First National Financial Corp

TSX:FN

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. And welcome to First National's Second Quarter 2020 Analyst call. [Operator Instructions] This call is being recorded for replay purposes on July 28 at 10:00 a.m. Eastern Time. It is now my pleasure to turn the call over to Stephen Smith, Chairman and Chief Executive Officer of First National. Please proceed, Mr. Smith.

[Stephen J. R. Smith, Co]

Good morning, everyone. Welcome to our call, and thank you for participating. Rob Inglis, our Chief Financial Officer; and Moray Tawse, Executive Vice President joined me from their home offices. Well, actually, we're in person at our Toronto office today.I will remind you that our remarks and answers may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties and should be considered in conjunction with the risk factors detailed in our MD&A. With the Bank of Canada estimating that economic activity is 15% below where it was at the end of 2019, Q2 was a challenging period for the economy. Despite this difficult background, First National staged a strong recovery from Q1, when we recorded [ some falloff ], our first since we began using hedge accounting. Pre-fair market value income increased 42% compared to Q1 and 12% compared to Q2 last year. Net income moved from a loss of $0.05 per common share in Q1 to a profit of $0.84 per common share in Q2. Notably, net income was ahead of Q2 last year by 14%. Strong profitability meant the after-tax dividend payout ratio against pre-fair market value income was 53% in Q2. Results of the second quarter exceeded our expectations and were driven by single-family origination growth in wider mortgage spreads. Rob will speak to spreads in his remarks. Looking at production, single-family mortgage originations were 15% or $600 million higher than a year ago. We didn't grow in all regions, but we did in our 2 largest markets. Compared to last year, single-family originations were up 32% in Ontario, our largest market; and 22% in British Columbia. This growth was more than enough to offset an 8% decline in Calgary and a 6% reduction in Montreal. We don't read too much in the single-quarter variances. But what we can say is that in all regions, the First National team did an outstanding job of responding to the needs of the mortgage broker community and the lending opportunities brokers brought to us. Our sense is that brokers have gained market. The branch and mobile sales forces of the large chartered banks meant that we have gained market share within the broker space. The efforts of our employees aided by our MERLIN underwriting system, which is the ideal solution for this time of forced physical distancing as it allows brokers to track the status of mortgage submissions in real time, online, without the need for direct underwriter contact. As well, the paperless aspect of MERLIN enables a high level of productivity for our underwriting teams. Through the first half of 2020, total single-family production, including renewals, was 28% above last year, a strong showing and an indication of a resilient housing market. On the commercial side, total production over the first half of 2020 was a record $5.7 billion, 19% above last year. This growth was achieved despite a 65% decline in conventional mortgage originations in the second quarter. This reduction was not surprising since pandemic-related risks [ tended to lead ] conventional market participants to the sidelines in Q2. Conversely, demand for insured commercial segment mortgages was strong with Q2 originations up 32% from last year. The largest part of our commercial business in the multifamily residential space for First National is the renewal of CMHC [ commercial lender ]. Our presence in both insured and conventional commercial lending markets has certainly helped First National over time. And credit goes to the commercial team for developing the expertise to serve borrowers in both product areas. As a result, mortgages under administration increased to almost 115 million -- $115 billion, a new record and 5% above last year. Overall, I would say First National has adjusted well to new realities, including working from home, and continue to do so for the foreseeable future. We continue to see this sustained [ across the portfolio ]. I wish to thank First National employees across all departments, who continue to work tirelessly and with purpose to succeed during this very challenging time. I'll now turn over the call to Rob. Rob?

