EQB Inc.

Welcome to EQB's earnings call for the first quarter of 2025 on Wednesday, February 26, 2025. At this time, you are in your listen-only mode. Later, we will conduct a Q&A session for analysts. Instructions will be provided at that time. It is now my pleasure to turn the call over to Mr. Mike Rizvanovic, Managing Director of Investor Relations for EQB. Thank you. Please go ahead.

Thank you, Ina, and good morning, everyone, and welcome to EQB's Q1 fiscal 2025 earnings call. Your hosts today will be Andrew Moore, President and Chief Executive Officer, and Chadwick Westlake, Chief Financial Officer. Marlene Linarduzzi, EQB's Chief Risk Officer, will also be available for the Q&A portion of this call. For those on the phone lines only, we encourage you to also log on to our webcast to view our presentation, which may be referenced during the prepared remarks. On slide two of our presentation, you'll find EQB's caution regarding forward-looking statements as well as the use of non-IFRS measures. All figures referenced today are on an adjusted basis where applicable unless otherwise noted. And with that, I will turn it over to Andrew.

Good morning, everyone, and thank you, Mike.

Before we begin, I want to take a moment to acknowledge the fact that this will be Chadwick's final EQB earnings call as he has made the decision to pursue a new opportunity outside the banking world. Chadwick joined us in November 2020 and has moved our bank forward in ways that are enduring. He led many important files and improved our financial disclosure, including introducing guidance that I know has been helpful to our growing analyst community on this call. In fact, the very reason we're meeting this week at the same time as our industry peers is largely due to Chadwick's efforts in adjusting our fiscal year end. One of his biggest contributions was helping us identify and nurture other talented people. We're in a fortunate position to have a stacked bench on the finance team that has the depth, skills, expertise, and perspective to maintain consistency in our approach and help take EQB to the next level as we make progress against our clear vision for growth. That team, with the new leadership of VP and Head of Finance David Wilkes, in addition to our long-term Treasurer Tim Chiron and a host of extremely capable others certainly has my confidence and is worthy of yours as well. Transitions like these are a natural part of any organization's evolution, and I want to be clear, my commitment to EQB, our people, and our future remains as strong as ever. We have an exceptional team and a clear strategy that continues to guide us forward. We will be announcing a permanent CFO in due course.

Chadwick, thank you for joining us on our Challenger Bank journey. All the best in the future. Now, turning to business at hand.

EQB got out of the starting blocks quickly this year with milestone quarterly earnings, our ROE at 15.2%, and lower interest rates beginning to drive higher growth, particularly in the bank's uninsured single-family residential lending business, which saw a strong increase in originations and portfolio growth. Chad will outline the financial accomplishments during his remarks that have supported our dividend increase, a payout that reflects our board's conviction to grow the dividend 15% annually over the medium term. It is evident to all of us on this call that the economic and geopolitical environment has shifted dramatically in the past few weeks. Without downplaying the wider spread of impact that cross-border tariffs may have on the Canadian economy, I think it is worth noting that our bank has some built-in risk mitigators. For starters, we lend in large urban markets with diversified economies and don't lend on balance to large corporate customers with direct exposure to U.S. trade actions. And because we are a purely domestic Canadian bank, we're not exposed to variables that could disrupt peers with large positions south of the border. Our status as Canada's challenger bank is even more valuable today for these reasons, as well as the fact that recent industry consolidation has left us with few mid-sized banking peers, an enviable place to be. As things stand, we are led to believe that Canadian fiscal and monetary policy tools will likely be used to support the Canadian economy and employment if tariffs escalate. As I think you know, we have found success in thoughtfully adapting to change in the past and approach the future confident in our ability work with our customers to successfully address second-order impacts. Regarding credit performance, we're pleased to see encouraging signs of improvement in the equipment financing, with PCLs in that part of our business at $8 million in the quarter, down from $16 million in Q4. Net impact equipment loans also declined from $57 million to $37 million in the first quarter, reflecting the write-down at the time assets were repossessed. We expect more improvement to follow, reflecting management actions to de-risk