how much did you actually issue this quarter in order to yield such a decline in the average rate?

Yes. Edward, its Pino.

So there are a couple of things there. First, generally speaking in our traditional mortgage portfolio the credit quality that we are seeing following the two years ago when the B20 changes occurred across Canada, the credit quality of these borrowers has become so much better.

We see it month after month consistently Beacon score is increasing, average Beacon score is increasing, and average loan-to-value is decreasing. So with those two metrics essentially really customers in general in our traditional book has more opportunities, has more choices out there.

So you really have to be sharper with your offerings. So that in itself has caused obviously the average rate to down.

The Ace Plus product in itself is gaining a lot of traction. Again this is a space that's new to us, really created in the past two years as I said with the change in lending rules.

But again, these customers are the closest to prime mortgages that we've ever seen in nearly 12 years I have been here and probably the 25 plus years we have been in business. So it really forced us to create this new product.

I think it's going to serve us very well. These customers should graduate into the prime space at a much more rapid rate than our traditional book.

So it's important that we segment it and we offer products accordingly.

If I may just follow-up on this. Like one of the reasons -- like Home Cap has always been in the market with the Alt-A market, which is people that are looking like new immigrants or people that cannot get the mortgage from a bank.

And you were the main lender for them and therefore you were able to charge them more. And you were able to sort of offset the risk by requiring high down payments.

Is it possible that that market is shrinking and therefore you had to go to these venues?

No. If anything means the market is expanding whether-- there are some parts of the market today that five years ago we would have been able to do that we can't do today because of regulatory changes.

But Pino pointed out there is also a better quality borrower coming into our space. But on that better quality borrower, there are more choices and hence that's really why the margins are little bit lower on that borrower.

Hi. Can you guys hear me?

Great. So just one quick one.

The originations of the traditional mortgage are very solid, up 11% year over year, in line with the 2014 pace. I just have a question, and forgive me if you talked about this already.

But the decline in the average balance of traditional and the higher amortization rate or runoff rate of non-securitized mortgages. Can you give me a little bit of color on what the breakdown on of this is, whether it's prepayment or lack of renewals?

Is there any color to provide on that?

Well, the only color I can give you from the top is that we have to recognize that over a couple of years now, it is not just something that happens yesterday. We have been moving up the credits scale and booking and been underwriting a better and better customer.

And I think the transition is that we had to be a little more vigilant on our renewal process and be aware that these are people that qualify either for a more prime rate or a better rate or they could move on to a bank, and what we've been trying to do is recognize that and make sure when they are ready to graduate, even though the mortgage isn't renewed or it's un-renew we got to be sensitive to give them a pricing and product that would suit them. But go ahead Martin.

Yes. So I touched on my opening remarks and we touched on a little bit and Pino talked about it.

So part of the issue there was retention. So as we've gone through the transformations sort of through 2015 into the early part of 2016, one of the things that we were a little bit weaker on was on the retention.

And this is not on renewal but on people who are looking for early refinance where they would often sort of call in for a mortgage statement and that would be sort of the first sign that they are looking up moving. And so what we've done is beefed up the resources around that to go after that customer and keep that customer, match the rate whatever it is.

So that wasn't happening through the end of 2015 and early part of 2016. But we have beefed up the resources to get that.

So as originations come on stream and we start to taking it up to the back end, you should see a lot more growth out of the portfolio overall.

Thanks Jaeme. So that wraps up the questions.

And what I'd -- in concluding the remarks what I'd like to say is that there is always a lot of questions the people ask us about the shorts, shorts are part of the marketplace. We know they are there, we don't put a lot of time and energy into dealing with what often is false comments by the shorts, they have their economic interest.

We honestly believe that the best way to deal with the short is make profits, increase dividends, keep growing, that's the best way. But I can't end the call without a little ditty that someone passed on to me of how people and me 19the century dealt with shorts and little ditty go something like this.

He, who sells what isn't his, must buy it back or go to prison. So with that I say thank you.

Bye, bye and see you at the annual meeting next week.