[Robert A. Inglis, Chief Financial Officer]

Good morning, everyone. Q2 financial results were much improved over Q1 and higher than a year ago. During my remarks, I will refer primarily to year-over-year comparisons, just to say that MUA grew second quarter itself by 5% or $1.4 billion. Starting with revenue, it increased 3% between the 2 second quarters. A part of this growth reflected a change in fair market value gains and losses related to interest rate movements between the quarters. As in the first quarter, First National recorded fair market value losses on its total short bond book in the second quarter. We use the short bonds to mitigate the interest rate risk related to funded single-family and multiresidential mortgages held prior to securitization but also for outstanding single-family commitments. These losses amounted to about $34 million in the quarter, but we were able to apply hedge accounting to almost -- about $26 million of this amount. In the end, we were left with about an $8 million loss by using these interim -- instruments. If we eliminate any changes in fair market value gains and losses between the quarters, Q2 revenue was 2% higher than a year ago. Let's look at the major contributors to revenue. Q2 placement fees increased 47% or $28.3 million due to increased mortgage spreads and the crystallization of higher-mortgage-rate single-family commitments originated in the first quarter, which transformed into funded mortgages in the second quarter. The company also increased its spreads in multiresidential products, which translated to higher placement fees. Q2 mortgage servicing income increased 5% or about $2 million due to growth in revenue earned by the company's underwriting and fulfillment processing servicing business. Revenue growth in these activities as well as a 124% growth in gains on deferred placement fees more than offset lower net interest revenue and lower mortgage investment income.Net interest revenue earned on securitized mortgages decreased 39% or about $13.6 million largely due to the financial consequences of the pandemic, including temporary compression in securitization spreads and the cost of indemnities payable to NHA MBS debtholders. To get a bit more detail, the company reduced its prime rate in March by 1.5%, following the Bank of Canada's overnight rate adjustments. However, when the funding cost of prime rate debt related to NHA-MBS and asset-backed commercial paper conduits were reset on April 1, the cost of funds for the month of April was lower by just 90 basis points, resulting in a 60 basis point compression in securitization spread, reducing the earnings -- company's earnings by about $4 million.Although funding costs normalized in May and June, the cost of funds related to ABCP conduits continue to be higher than last year. We believe this is partially a result of ABCP conduits selling 3-month paper so that prepandemic rates are still being passed through. While these costs have decreased recently, they are still higher than the last year, and this reduced securitization margins by an additional $2 million. But the most significant impact was the cost of indemnities payable to debtholders when mortgages prepaid prior to their scheduled maturity date. Indemnities are calculated to make whole NHA-MBS debtholders who are assumed to reinvest the prepayment principal at risk-free reinvestment rates. With the recent decrease in interest rates, the cost of these indemnities increased significantly. This resulted in a $9.9 million increase in securitized mortgage interest expense year-over-year. Growth in the Excalibur securitization program offset some of this negative variance in asset growth in securitized and commercial segment mortgages. Looking at Q2 mortgage investment income, it decreased 22% or $4.8 billion primarily due to the lower interest rate environment brought on by the pandemic. Last quarter, we discussed mortgage payment deferrals and noted that, in response to COVID-19, First National would provide qualifying borrowers with 3-month deferrals and would consider granting a second 3-month deferral in cases of extended hardship. By mid-May, the company had approved mortgage payment deferrals for about 33,800 single-family borrowers or 13.9% of eligible single-family MUA. Over by mid-July, this number has fallen to 10,473 borrowers or approximately 4.2% of the relevant MUA. About 1/4 of borrowers granted initial deferral are now requesting an extension, although many borders also rescinded their deferral arrangement before the initial 3-month period expired. Deferred mortgages are not classified as delinquent or in arrears and will not be reported to mortgage default insurers or credit bureaus. As most of the company's own exposure is due to mortgages that are insured, the increase for the company -- the issue in the company is in cash flow and generally not credit losses. From an accounting perspective, these deferred mortgages will cease to amortize, and interest otherwise payable will be capitalized to the principal of the mortgage as the mortgage balances will increase during this period. It's only where the company has securitized mortgages that it is required to fund these debt obligations. The most significant is the company's NHA-MBS program. As the issuer, First National is required to make timely payments on the NHA-MBS securities it is issued. Despite not having -- or receiving the payments from borrowers on the mortgages that support the NHA MBS, the company is still required to pay the interest and the amortizing principal on the debt. At June 30, 2020, this obligation has required investment by the company of about $39 million compared to about $5 million at the end of March 2020. We're hopeful that, as the economy reopens, the need for borrowers to seek mortgage deferrals will continue to dissipate. Now here's Moray with our outlook.