our exposure. Overall, men-impaired commercial loans increased $68 million during the quarter, with $17 million of that associated with a single CMHC-insured loan. To reiterate what we said on our last call, we remain confident in our ability to resolve the remaining impaired commercial real estate loans with the reserves already set aside. As we previously indicated, resolutions are expected to accelerate in Q3 and Q4. Within the personal loan book, net impaired personal loans increased 11 million in the quarter and represented 98 basis points of personal loan assets. We expect any losses in residential real estate lending to be small in the context of the business overall. Recent monetary policy easing and house price stability support our conviction. To bolster that outlook, I would note that $94 million of impaired residential mortgages discharged or resolved in the quarter. Canadian media has written extensively about a mortgage renewal cliff facing borrowers and their banks. While this may be a concern for other institutions, our reality is quite different. 74% of equitable banks in uninsured single-family mortgages that are renewing in 2025 will do so at lower rates. assuming rates remain around current levels. That's the advantage of our relatively short-duration book. You'll hear the word growth more often in the coming year as we take advantage of high-quality lending opportunities that are available to us in our single-family, multi-unit residential, and decumulation markets. While the long-term impact of potential tariffs has yet to become clear, six Bank of Canada rate reductions since last June are stimulating the housing market, We believe we can expect further market demand for credit, and EQB is ready. As in all past years, we will focus our growth on lending in areas where we can drive change, give our customers a better deal, and create meaningful shareholder value using our RRE calculator on every loan. One of those areas is conventional single-family residential, our longtime engine of growth. What we saw in the first quarter was encouraging. with uninsured single-family originations up 23% compared to last year and 13% compared to last quarter. We are seeing this trend continue. Our single-family uninsured application volumes increased about 29% year-over-year in the first few weeks of February. While the underlying drivers are different, our decumulation business is enjoying continued strength in demand. And we see many opportunities to deploy capital to address the needs of Canada's growing population of retirees through our reverse mortgage and insurance lending lines. Growth in multi-unit residential loans under management was once again a highlight of the quarter, reflecting our long-time leadership in providing insured construction and term loans that support Canada's apartment sector. One thing to think about here is the natural step up that we get in our CMHC construction lending portfolio, as funding is drawn when builders reach each stage of completion. This will act as a tailwind for growth going forward. We believe more accommodative monetary policy will be good for this large portfolio, as well as other commercial markets we serve. The final comments on ECBank. We ended Q1 with 536,000 customers, up 26% year over year, as many more Canadians are choosing EQ Bank each day, including a growing proportion who choose us as their primary bank. In the past year, we've enjoyed a steady quarter-to-quarter increase in customers choosing to deposit their payroll with us. Such as these funds now represent a meaningful ratio of total deposits. This is a clear sign of affinity by customers who are making a long-term commitment to bank with us. and represent exactly the kind of customer relationship we strive to earn. In line with our challenger bank ethos, one area that deserves a shout out is our broader effort to redefine value and convenience for our customers, regardless of currency. We launched new pricing that challenged stubbornly high FX fees in the market with a new approach that significantly improved our EQ bank CAD to USD exchange rates in the quarter, such they are now better than most other bank competitors. while also maintaining a high interest rate for our U.S. dollar account. The combination of these features clearly resonated with customers and helped invigorate deposit growth in this offering. Add to that easy international money movement capabilities through our beloved partnership with Wise and seamless international spending with the EQ Bank Card, and you have a compelling and materially different offering in the world of high hidden fees. We expect continued growth in EQ Bank customers, deposits, and customer engagement going forward, with an assist coming from the continuing rollout of Banque Cousine services in Quebec this year. To sum up, strong quarter and good prospects for growth in the bank's key conventional lending markets as we maintain a close and proactive eye on the changing geopolitical climate. John Wick.

