Home Capital Group Inc

TSX:HCG

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Home Capital Group Second Quarter Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Jill MacRae, Head of Investor Relations. Thank you. You may begin.

[Jill MacRae, Director of Investor Relations]

Thank you, April. Good morning, everyone, and thank you for joining us today. Our agenda for today's investor presentation is as follows: We'll begin the call with remarks from Yousry Bissada, Home's President and CEO; our CFO, Brad Kotush, will then review our financial performance, which will be followed by a question-and-answer period for participants. We have members of our senior management team with us on the call to help answer your questions.On behalf of those speaking today, I note that this call may contain forward-looking statements and that actual results could differ materially from forecasts, projections or conclusions in these statements. Please refer to our advisory on forward-looking statements in -- on Page 2 of the presentation.I would also remind listeners that Home uses non-GAAP financial measures to arrive at adjusted results, and that management will be referring to both reported and adjusted results in their remarks.And now, I'd like to turn the call over to Yousry Bissada.

[Yousry Bissada, President, CEO & Non]

Good morning, and thank you for joining us for our second quarter conference call. Turning to our Q2 results. Today, Home is reporting net income of CAD 72.8 million or CAD 1.42 per share, an increase of 118% over Q2 of 2020. We're very pleased with these results, and the factors that contributed to this achievement include: a robust housing market, leading to healthy top line growth; disciplined expense management; and a release of credit provisions this year compared to increase in credit provisions 1 year ago. Brad will have more detail on the financial results in his presentation.Today, I'd like to talk to updating you on the lending restrictions we put in place at the start of the pandemic last year, review some of our activities during the quarter, and give you a sense of our expectations for the balance of the year. We spoke last quarter about our lending restrictions and the adjustments to our risk appetite we put in place at the time of the initial lockdown. Throughout the second quarter, as the economic data became more positive, we gradually returned to our pre-pandemic risk appetite. By the end of July, all the restrictions were removed from both resident and commercial underwriting. This means that all our businesses will have returned to normal risk appetite for most of Q3. We believe there is lots of opportunity in the market with our current guidelines.Following a successful Q1, we saw continued strong growth in single-family originations this past quarter, both in Alt-A and A mortgages. Originations in our single-family residential portfolio totaled CAD 1.84 billion, an increase of 63% over 2020. We're proud of the incredible effort of our sales, underwriting and funding teams to bring in this volume. This showed their commitment to support our broker partners and providing mortgage solutions for our borrowers in market conditions that are constantly changing. One of our Home values is know your business, and I believe this quarter we demonstrated how this value drives our success. We grew our volumes by delivering responsive service and industry expertise through evolving market conditions and risk parameters.This quarter also saw steady growth in deposits through our Oaken channel, which now make up nearly 31% of our total deposits. Our Oaken store in Toronto reopened in mid-June and we are now back to welcoming customers into all our stores. I'm pleased to report that the traffic in our stores has bounced back quickly since reopening, demonstrating the value of the in-person option for many of our customers.Our Treasury group has also been busy this past quarter. In June, we closed the second successful cross-border RMBS offering. Compared to our inaugural issue in the fall of 2019, we saw increased investor interest and increased participation from US investors. Based on the investor demand for our [ last ] offering, we expect to be back in the market later this year subject to market conditions. We continue to believe that RMBS offers a valuable strategic option for diversifying our funding options and growing our institutional source of funds.We have also expanded our whole loan sales program, adding to the counterparties who are interested in purchasing loans originated by Home Trust. This quarter, sales under this program were CAD 431 million, up from CAD 37 million in Q1. Whole loan sales enhance Home's capacity to offer insured mortgage products to our brokerage channel. Whole loan sales take these mortgages off balance sheet, recognizing a gain on sale while collecting servicing income over the life of the loans. We expect to make regular sales of our mortgages under this program.Within the Company, our execution of the Ignite Program continues to transform the way we work. I credit the effort of all our teams to implement the transformation of our core banking system with minimal disruption to operations, all while navigating the demand of an active housing market and remote working conditions. Initiatives in our technology transformation include: our rollout of robotic process automation has allowed us to be more efficient by automating routine repetitive tasks; our new CRM has improved productive engagement with our broker partners with new features in reporting to a broker, a variety of productivity KPIs with Home.We have refreshed our Loft platform to quickly and effectively update brokers with information on our mortgage promotions and other important communications. Loft is the system we and the borrowers used to collect documents from mortgage applications, request additional information and post updates on the status of an application. This increased functionality built into the Loft platform has been very well received by our brokers. We are progressing towards the launch of an enhanced digital experience for our Oaken customers with the expected release of our mobile banking app later this year. All these are examples of the improvements in efficiency and customer experience made possible by our Ignite Program.As we look ahead to the second half of 2021, we see good visibility for further mortgage growth and continued opportunity to deliver on our strategic objectives. First, we plan for a return to more normal working conditions. We note that a healthy economy requires a healthy population. We're delighted to see high vaccination rates in Canada and we hope [ the trend ] towards a reduction in COVID cases continues. It has now been over 500 days that most of the team has been working from home. We continue to prioritize the health and safety of our employees, customers and partners as we make plans for a gradual return to the workplace. At this point, we, like most downtown employers, are planning for a hybrid model of home and in-person working. It may take some time and adjustments before we land on our final version, but we are committed to following public health advice and to be transparent, 2-way communication with our employees throughout the return of the office process.Looking at the economy, the latest GDP and employment data has been positive, and this constructive outlook is expected to persist into 2022. The Bank of Canada is reducing its quantitative easing measures and OSFI has announced plans to increase the Domestic Stability Buffer effective November 1, 2021, a signal of their confidence in the resilience of the financial system.The latest housing data show steady upward price movement in our major markets and an increase in sales over 2020. We consider the recent pullback in sales volumes for June and July to be a healthy moderation from the peak volumes in February and March. We believe that current conditions, namely low interest rates, high consumer savings and changing housing needs in line with evolving working conditions, all support a robust housing market. We see improvements in employment and immigration providing additional support to the medium and contributing to demand for mortgages in both prime and alternative space.Our residential team is reporting that the market conditions we saw in May and June has helped to start third quarter. Our commercial team is seeing more opportunities in both the large and small commercial markets as they return to pre-pandemic underwriting parameters. We will continue to pursue attractive options to diversify our funding by investing in our open platform and expanding our RMBS and whole loan sales program.Another of our priority is optimizing our capital base. We ended this quarter with a common Tier equity 1 capital ratio of over 22%. We reiterate our commitment to manage towards the target CET1 range of 14% to 15% [Technical Difficulty] regulatory restrictions is lifted.I would now like to turn the call over to Brad for review of our financial results.