[Moray Tawse, Co]

Good morning, everyone. Our Q2 performance was surprisingly strong given the extent of the economic and social disruption has certainly exceeded our expectations. We're pleased with the results. But that being said, we still face much uncertainty regarding the future path of the economy. With the COVID-19 uncertainty still present, it's difficult to look too far ahead. What we can say is that compared to the comments we made at the end of Q1, our outlook has turned relatively positively. We are hopeful the trends established in Q2 will continue strongly into the third quarter. I'm speaking specifically of substantially higher seasonal residential origination, good commercial segment success that originate larger volumes at higher spreads and very good employee productivity. Reflecting about our markets in the second quarter, some of our commercial competitors temporarily reduced their activities, and First National increased its market share while experiencing wider spread. Although most competitors are now returning to the market, wider spreads are still persisting. On our residential side, we experienced substantial origination growth, which in part was due to the COVID-19 disruptions experienced by chartered banks and their branch network and mobile sales force channels. With MERLIN, we did not face these same kind of disruptions and nor will we. On the funding side, stronger demand from institutional investors continues because of the substantial amount of liquidity now in the financial system as a result of the government's actions in providing facilities to purchase securities and a slowdown of asset originations at most financial institutions. Securitization markets have normalized, as Stephen said. Similar in 2009, when we emerged from the credit crisis, First National is now benefiting from wider mortgage coupons related to our funding costs on the new originations. If wider spreads persist, the company will continue to benefit as we did in Q2. Of course, any forecast must be tempered by the fact that the duration and impact of COVID-19 outbreak is still unknown and is the long-term success of the government and Central Bank interventions. It appears that the government's willingness to do whatever it takes to support Canadians remains a strong endeavor, and it is certainly comforting to know that the emergency wage and business subsidies have been extended. That said, it's simply not possible to reliably estimate the length or the severity of the pandemic and its impact on the financial results and condition of our company. What is comforting to know is that we have strong relationships with mortgage brokers, a diverse funding source, and these factors will continue to set First National apart from its competition. Additionally, we'll continue to generate income and cash flow from our $33 billion portfolio of mortgages pledged under securitization and now $80 billion of servicing portfolio while focusing on the value inherent in our single-family renewal book.In closing, I would like to add my thanks to the First National employees, partners and customers and extend our sincere hope that you stay safe as this health crisis continues to play out. That concludes our prepared remarks. Now we will be pleased to take your questions. Operator, please open the line for the questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Jaeme Gloyn with National Bank.

[Jaeme Gloyn, Analyst]

I just want to dive into the mortgage payment deferrals and the 4% of MUA outstanding that's still on a deferral program. Are you able to just talk through some of the rules and criteria that are in place today, how that's different from the initial program? And maybe a little bit of color as to what's driving the 4%. Is it 0 payment? Is it no income, no job? What are the characteristics of the borrower in that 4%?

[Stephen J. R. Smith, Co]