Thanks, Andrew. Thank you. Good morning. I'm going to go right into remarks on our strong Q1, then I have a couple closing comments. As we state consistently, our priority measure is generating return on equity above 15%. And we started fiscal 2025 right on target. This includes earnings per share of 298, up 19% sequentially, and 8% year over year. Before more on those results, a couple points on funding and capital. In December, Equitable Bank announced a milestone as it closed its $500 million fixed rate deposit note offering that was nearly three times oversubscribed and issued at record low credit spreads, underscoring the unique appeal of the bank's issuances in the capital markets. We expect this type of positive momentum to continue. This quarter, Moody's assigned Equitable Bank a long-term issuer rating of BAA2 and a short-term issuer rating of P-2. We also assigned a deposit note rating of BAA1, matching the existing DBRS BBB high deposit note rating. These ratings demonstrate Moody's confidence in the bank's financial stability and are expected to broaden our access to investors. In January, EQB renewed and increased its NCIB that allows for the repurchase for cancellation of up to 2.3 million common shares, representing approximately 8.4% of the public flow. And that is the most prudent use of capital. During the quarter, EQB leveraged its prior NCIB and repurchased common shares for the first time. Adjusted PCLs for the quarter totaled 13.7 million, a significant improvement from the 31.9 million in Q4. The annualized PCL rate was 12 basis points, the lowest since Q1 2024. Of the total, 3.6 million was for Stage 1 and Stage 2 performing loans, reflecting growth in the uninsured lending portfolio and elevated macroeconomic uncertainty impacting modeled expected credit losses. Stage 3 PCLs associated with impaired loans were 10.1 million. nearly 70% contributed by equipment financing. Note that our adjusted PCL excludes a $5 million provision related to the purchase facility through the Pride Group with updated disclosures in our MD&A similar to prior quarters. While there continues to be macroeconomic and geopolitical uncertainty, our PCL outlook remains constructive for a few reasons, including stabilization and credit trends within our equipment financing portfolio, which was the source of over 70% of adjusted PCLs last year. as we've taken decisive action to de-risk this portfolio. Housing market activity is increasing and pricing in most major urban state markets is stable, which helps reduce the likelihood of experiencing losses. And the fact that the vast majority of our single family residential customers have already been repriced at higher rates and will be renewing to lower rates. Next, net interest income. NIM was consistent at 2.07% and up six basis points compared to last year. This quarter benefited from consistent prepayment activity driven by a more active residential housing market, which should see further strength in the crucial spring market, as well as a slightly more favorable loan mix, given the sequential reduction in balances and lower spread insured single-family residential mortgages. Looking ahead, we expect NIM to remain above 2% through the year per our guidance, as the impact of declining policy rates are offset by the benefits of our funding diversification strategy and lending asset mix. For non-interest revenue, we reported a record result in Q1 at $59 million, up 4% from last quarter and almost 40% higher than the same period last year. Non-interest revenue represented 18% of total revenue in Q1, as we continue to see strong progress with our diversification strategy. The sequential improvement was broad-based across strategic areas, including a 7% increase in fee-based revenue, which continues to see a strong contribution from credit union services and ACM advisors. and a 5% cure-recure increase in revenue from securitization activities related to our insured multi-unit residential lending business. Moving on to expenses, which increased 3% from last quarter, driven by staffing costs, including the annual reset of benefits and merit increases, and continued investments in technology to enhance our digital capabilities. As we often reference, we will continue to prioritize investing in strategic initiatives to support growth and enhance our long-term franchise value. That will impact our efficiency ratio quarter to quarter, but our primary focus remains long-term growth in our ROE North Star. Having said that, we do have some levers to pull on the expense side, and coupled with an improving revenue outlook, we do expect our operating leverage to gravitate towards our target of flat to slightly positive in the latter half of this year. Now, in the balance sheet, total loans under management ended Q1 at $69.3 billion. growth of 2% from last quarter and 8% versus the prior year. This was driven predominantly by our higher growth lending businesses, including insured multi-unit residential, which was up 5% quarter-by-quarter and 30% year-over-year, and decumulation lending, which improved another 9% quarter-by-quarter and 47% year-over-year. We also saw positive trends in insured commercial construction, up 13% sequentially. In addition, we saw a pickup in uninsured single-family mortgages, which had quarter-per-quarter growth of 1%, but underneath that was the 23% year-over-year increase in originations that Andrew noted earlier. We expect further momentum here, particularly uninsured personal lending in the latter half of the year. Shifting over to funding, deposit growth was 3% quarter-per-quarter and 7% year-over-year. We saw positive trends within the mix of deposit balances as term deposits moved up 1%, while lower-cost demand deposits increased by a solid 8%, driven by strength in the EQ Bank demand balances, which were up 4% sequentially. While EQ Bank total deposits were about consistent quarter-by-quarter, we have thoughtfully managed our profitability while being impacted by maturities of term balances with higher rates, with most deposits either rolling into new terms or being kept in demand accounts. We continue to see strong engagement and activity with a growing share of deposits associated with payroll and regular direct deposits, as Canadians choose EQ Bank as their primary bank. Shifting to capital, as you know, we use an ICAP, or Internal Capital Adequacy Assessment Process, to govern the quality and quantity of capital we need to hold against the bank's risks. We have always run our total capital ratio well above regulatory minimums, a prudent practice that will continue in fiscal 2025 and beyond. Through our recent ICAP, management has established it will operate above 15% total capital and expects that up to 300 basis points of total capital could be contributed by alternative Tier 1 and Tier 2 in 2027 and beyond. Set 1 guidance remains 13% plus for the balance of fiscal 2025. We continue to prioritize organic growth as our top priority for capital deployment, consistent with how we intend to maintain our 15% to 17% ROE objective While M&A opportunities that fit our strategy and are EPS-accretive are a great second option, followed by share repurchases, which will be used strategically. In closing, we're very pleased with the results this quarter, which highlighted a strong improvement in credit performance, continued strength in lending volumes in high-growth segments, and clear signs of improvement across other key loan categories. Further progress in revenue diversification strategy and a robust excess capital position that provides us with flexibility in options. We remain excited about 2025, which we expect will be a pivotal year for the EQB franchise. And finally, I want to thank you. Thank you to our shareholders and all stakeholders that have trusted me in this capacity. Saying that serving as the CFO of EQB has been a privilege is an understatement. My decision is a very personal career pivot. EQB is an incredible position of strength with world-class talent, and I'm excited to cheer on the continued growth trajectory. I want to say thank you to our board of directors, the management team, and my finance team colleagues, including David Wilkes and Tim Schron, who will have broadened accountabilities. And importantly, I want to say thank you to Andrew. He's a pioneer of innovative change in Canadian banking and one of the most incredible people I've ever met personally and worked with. I greatly value being his co-pilot these past four years and know the best is yet to come as someone new transitions into my chair. And I look forward to engaging with many of you in my new role, which was just announced publicly. couldn't be more excited to share that I'm switching over to the technology sector, supporting the purpose of companies across all industries, as the new Executive Vice President and Chief Financial Officer of OpenText, the greatest information management software and services company in the world. There's extraordinary growth and transformation ahead for OpenText, and I can't wait to engage with you from that share. Now, I'll turn it back to you, Ina, to begin the Q&A portion of the call.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. And should you wish to cancel your request, please press star followed by the two. If you are using your speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question.