[Bradley William Kotush, Executive VP & CFO]

Thank you, Yousry, and good morning, everyone. Slide 6 shows highlights of another strong quarter of financial performance. Our second quarter net income was CAD 72.8 million, an increase of 113% over 2020 and on an adjusted net income, it was CAD 73.9 million, up 102%. Net income per share grew by 118% to CAD 1.42 per share. Our book value grew by 17% year-over-year at CAD 35.32 per share and our annualized return on equity was 16.6% for the quarter or 16.9% on an adjusted basis. We generated that return on equity while holding a significant amount of excess capital, ending the quarter with just over 22% CET1. If our CET1 level had been at the high-end of our target CET1 level, 15% throughout the quarter, our pro forma annualized return on equity would have been in excess of 25%.Slide 7 shows the factors contributing to the year-over-year quarterly earnings per share growth. The largest contribution came from the relative change in credit provisions. The first 2 quarters of 2020 included substantial credit provisions in keeping with the uncertainty and economic outlook at that time. The first 2 quarters of 2021 included provision releases in line with updated forward-looking information and better-than-expected actual credit experience. I will discuss credit provisions in more detail later in the call.The EPS contribution from the change in provisioning compared to Q2 2020 accounted for CAD 0.53 in earnings per share, or 69% of the year-over-year increase in EPS.Our net interest margin for the quarter was 2.61%, consistent with last quarter, and an improvement of 21 basis points over the comparable Q2 2020 figure. The increase in NIM contributed CAD 0.11 to the increase in our net income per share. Our funding costs continue to trend lower with the roll-off of some higher-cost funds, partially offset by lower realized yields on our assets. This quarter, we also terminated our CAD 500 million standby credit facility, which will reduce our funding cost by approximately 5 basis points going forward. We continue to expect our net interest margin to stay in this range for the balance of 2021 based on our current interest rate outlook.We generated positive operating leverage as we grew our year-over-year revenue by 5% while reducing operating expenses by 12%. Non-interest expenses were below the first quarter level and below our expectations at the start of the quarter and some planned IT spend was deferred to later in the year. The reduced expenses compared to last year resulted in a benefit to earnings per share of CAD 0.12 and improved our operating efficiencies to 42.1% or 41% on an adjusted basis. In total, our year-over-year quarterly growth and pre-tax pre-provision net income was 23%. Reducing the number of average shares outstanding through our normal course issuer bid, resulting in a modest benefit of CAD 0.03.Slide 8 shows our originations for this quarter compared with last year. Total single-family originations grew by 63% with significant strength in both our Classic and Accelerator businesses. We note that our sales and underwriting teams delivered this growth while pandemic underwriting restrictions were still in place during the first part of the quarter. As Yousry indicated, those restrictions were relaxed for both our residential and commercial groups early in Q3 and our normal prudent risk parameters have been restored.On the commercial side, our insured residential volumes declined compared to last year with the CMHC pivoting their allocations more towards affordable housing. Our non-residential volumes increased year-over-year as we saw more opportunities to participate in good quality projects. Since our return to pre-pandemic underwriting parameters in the third quarter, we expect to see growth pickup for the remainder of 2021.Turning to our funding on Slide 9, we continue to emphasize the growth of our Oaken channel with a significant weighting towards term deposits versus demand deposits. Oaken now makes up 31% of our deposits, compared to 26% in Q2 of 2020 and increased by 2.5% quarter-over-quarter and 13.3% year-over-year. This quarter, we also announced a successful completion of another cross-border offering of residential mortgage-backed securities. As Yousry mentioned, this offering had a greater percentage of cross-border participation than our inaugural RMBS in 2019 as more investors came to appreciate the AAA rating of the Class A notes and the excellent credit performance of the loans in the structure. As stated previously, we intend to be a programmatic issuer in this channel, subject to market conditions. We continue to believe there is investor appetite to support the continued development and expansion of private RMBS.Slide 10 shows the details of our credit provisioning this quarter. We booked a release of CAD 18.8 million, compared with provisions of CAD 18.7 million 1 year earlier. For the year-to-date, total releases have been CAD 30.9 million, compared with provisions