Yes. So that's a good -- that's an interesting question. I think, like most institutions -- and I find the program was instituted at the end of March, early April. There's a lot of misunderstanding of the program. Certainly from the government, we see a huge encouragement to go and take this deferral program. I think there was a lot of misconception that people felt that maybe it was a free program, that you're just [ making abatements. ] There is an element there [ for this charge ]. I think there would be a lot of people frightened at the time [ who are waiting to get liquidity ]. Certainly, I've heard some comments [ on these that ] seem to indicate that a lot of deferrals [ just end up bringing cash into deposits ]. The criteria we would have on our deferral initially would be that [ you would need an attestation that you had ] a loss of income related to COVID. You didn't have to provide any documentation or further information.For the second deferral, it was that but a little bit more beefed up to give people pause. We included that in the second deferral. We didn't have the resources to do the [ communication ]. But we -- if you go on the website and ask as for the information, it says we could give you but you have to have had lost income related to COVID and that there has to be supporting documentation for that. So we would think that, just our sense, and what we are going to be implementing to the extent that we can is we're going to start [ reaching out to a number of those borrowers ] now to see what we could do in respect to perhaps [ going on repayment ] before the 3 months end and get a little bit of understanding of why they're losing their jobs [indiscernible] and I think there's a lot of people, particularly people that took up mortgages in the last year or 18 months are [indiscernible] liquidity. So it's really an easy way [ for money to see -- essentially, for the money mortgage ] in your pocket. [indiscernible] So we had a sense. We don't think there's a big job loss there, but we don't have actual facts to support that. So that would be my -- that would be my sense on that.We don't see it as a problem, but I can't -- I don't have facts. What the fact we did determine actually, I think we got that from one of the mortgage insurers where they did an analysis of mortgages, and there were certainly a lot more people with mortgages taken out in the last 12 months, 18 months taking deferrals than those who've had mortgages from 4 and 5 years ago. [indiscernible]. I hope that's some help.

[Jaeme Gloyn, Analyst]

Okay. Okay. So just wanted to confirm, did I -- if I heard correctly that the program as it stands today still doesn't require proof of income loss?

[Stephen J. R. Smith, Co]

No, what we -- when we say you -- they have to give an attestation, we don't require them today to send in documentation to prove that. We have the right to go and ask them. They have to -- they attest that they had income loss due to COVID. So we're relying on [ a broad definition ]. And I don't know to what extent that income loss is. It's a broad definition. It could be a broad definition.

[Moray Tawse, Co]

I think as we worked down on those last 3 months where we're coming to the end of the period, we're going to have a lot more contact with those -- the last few bits of the clients to find out actually what their situation is. But we're just developing the programs now that we'll be able to discuss with the clients that we cover the 6 months what their actual situation in here.

[Stephen J. R. Smith, Co]

I think what we want to do if we can of, let's say, 10,000 people, we probably -- as much as we can, let's say, call it, a couple of thousand of those or even 1,000 to start to get a sense then of how much of those are hard -- job loss.

[Jaeme Gloyn, Analyst]

Okay. Great. Digging into the origination number in the quarter for single-family, specifically, are you able to quantify or break down how much of that origination number would have been purchase activity prior to COVID versus activity post COVID or acquiring mortgages from other lenders?

[Stephen J. R. Smith, Co]

So there's no issue of acquiring mortgage from other lenders. These are all -- oh, I see, in terms of market share. So let me give you just a number that we would have -- just top of my head in terms of commitments. In April, they were down about 40%; May, down 10%; and June, they were up 50% compared to the same month of 2019. Our conclusion is that we are gaining share within the overall market, mortgage market, from branch and mobile sales force is probably based on new June numbers. Sales according to CRE were up by about 15%. We were very strong [ early in the sales market ]. And so within that and one the factors that explain 15% growth, I think one factor would be if we are gaining share perhaps within -- from our competitors in the mortgage broker channel. But I think the bigger factor would be that certainly a percentage of all these bank branches are closed. The -- a lot of people bank where they work, not as many people going into work anymore. And so a lot of the branch origination channel was disrupted. And banks [ are all the same ] unless you have to. I mean people having issues [indiscernible]. There's lineups. [indiscernible] So that would be our sense.So sales before the COVID period, no. That's -- that wouldn't be really a factor. We had quite a very strong March. But the numbers we've seen June of those, I don't know the number off the top of my head, but percentage of sales was high. I mean it was high and in line with other periods.

[Jaeme Gloyn, Analyst]

Right. Right. So if I understood correctly, it's primarily on purchase activity where you're getting the origination flow and not so much from transfer activity from other lenders, specifically.