Your first question comes from the line of Manny Grumman from Scotiabank.

Please go ahead.

Hi, good morning. First off, best of luck, Chadwick. In terms of my questions, I want to start off maybe with you, Andrew. It definitely sounds like you have a more optimistic outlook than a lot of what we're hearing. And so that caught my attention. And specifically, just want to understand the guidance that you're providing or the outlook that you're providing in terms of housing activity and how that will translate into loan growth. Going forward, we saw some encouraging trends in Q1, and it sounds like you expect that to continue despite all the tariff uncertainty and all those question marks. So I just wanted to understand whether I'm reading that correctly and whether there's more of a nuance there, or you're really that optimistic despite all those big question marks for the economy?

Well, I am optimistic, but I think as we've spoken over the years, you know, you always have to temper that with trying to understand and think about downsides. And clearly this is, you know, unprecedented geopolitical times. So my optimism may be misplaced for sure. Having said that, you know, I do think that at some point we'll get to get some sort of trade off on the geopolitical side that will be acceptable to us. I have enormous confidence in Canada and the democratic institutions, how they operate in Canada are able to respond to this type of, of threat and, and approach. We've got 40 million really talented Canadians that can work our way through this. And then beyond that, there is a, you know, the backdrop as we came into the, if it were not for these tariff threats, I think we'd all be facing this year with more confidence, you know, interest rates down, there's pent up demand for housing. None of that's going away despite the, by the geopolitical threats. So, you know, when I think about that, you know, I definitely think about downsides and work with Marlene and her team to sort of put some analytics around that. But I do end up with a sort of reasonably confident posture for the year. Again, I think we've got a, it seems to be changing more rapidly than we can think about in terms of kind of policy, all these responses, policy statements from the U.S. and then potential policy responses to that and Clearly, we've got some geopolitical uncertainty in Canada for the moment, but I think we'll be feeling a lot better about it six months from now, and I think that's going to reflect well on our business.

Got it. In terms of follow-up, just two questions that are PCL-related. One is just that $5 million adjustment to the PCL line. Just wanted to get a better understanding of what's going on there and how Can we see more of that over the next few quarters, or is this basically it for this kind of adjustment?

Manny, I would say it's consistent with how we adjusted it last quarter. You're seeing a combination of stage two, so actually about three and a half, that probably was stage two. There's some stage one and stage three. I think Marlene might have some additional comments on the four looking for it, but I'd say there's nothing inconsistent with how we've treated this previously.

Yeah, thanks, John. I think... When I look at that portfolio, we look at it very carefully every single month and adjust it according to the information we have. I think at this point in time, it felt like the $5 million was the appropriate based on what we know at this point in time. But as you know, it's still going through the court system and we continue to work through it.

I guess what I'm trying to understand is how much more potential is there for more of this kind of... adjustment to flow through. Like, can you kind of scale it for us in terms of how to think about it, the potential there?

Yeah, I think what the provisions we've provided so far, we feel are appropriate given everything that we know right now. And I think we're pretty confident that we're in good shape. But as I said, it's in the courts right now, and so it's difficult for us to comment.

Okay. And then just a final question, just... On the PCL guidance, you provided that guidance last quarter and obviously, well, what I'm looking for is what would that guidance be in a tariff scenario? And can you provide some sort of color in terms of how you're thinking about it relative to what you talked about last quarter?

I would just say that, you know, the threat of the tariffs does increase uncertainty and it's difficult to predict at this point which industries are going to be targeted to the extent that they'll be impacted. And for how long is this narrative has been changing fairly rapidly. And we're very much attentive to that risk. We did say that the base case scenario that we put into our scenarios for our PCL forecast as well as some of the downside scenarios already account for some level of tariffs in the forecast. So we've already baked some of that in. But I can say for sure that our portfolio fundamentals are strong. And, you know, as Andrew said, we lend in major centers with diverse economies. Our loans are secured by real estates that are predominantly housing related and backed by strong LTVs. So I feel like we're in a stronger position than ever to face these headwinds.

And I think when you think about, you know, having exposure to say just a manufacturer

out in a comment. Thank you.

Thank you.

And your next question comes from the line of Gabriel DeChina from National Bank. Please go ahead.

Good morning. Can you just, I guess, summarize? You sound more optimistic on the mortgage growth outlook. And from your commentary, it sounds like as you've funded some CMHC-insured resi-construction projects, those get completed, and then the people move in, take mortgages, and get some natural market share out of that? Is that how I should view that?

I could frame that a bit better. When I was talking about the tailwind there, the way we might commit to this, let's say an example might be it's a $100 million CMHC construction loan. As the floors get added to, then we'll make advances against that construction. I think we've got over $2 billion, actually quite a bit more than $2 billion of undrawn demand that we've committed to in that area. Now, these will be rental apartment buildings, so they will not be ones where we provide individual single-family mortgages. But when they reach completion and they're fully leased out, then we will put a term mortgage on them and take them into our securitization facility. So it provides us as well a kind of tailwind to that side of the business.

Okay, great. That makes sense. Now, as far as the uninsured mortgage portfolio, I guess I didn't understand your outlook. Are you more optimistic now? Because I'm just thinking out loud here, but a lot of your customers I think of are small business owners, self-employed, and they might be more you know, vulnerable to, you know, tariff war stuff than, you know, somebody working for the government or whatever. And that, you know, seems to me like a demand suppressant. Is that, you know, not embedded in your outlook? And then maybe if we talk about the other side of the coin on credit, those same types of borrowers might be also vulnerable to, you know, defaulting if the trade war happens. expands or, or is, uh, takes off. Uh, and that might be maybe more of a 2026 thing. So just how, you know, how, how, how, how, how can we be optimistic, I guess?