[Robert A. Inglis, Chief Financial Officer]

We're not really -- we don't do a lot of transfers, Jaeme. I think the pricing part was that such a large percentage was purchases. And again, we think the mortgage brokerage channels really strengthened from the lack of the bank branch being open, and we gained market share in that channel. So it's really -- we've had these 2 advantages that have really made it a really good quarter for us.

[Stephen J. R. Smith, Co]

And while the sales force channel was -- for the banks is formidable, but a lot of this, they do tend to do referrals to branches. There's an element people go into the branch, and either they [ fulfill with the ] branch or they're a hot referral to a mobile sales force to the extent that that's [ suffered ]. So -- and transfer business, just generally is not a big business. I'm trying to think -- it'd be under 5%. I think 2% or 3%. It's not a number we even track.

[Jaeme Gloyn, Analyst]

Okay. Great. And actually, just my last one, I wanted to go back to the deferrals. I just want to confirm that the decline in the deferral rate or -- so those borrowers that are no longer on a payment deferral program, that those borrowers are off that program because they are now paying their mortgage, not because they've been written off or some other measures that would have kicked them out of the deferral program. Do you have a sense as to, is it 100% of those borrowers are now paying their mortgage? Or is it some other percentage?

[Moray Tawse, Co]

We've added nothing to the default side of it. These people are that are paying. And there are people that have come on over that period that didn't take advantage at the beginning part. So the people that are actually coming off are probably a little bit higher than what's shown because we do have some new clients pulling on that or maybe lost their jobs in the last months or 2 that do qualify again for this 3 months -- plus 3 months. So the amounts that are coming back and starting to pay are actually a little bit higher than what it shows.

[Operator]

Next question comes from the line of Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, Analyst]

I was wondering like what you're seeing so far because you talked about Q3. It looks like it started off pretty well. Are you able to talk about relative to what you have seen versus last year? Like, are we tracking similar to Q2, in other words, up year-over-year?

[Stephen J. R. Smith, Co]

Yes. I'll give you -- and this is where we reply to single-family, and I'll give you a number that's not in the MD&A, Geoff. But we would think for the first 18 days of July, commitments are running at a level of 80% higher than July 2019.

[Geoffrey Kwan, Analyst]

Okay. Sorry, I just want to make sure I heard that right: 80% as in 8-0 percent, correct?

[Stephen J. R. Smith, Co]

That's Correct.

[Geoffrey Kwan, Analyst]

Okay. And are you able to say, like, from what you're seeing there, is it largely driven from, say, Toronto, the suburbs of Toronto and of Vancouver? And then also too, is it, I'm guessing, probably more driven by, call it, more detached houses as opposed to condos or...

[Stephen J. R. Smith, Co]

I can't give you the breakdown between Toronto, Vancouver and the other markets in order to break down condos, other than to say, I have no reason -- any indication I have -- or my sense that, Geoff, would be that it's probably in line with Q2, where there's strong activity in Vancouver and Toronto and not so strong in Québec and in Alberta. So I wouldn't -- that would be my sense. There hasn't been a material change. It's more a continuation of June. And I think I don't have a difference between condos and [ single-family housing. ]

[Geoffrey Kwan, Analyst]

Okay. Obviously, the housing activity would have benefited from the pent-up demand from lockdowns due to COVID-19. How do you -- how are you looking at -- or what's your thoughts on it right now? Obviously, it's hard to say for sure, but I mean, does it feel like as we enter the fall and we kind of get out of peak housing season that things will taper off from a seasonality standpoint but maybe still stay strong in terms of the overall housing market recovery? Or do you think that there is some temporal reasons for what we're seeing right now and, as we enter the fall, things may maybe fall off a little bit more than usual given the situation we find ourselves in?

[Moray Tawse, Co]

I think you go back to the last comments are that if the bank branches continue to be closed and more of the people that are purchasing, despite the seasonality of the purchases, are going through mortgage brokers and because of our systems, we are tending to get a higher proportion of that market, then I think we should stay strong. Whether we'll get a higher percentage, we hope, of what's available in the marketplace, you can't really tell what the market is going to be like. But if COVID stays like it is and branches stay shut down, we see that as a strong advantage for our product.

[Stephen J. R. Smith, Co]

We're really in uncharted territory. I would say that, within First National, this analysis of the shift from branches only really dawned on us, probably when we saw the June real estate sales. And I would have said -- during June, we would have said it's pent-up demand. Like if you do you think the sale -- if you looked at March, pre COVID, they were a record commitment period for First National and everyone else. And that was starting to have remnants of the bubble [ or the frenetic crisis ] of 2017 and COVID [ started that ]. So there's certainly pent-up demand. So here, breaking our questions to 2 things. Where the real estate market is going, we don't know. There's certainly pent-up demand, and I think that had a factor applying to sustained sales which were 15% over June '19. The pent-up demand and the sales didn't take place [ in April, part of May]. How that's going to play? I don't know that we know. I mean that sort of the million-dollar question. We don't know. One starts to have to think that as the economy slows down, that's going to be -- have an impact. But the other factor is, we're grappling with, we see is, I think we're coming to conclusion based on what we're seeing on our numbers. Certainly in June, what we're seeing this month in sales and what we hear on The Street with respect to how the branch channels are doing [indiscernible], where we seem to be picking up share. And to Moray's point, I think I could see that lasting. And just if you think of it anecdotally, if you just think about those stories that people have -- they have to go into a branch. There's lineups. It's difficult. Where do you bank? We do a lot of people bank? A lot of people bank where they work. If -- I would say we tend to go walk down the stairs or walk across the street to be in their branch to get a mortgage. We're not doing that now. And I think is the opportunity where the realtor is saying, well, you can't go into your branch or you can't -- look, I'll put you in touch with a broker. They'll deal with you over the phone or -- and you can do -- use that arrangement [indiscernible]. So it's a point of differentiation. So it's new. It's new and it's different.

[Geoffrey Kwan, Analyst]

Okay. On the 975 pools and the prepayments obviously had an impact on the NIM in Q2. Can you talk about what the trends you're seeing so far in Q3 on prepayments? Has that kind of remained where it's at? Or has the trend changed relative to how you exited Q2?

[Stephen J. R. Smith, Co]

I think we're going to continue to see those low interest rates. We are taking some steps with respect to essentially offering more [ standard ] rates on 1- to 3-year mortgages so we'll be more competitive in the marketplace. And so we see that -- we certainly see that trend continuing. I think Rob alluded to the fact that we would probably have -- notwithstanding those strong results, we had some pretty unfavorable capital markets activities in April that would have affected margins. Certainly, the ABCP program is very [ indicative ] and that noise is disappearing. So we would -- and in many ways, but the -- our results are very much, I think, influenced -- the biggest factor here, Geoff, which in addition to the larger volumes we see continuing, would also be the wider spread. And I think if you want to think of spreads -- and I guess this one is just 5-year mortgage spreads relative -- reflecting the Canada bonds quite a bit wider than they were pre COVID. We had First National's space in much of '18, '19, part of '17, very, very tight spreads that we've only been able to mitigate through larger volumes. And what we're seeing is we're getting these large volumes out of the wider spreads. Given the volumes can reduce spreads by 20 basis -- 20, 25 basis points, that's why this has a big impact.

[Geoffrey Kwan, Analyst]

And maybe just one last question. It's on funding side. Institutional was almost 70% of originations and renewals in the quarter. What you're seeing so far this quarter, do you think the mix will look similar for Q3 as it did in Q2? Or is there some drivers that may move it different from what you actually had?

[Moray Tawse, Co]

Geoff, you ask this question every quarter. Who knows?

[Stephen J. R. Smith, Co]

I would say I don't think we can say. There's -- certainly, the financial system is awash with liquidity, where mortgage assets, particularly government-guaranteed mortgage assets, are very well [ bid now ].

[Robert A. Inglis, Chief Financial Officer]

So we're seeing more inbound calls from finance institutions than we ever have.