Well, I think we try to be realistic, frankly, while sort of maintaining kind of clear right view on it. I mean, I think when we think about many of our small business customers, many are servicing local are in the local service economies. So, uh, whether it's somebody that's a hairdresser or a local lawyer, these kinds of services, I would say, represent a good chunk of that business. So I think that feels less, and in places like Toronto, Vancouver, Montreal, as opposed to, for example, a small business that's focused on making some kind of component part that gets shipped across the U.S. border. And the other thing I always love about, I mean, I love talking to our customers, but What I find about the small business, and we saw this during COVID, is, you know, the guy that was running a restaurant pivots to being doing food delivery. And these people are fairly quick to adapt and change to economic trends. And so I find that, you know, obviously we've got to be, I can't say everybody's going to be like that, but certainly fairly, you know, I've just got a great belief in entrepreneurialism. And our small business customers do seem to be able to adapt to changing economic trends. more quickly, perhaps, than somebody who's been working in, say, a steel plant for 20 years, gets laid off, and finds it more difficult to adapt to an economy that's changing, where those skill sets they made have built up are less relevant going forward.

Okay. Well, I appreciate that. Then what is your base case mortgage growth outlook? More in the second half? Is there a number you can put on that? I appreciate it. Look, your guess is as good as mine on how this situation develops, because it's changing every day. But just for... Having something in mind, I guess, is where that's important to me. What do you expect your uninsured mortgage growth to look like this year?

I think our base was five, and I think we might expect that, if anything, we're trending to beat that number at this point. We were expecting it. I think the tail of the tape is always the spring market. There probably haven't been too many people buying houses in Toronto over the last couple of weeks where you can't even see the house under the snowdrift. We would expect that. I think a combination of a slightly more positive tone around tariffs and a sphere around that and improving weather and the traditional Canadian spring market with lower interest rates might set us up for a reasonable tone. To be clear, Gabe, I'm not trying to be wildly overly optimistic, but I don't want to be the narrative in the Elsewhere seems to be overly negative, given that sort of broader context. And I think just finding a pragmatic, sensible way to think about this doesn't feel unreasonable. I feel reasonably optimistic that things will go ahead.

Well, the snow is melting, so that's good.

Just to be clear, my money's where my mouth is. I put a bid in for a house yesterday myself, so I don't know if that means anything, but...

In the past two quarters, you've had $9 million or so of this derivative income in each quarter. The way I've understood it in the past is that trends to zero over time. It's a hedge position, so it's not supposed to be a profit center. How should I model that? kind of disregard this revenue item? Because if it is going to zero, then it's been over-earning the last couple quarters.

You know, I wouldn't say going to zero again, but I think that's part of the overall multi-unit insured lending business. You're seeing it across a couple lines, and it's all back to the reinvestment swap and our participation in CMHC, MBS, and CMB programs. They're always going to see gains on sale recognized up front, but also over time. You know, we're collecting interest-only strips and reinvest principal repayments in the case of the CMB program. So you saw some last quarter. You saw some this quarter. You'll see some... It's never... I wouldn't say it's zero, but you're going to see it somewhat consistently over time, but that amount will vary. And it's always going to come down to the present value we see on the future cash flows and how we manage that reinvestment risk.

So I wouldn't... So what is a sustainable figure then? That's my last question.

I think we'll take that off the line, but I'd say it's... I'd call it low single digit, probably as if you need to model something.

Okay, great. Well, good luck in the next job and congrats. And yeah, that's it. Thanks. Thank you.

Thank you. And your next question comes from the line of John Aiken from Jefferies. Please go ahead.

Good morning. Chadwick, I wanted to take a look at the non-industry revenues for a moment. And I apologize since I'm reasonably new to the game. The fees and other income, I'm assuming that the bulk of that actually comes from the association of the credit unions and ACM advisors is a bit smaller proportion. Can you quantify the growth that we saw, I guess, sequentially between the two? What was driving higher growth in the, at least on a relative basis?

So the overall, so the 7% growth you see in fees and other income, that's where you're referring to probably. So we had great growth. At this point in the year as well, on the Consensual Trust side, you saw very solid growth on the assets under administration. So that's fees and services that we provide to credit unions for their 6 million members. So that was a big part of it. And then ACM is continuing to have nice, solid, steady fee-based revenue growth. And that's also just when you think about a year-over-year basis, we closed – ACM December 2023, you're seeing a full year impact down, a full quarter impact, and Q1 of that as well. So it's where you're seeing some of the year-over-year benefit. But if you kind of go back, you'll see how much of that is weighted to ACM once that started rolling in about a year ago.

And Chadwick, when I look at the various other lines in the miscellaneous gains left, right, and center, we're seeing a bit of a shifting mix in terms of contribution. When I look at this, should I look at this in totality or should I actually be trying to figure out what each of these individual lines are doing?

I would lean towards assuming that a lot of that is in totalities or overall non-interest revenue. But the ones that we've said are a little more non-core would be the net gains on other investments and strategic investments. You're going to see some inconsistency there, including on some of the, for example, strategic investments we hold, where you might have market-to-market gains in certain quarters that we've shared in the past. So that would be more non-core. But your majority of that is really your fees and other income and gains on sale and income from retained interest. Those two lines represent the bulk of your NIR, and that should be what you really map to with good steady growth. The other ones would be a little bit more consistent.