[Operator]

Our next question comes from the line of Graham Ryding with TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

I just wonder if you could maybe -- if we could set aside the prepayment expense on the securitization side that you experienced, but just looking at you had wider mortgage spreads that you benefited from on the institutional placement side, but you noted that you had some NIM compression on the securitization side. Can you kind of explain the differences? Or what was driving the difference there?

[Stephen J. R. Smith, Co]

Well, I think fundamental issue is I don't see [indiscernible] when we look at the NIM number [indiscernible] prepayments so that tends to compress the NIMs. So -- and the -- when you get the wider spreads, those wider spreads are then reflected on the gain on sale of the selling to an institution. So if we sell on an institution, we get the gain on sale, and that's not going to [indiscernible]. It's when we securitize ourselves, which we've done a lot of, that will be wider NIM. But then the -- probably, the biggest negative we would have to be the prepayment penalties or indemnities [indiscernible]. So even though we're getting big gain on sales in this institutional sales, we're -- also, that's been [indiscernible] because of the prepayment...

[Robert A. Inglis, Chief Financial Officer]

And I would add, on the NIM, we're still dealing with the 2016 and '17 business that's been there. So that was tight, right? So that was still a tight spread to adding wider spreads, in 3 months, it's not going to make a big difference on a 30 -- $3 billion book. So it will be better as the old stuff pays off and the new stuff takes over. Hopefully, the [ kind of lease ] are lower in Q3.

[Graham Ryding, Research Analyst of Financial Services]

Is there any dynamic there in terms of like the variable rate mortgages within your securitization portfolio? Was that a dynamic at all or no?

[Robert A. Inglis, Chief Financial Officer]

Yes, very much. In the month of April, there was a big change to price. It went down, but our -- the SEDAR didn't follow that month because the banks didn't reduce their cost of funds in the bank. So that was a 1-month sort of $4 million hit that we took, which I reported in my comments. That went away in April. So in -- we think the government came in and offered to buy [ BAs ] from the bank, but SEDAR went down to 52 basis points for May 1. That was like a 1-month issue. So going forward, that issue's gone away.

[Graham Ryding, Research Analyst of Financial Services]

Got it. And would that be around 20% of your securitization book could be variable? Is that accurate?

[Robert A. Inglis, Chief Financial Officer]

Sounds a bit high, to be honest.

[Stephen J. R. Smith, Co]

I think it's 6%.

[Robert A. Inglis, Chief Financial Officer]

I think it's like less than -- I would say less than 10%, maybe.

[Graham Ryding, Research Analyst of Financial Services]

Yes. Okay. And then just my last question would be on the prepayment side. Like, is that a dynamic that you expect to persist with low interest rates probably going to be here for at least the near term? Is -- are you going to be still faced with further indemnities payable on the NHA MBS?

[Stephen J. R. Smith, Co]

Yes, I think that's a fair statement. Yes, I would agree with that.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And then just lastly, maybe the -- last quarter, you quoted $2.6 billion of MUA where you have some credit risk. That would be, I guess, your asset-backed commercial paper and then your on-balance-sheet commercial bridge portfolio. Can you speak to how those mortgages are performing from an arrears perspective?

[Stephen J. R. Smith, Co]

We -- I don't think there's any change from last quarter. They were all performing and performing to our expectation, and they continue to do so. I think the commercial book is fine. Those tend to be in the nature of more short-term bridge loans with very strong covenants. And if anything, I think we're starting to -- we're going to open up that program again. We're going to start lending again under that program. On the single-family book, I think it's just too early to tell because of the deferral program. So if there are cracks, we wouldn't see them evolve until the end of the 3-month deferral period.

[Operator]

[Operator Instructions] Our next question comes from Jaeme Gloyn with National Bank.

[Jaeme Gloyn, Analyst]

I wanted to follow up on the Excalibur program in the quarter. Can you offer us any additional color as to how that program performed during Q2? And what you're seeing perhaps early days in July as well, similar to the comments you provided regarding the overall single-family portfolio?

[Stephen J. R. Smith, Co]

Yes. So we continue that -- originally that -- originations are in line with where we would expect. On the deferrals program, our Excalibur deferrals are at 8% as opposed to 4.2% for the overall program. I would -- we're very pleased with that. And a factor I would point out on the 8% would be the fact that the Excalibur mortgages tend to be 1 to 2 years. So they're also more recent [ than previous ]. So we're actually quite pleased with the Excalibur book and how that's [indiscernible].

[Jaeme Gloyn, Analyst]

And in terms of origination activity and what you're seeing in Q2, was that a strong contributor, similar to what we're seeing in like GTA and BC numbers? Or did you see any leveling off in the Excalibur program either in Q2 or in July? And I'm kind of thinking about this program does target new Canadians. Have you seen any sort of impact from that demographic?

[Stephen J. R. Smith, Co]

I wouldn't say that, that program is currently a new Canadian program. I think that would be -- it's probably a self-employed program. We are primarily in Ontario and the GTA. We have a little bit of a pilot program [ out West ], so we would see the numbers there. We stepped back a little bit on it and went to [ 75% we find ]. So we were coming up quite as aggressive perhaps some of our competitors in that market. But we were quite happy with our Excalibur numbers in Q2. I don't -- off the top of my head, I can't -- I don't know where they'd lined up with respect to Q1. I think we're sort of on plan.

[Robert A. Inglis, Chief Financial Officer]

Yes, we're on -- ahead of target.

[Stephen J. R. Smith, Co]

We're on target?

[Robert A. Inglis, Chief Financial Officer]

No, we're ahead of target.

[Stephen J. R. Smith, Co]

We're ahead of target, yes.

[Robert A. Inglis, Chief Financial Officer]

But we did tighten up the credit criteria quite a bit in doing -- during March, and I think we'll continue to have that -- the same view of credit tightening...

[Stephen J. R. Smith, Co]

Yes. I mean there's a little -- yes, I think there isn't a debate here. That's not core business for us. It's less important, but we'd to grow it, but we're -- I think we're still a little bit concerned. [ Surbans ] I mean we've discussed it here. [ Surbans ] a little bit of [ false going here. I'm wondering [indiscernible] if certain programs are getting quite the impact ]. There are going to be tough times. 9% or 10% unemployment [indiscernible] will sort of have an impact. [indiscernible]

[Jaeme Gloyn, Analyst]

Okay. And -- sure. And can you just remind me, you just said 8% payment deferrals on the Excalibur program. Can you remind me what the number was in Q1 or as of May 11, I guess?

[Stephen J. R. Smith, Co]

Higher. 20%.

[Robert A. Inglis, Chief Financial Officer]

I never thought...

[Stephen J. R. Smith, Co]

18%.

[Robert A. Inglis, Chief Financial Officer]

Much higher...

[Jaeme Gloyn, Analyst]

Sorry. I didn't catch that.

[Stephen J. R. Smith, Co]

Well, we're trying to figure out...

[Robert A. Inglis, Chief Financial Officer]

We're trying to remember.

[Moray Tawse, Co]

We're trying to remember.

[Stephen J. R. Smith, Co]

We're trying to remember.

[Robert A. Inglis, Chief Financial Officer]

It was a little bit higher than our regular book but not a lot higher.

[Stephen J. R. Smith, Co]

[ I know this was 25%. ]

[Robert A. Inglis, Chief Financial Officer]

Well, I'll have to get back to you on that.

[Operator]

Mr. Smith, there are no further questions at this time. Back to you for closing comments.

[Stephen J. R. Smith, Co]

Well, thank you very much, operator. Actually, this has been a record conference call. We've now gone 45 minutes. Generally, most of our calls is -- they're done in about 22 minutes. So I appreciate for the active Q&A session from everyone today. We look forward to reporting our Q3 results in late October. In the meantime, thanks, everyone, for taking part in our call, and have a good day.

[Operator]

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