Great. Thanks, Chadwick, and best of luck.

Thank you, John.

Thank you. And your next question comes from the line of Darco Mihalik from RBC Capital Markets. Please go ahead.

Hi, thank you. I just have two quick questions. The first one for Marlene. The portfolio, the purchase facility that is 70.6 million in size, how much of that is performing versus non-performing?

Are you talking about T-pines? Yeah.

Yeah. Sorry, could you repeat the question, Darko?

How much of it is classified as performing and how much of it is non-performing?

Yeah, I'll have to, I'm going to look that up, but I think most of that is performing. I think for version four versus our stage one, stage two, stage three, I would say that there is probably about, I'm just going back to memory here now, it's about 7% is in the stage three.

and most of that is, the rest of it's performing.

So just to be clear, this entire facility is in bankruptcy court, but most of it is performing?

That's correct. It's the parent T-fine that's in bankruptcy court.

Okay. The second question is on capital. I'm noticing, I just want to make sure I understand your capital. your new capital sort of target. So it seemingly suggests to me that, I mean, although this year it looks like your set one will be 13, it just looks like it'll grade down because you want to issue more tier one and tier two, such that by 2027, we are thinking about something in the range of 12% for common equity tier one. Is that how I should read that?

I think the way I'd characterize this, we have very strong total capital ratios at 15.5% total capital, and we are going to maintain that very high capital levels. I would say that just kind of the way I think about it sort of back of the envelope, you've got roughly 20 billion of risk-weighted assets. It was about 2.1% of set one in excess of that number you quoted there, Darko, the 12% number. So roughly speaking, You might think we could substitute $400 million plus of Set 1 with alternative Tier 1 and Tier 2 instruments. And that's equivalent to about $10 to $11 a share today as we speak of kind of surplus common equity. But we're not going to get that right away. So we will maintain Set 1 over that 13% amount, as you just commented. So I think the key message is really strong total capital. And don't forget, we're on a standardized metric. So if we were being compared in the same way as our banking peers, our total capital would be well into the 20% plus type ratios. So we're committed to having a really strong capital foundation, but there is probably some surplus equity on the balance sheet.

Okay, so I think that's helpful. And I guess we'll worry about ROE guidance for next year or any time thereafter, Andrew. Is that the way to think of it?

I think that's the way to think about it. I think you don't change the pricing on your loan sets just because you've got a different capital structure, but it does allow you to go into other markets where they might hurdle with that more efficient balance sheet.

Great. Thank you very much.

Thank you. And your next question comes from the line of Doug Young from Day Jardine Capital Market. Please go ahead.

Hi, good morning. Just maybe the first question on credit, two-part, or maybe we can split them up. But the T-Pine and the Pride group, like when would this, when do you think that's going to be completely behind you?

It's really difficult. Yeah, I can answer.

I mean, I'm just more used to these court processes. They always move slower than you think. You know, I think we won't be talking about it very much, but I would imagine that it could take as much as two years or something to resolve through court processes.

So, I mean, we could have things like that 5 million PCL rate or PCL continue as these things develop. Is that, like, what we – I'm not going to model it necessarily, but is – so there could be another few years of just noise around the PCL related to these items.

Yeah, I think there could be noise. I mean, with this – Marlene, Javik, myself, and some of the rest of the team have been spending a fair bit trying to figure out how to, you know, account for all of this. But, yes, there's –

be quarters where you hear nothing about it maybe a couple few quarters in a row and then something might happen in the courts and we may maybe some differences and changes we have to put through lots of uncertainty yeah okay and then it sounds like you've built in some of the tariff risk in your performing loan allowance you use moody's moody's had reflected that already when your quarter end happens so it's a bit different than what we're seeing at the big banks but I know this is maybe a tough question, but is there any way to quantify what you did or how much the tariffs had an impact on PCLs or allowances or any kind of context you can kind of give us?

Yeah, I wouldn't say at this point it's as scientific enough for me to be able to quantify that for you. I would say that we've taken into account it's in our Moody's forecast. and we'll continue to monitor that fairly closely.

Well, you've seen the MD&A, right? The shifts as well in unemployment, GDP, HPI, everything is built in and embedded within those estimates and the various scenarios where you're seeing tariff weights of 5% to 25%. So it is within that and the change in our performing, to Marlene's point.

So we wouldn't break down just that aspect, but I think we're actually leading in how that's been incorporated into our performing estimates.

Okay, and then Chadwick, you both talked about payroll deposits increasing, and I kind of get to understand the value of that. Can you quantify how much of your deposit base, your EQB, or sorry, your EQ bank deposit base is now payrolls? I assume that's where it kind of goes through. Any targets and any thoughts around the benefits you get from that? Obviously, from a funding perspective, is it really going to be that material over the near term?

I think we're sort of a little bit reluctant to talk about those metrics publicly yet, but I can tell you they are material increases. We get lots of activity and engagement in those platforms. And of course, when you've got payroll, people by definition are coming into your account more frequently. So things I spoke about, things like the foreign exchange offer and so on, we can make those because people are coming into the accounts more often. I think you might see us through the years start to give you some sort of metrics, but I find it very encouraging. I've obviously spoken to a number of challenger banks around the world around how many people see payroll. I can tell you our metrics are starting to look very good from a kind of global perspective.

Yeah, the most we could say is when you think of the balances, it would be in the double digits and balances in terms of relative percentage, but we know if we give you a number now, you're going to ask again next quarter, and we want to make sure we have the clear metrics to share consistently going forward, but it is very, very encouraging.

Yeah, no, you're absolutely right. I'll continue that. But yeah, no, I just think it's kind of an interesting development. It would be interesting to see the metrics. And then just, yeah, just lastly on expenses, you know, you talk about flat operating leverage in the second half. Like, you know, I assume, like I know the answer, but like what drives this? I assume it's going to be more revenue growth than expense kind of curtailment. And what gives you the confidence you can kind of get that given all the uncertainty?

Well, it's the latter half. I wouldn't say cumulatively for the second half, flat to positive. But part of the equation here is revenue growth accelerating with more loan growth, more conventional loan growth as well. So seeing that really pick up. And then, you know, you saw some step change increase in expenses. But as we indicated, ROE is always going to be our anchor point, not the efficiency side. And if we continue generating that, ROE will keep investing through the cycle. But I would expect to see that revenue growth pick up even more momentum, and then we can curtail some expense growth if needed. But we're making very, very smart long-term investments right now. So the equation will come together, anchored particularly in even more revenue growth.

I think the flip side of that, by the way, is you should have comfort that we're investing appropriate amounts in things like compliance technology, compliance risk management systems that can take us and scale us to the next level. While expenses may not be quite so favorable all the time there, I think we've all seen that it's really important to have the correct infrastructure in banks as you scale. We believe that we're making the appropriate investments.

Appreciate the time. Thank you.

Thank you.

And your next question comes from the line of crime writing from TD Securities. Please go ahead.

Hi. Good morning. If I could just I'm asking a question on your on-balance sheet mortgage growth. You're seeing decent growth from a loans under management perspective, which includes your off-balance sheet. But what's your outlook for on-balance sheet loan growth, which ultimately drives your NII? Because we've seen that decline for two quarters in a row now.

Yeah, so I think we laid that out. I mean, the big driver, as I spoke about, is the single-family mortgage. terms of mortgage application. And actually, we're seeing some good activity in our commercial business now. We're seeing some more application flow. That's a bit more lumpy and harder to sort of look at, but we're seeing some, I think, where I am seeing that. I also question more about the sort of confidence in the housing market, which is going to color all that with that previous response. But at this point, I think we're at 29%. Our applications are up 29% year over year in February.

That's an encouraging sign.

And then maybe I can just jump to the GTA condo market. It's showing some softness and weakness. Can you give us some context? Do you have any exposure either on the sort of condo construction side of things, or what's your exposure on sort of single-family mortgages behind either condo owners or condo investors?

We've done a deep dive on that, and we're not seeing any real exposure on Mimali, McKim, and Calabat. And then similarly, You know, condo construction, a lot of us, a lot of our condo construction has rolled off actually because not many projects have been greenlit in the last couple of years since interest rates have risen. We haven't seen any problems with our construction loans as a result of purchases not closing on pre-construction commitments. So it feels, that feels fine.

We have, we're very attentive to The GTA condo portfolio, it's not a very large portfolio for us, either on the single-family side or on the condo construction side, but we're attentive to it, and they're all supported by strong loan-to-values, good performance. You know, the average completion rates are high, and the loan-to-values are quite low.

They're about 55% loan-to-value, so while Well secured there.

Okay, great.

And just one last one, if I could. Non-interest expenses. There's been, there were some adjustments this quarter. There's been sort of some recurring adjustments. What's the outlook there? Should we expect real estate and operational initiatives to be an adjustment going forward? Or when does that sort of dissipate and play itself out?

Things that are non-recurring in nature, Grammy, you're seeing some in there. We did have some one-time costs on the equipment financing side there. We have some adjustments for the new building. We have some other non-recurring one-time items that would recur through there, but you shouldn't normally see.

Just on that, so many of you are aware, we're moving into a new building across the street in April. So one of the adjustments is the fact that we're paying rent on the current space we're in as well as on the building across the street. So that should soon roll off as we actually move into that space

That's it for me. Thank you.

Thank you. And your next question comes from the line of Stephen Voland from Raymond James. Please go ahead.

Thanks. Good morning. First question, a couple of larger banks talked about lower immigration levels impacting their single family business, but it doesn't seem to have impacted yours. And that tends to be one of your key markets. I'm just wondering if, you know, has there been any impact or do you expect any impact with lower targets from the federal government.

Thanks, Steve. I'm a bit surprised that people would be identifying that as sort of impacting the business yet. Frankly, there's still a lot of new arrivals that have been in Canada. If we take a longer term five or ten year view, maybe there's something to be concerned about. Just remember that people don't immigrate to the country and get a mortgage, you know, day one, we have to see sustainable income and find a profession, find their feet. Many people come as students, not likely to be in the house buying cycle and find a job. So I think there's a pretty strong tailwind actually from the immigration that we've seen over the last five years of people being sort of first time home buyers that we can address and help.

Okay. And then last quarter ended, we talked about the removal of the stress test. and packed on renewals, you were pretty confident it shouldn't really be an impact and you've got tools to deal with that. The growth maybe is, you know, this quarter has shown that perhaps. I'm just wondering about with the growth, like how much is new customers versus, you know, matching rate if somebody is graduating in terms of the growth. I'm wondering if it's possible to break down returning customers or new customers.

These are all new customers, basically.

That's the way our business comes to us through brokers. So we've done a better job, I think, or the team's done a great job on retention of customers. Lower interest rates has helped that in terms of customers that are coming up for renewal. We quoted that 74% of our customers will actually see an increased rate decrease this year as they come up for renewal. So that helps with renewal percentages in our experience. But most of the growth comes from new customers. that come back to us.

Okay. That's all I had. I just want to say thanks, Chad, for the last five years. You've done some great work there at EQB. You've always been accessible. So good luck in your new role.

Thank you so much, Stephen. Really appreciate it.

Thank you. Thank you. Once again, should you have a question, please pass star 4 by the 1 on your telephone keypad. Your next question comes from the line of Limor Prasad from Cormark. Please go ahead.

Yeah, thanks, uh, maybe for Marlene and just picking up this discussion on this, uh, pride group, uh, exposure. Can you just help me understand why it's this like kind of slow grind in terms of, of positioning? I know it's going through the court system, but you know, specifically what information are you using, uh, to look at when you're gradually bumping up the, uh, the allowances against this, uh, exposure here? Like why not take a more meaningful provision to put this to bed? versus the kind of slow bleed over the next two years. Then just building on the answer to Darko's question, how do you justify having 93% performing when this is going through a CCAA process? Just help me understand this a bit more. Thank you.

Yeah, I think it's going to take some time for this to work out. So rather than take a large provision and then have to unwind it down the road. It feels appropriate for us to base it on the information we have at hand, the performance of the portfolio, the information we receive from the monitor, etc. And that's the approach we're taking. That's our strategy.

I think just to think about the 93% performing, this is not a loan to T-Pine. This is a series of leases that we bought from T-Pine. And so we are now, as of the back end of last year, collecting those leases ourselves. So our own team at Bennington are collecting those leases, and that's where 93% of them being performing comes from. The broader concern is there are other lenders that might be disputing pieces of collateral, and that's a sort of legal judgment that we have to make. We think we've got really strong, we think we've got a good legal position, but we haven't seen the other side's arguments and so on. So it's tricky. We're really trying to follow the accounting guidance to make the best judgment we can given that uncertainty. But there's definitely more uncertainty with this one than would be typically the case with, say, a piece of secured real estate where it would be much easier for us to get to appropriate provisioning.

I guess that's what it kind of comes down to for me, like the competing claims. It just seems odd that you... be able to justify keeping 93% and performing when there's complete competing claims against those, the underlying asset. I, am I understanding this correctly? Like, like, you know, uh, are you just, uh, it's just like, you guys are just senior. Like how do you like, just help me understand that piece. Maybe.

I think it's probably good to have a conversation with Marlene to get deeper offline on that. But yes, there can be competing claims. And even though we might be registered on the VIN, so that's the vehicle identity number, getting to sort of details, others might dispute whether we have a clear claim to that vehicle. And so it's that nuance that's a bit subtle. And we don't really know what... In some cases, we've yet to have the facts revealed about what we... what we have from those things. And the competing claims is not the whole piece. To be clear, it's a subset of that piece. So there's a fair bit of complexity here, but I'm sure Marlene can give you more color offline.

Okay, I appreciate that. And then just moving on to a different type of question for Chadwick here. Again, I appreciate that these targets are medium term, but operating leverage negative in the first half and then, I guess, neutral to slightly positive in the second half. So does that feel like operating leverage for a full year 2025 will be negative? Am I reading that correctly?

Could be. We're going to focus again.

I know I say the same thing every quarter, but we're going to focus on ROE. I think we're seeing the heavier investment now. Does it average out to the flat for the whole year? Maybe, maybe not. It depends on the smart investments we make each quarter. But I do expect revenue will pick up momentum as expected as conventional asset lending picks up.

And then we'll manage our investments smartly in the business. But That's why it is medium-term, you're right. But it should be plus minus within that range.

Where I get sort of more comfortable about the future is seeing this faster asset growth, which frankly doesn't translate too much in some additional learnings this year. Every time we book a loan, let's not forget we have to put a stage one provision up against it. So you see stage one provisions the day we book the loan. We lose money the day we make the loan. But if we start the fiscal 2026 with higher asset balances, that's obviously going to bode well for the future and beyond.

Okay, thanks. And then thanks for all the help over the years, Chadwick. Best of luck. Thank you. I really appreciate it.

Thank you. There are no further questions at this time. I will now hand the call back to Mr. Andrew Moore for any closing remarks.

Thank you, Ina. This year we will host our hybrid annual meeting on April 9th.

I encourage everyone listening to participate. Watch for our management information circular, which is about to be put in the mail. In the meantime, I hope you will join me in showing pride in our country by shopping for all Canadian goods and services, including, of course, everything we offer here at Canada's Challenger Bank. We are proud to be made in Canada for Canadians. We look forward to updating you on our progress at the time of our second quarter call, May 29th. Goodbye for now.

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.