of CAD 48.8 million in 2020. We realized a net recovery of less than 1 basis point or CAD 0.2 million across all lines of business in Q2. For the year-to-date, net write-offs have been less than 1 basis point or CAD 0.2 million, compared with net write-offs of 3 basis points or CAD 2.3 million in the first half of 2020.Slide 11 shows a breakdown of our credit provisions. The CAD 18.8 million total is made up of CAD 15.2 million release of provisions on our Stage 1 and Stage 2 loans and a CAD 3.6 million release of provisions on our Stage 3 loans. The CAD 3.6 million release in our Stage 3 loans comes predominantly from increased expectations for and actual repayments in our commercial loan portfolio. The CAD 15.2 million release in our provisions for Stage 1 and Stage 2 loans across all lines of business results from a change in the forward-looking expectations for housing prices and employment levels in our third-party economic forecast and actual repayments. Last year's quarterly provision number reflected a downward revision in forward-looking expectations. Our provision releases in quarter subsequent to Q2 2020 reflects more positive forward-looking information, improved credit quality and actual repayments.The inputs to our economic models are shown on Slide 12, as is the total allowance for credit losses. The assumptions for future housing prices and unemployment levels have improved from the March 31 levels in all scenarios. The total probability-weighted allowance for loan losses stood at CAD 39.7 million at the end of the quarter, used in just the base case, the allowance will be CAD 31.8 million. The use of multiple scenarios adds nearly CAD 8 million to the base case allowance.The next slide shows the breakdown of our allowance for credit losses. The chart on the left shows that 76% of our loan loss allowance is attributable to our Stage 1 and 2 loans. The decline in allowance attributed to our other consumer retail loans is due to provision releases related to a more than 80% reduction in the gross amount of that portfolio or approximately CAD 200 million through portfolio sales and repayments, as well as net write-offs since Q2 2020. The decrease in allowance on our Stage 3 loans is also due to the reduced value of non-performing loans, down by more than 15% for the year-to-date as shown on Slide 14. Net non-performing loans now make up 24 basis points in gross loans compared with 57 basis points at the end of 2020. Allowance for credit losses for Stage 3 loans as a percentage of total Stage 3 loans has increased from 18.7% from 15% at the beginning of the year.Turning to Slide 15 for a discussion of capital. Our CET1 capital ratio at the end of Q2 was 22.27%. We added 126 basis points to our capital base during the quarter. As you may know, we, together with all federally regulated financial institutions, are currently restricted from increasing dividends out of our regulated entities by our regulator. Absent that restriction, we could fund capital distribution by Home Capital Group through dividends out of the regulated entities. However, we were able to use funds at the holding company level to repurchase approximately 517,000 shares during the quarter through our NCIB. For the year-to-date, we have spent approximately CAD 50.6 million to buy back over 1.6 million shares at an average price of CAD 31.23 per share. This price represents a discount of 12% to our quarter-end book value.As we said during our last call, subject to market conditions, we plan to choose the most effective method to increase shareholder value, while moving towards our stated target range of 14% to 15% CET1.And now, I will turn the call back to Yousry for closing remarks.

[Yousry Bissada, President, CEO & Non]

Thank you, Brad. I'll now ask the operator, April, to poll for questions.

[Operator]

[Operator Instructions] Your first question is from Geoff Kwan with RBC.

[Geoffrey Kwan, Analyst]

Brad, I just wanted to start off with the -- when we talked about in terms of the capital strategy. Obviously, with a lot of excess capital that you have and when the ban does get lifted. How do you think about the rough timeline of how long it would take for you to get down into that kind of 14% to 15% CET1 target ratio?

[Bradley William Kotush, Executive VP & CFO]

Geoff, I think we would consider what the market conditions were at the time. So that time line would necessarily flex depending on our view. Previously we've discussed starting with an SIB, again, depending on market conditions and the intrinsic -- pricing and intrinsic value or our view of intrinsic value of our stock. We have done SIBs in the past 2 years in the range of CAD 300 million to [ CAD 150 million ]. So that would move us reasonably rapidly to a lower rate, and then we would think of either a combination of NCIB and dividends on a prudent basis. So, it could be, depending again on market conditions, anywhere between 18 months to 24 months as we could work our way down. Again, we want to make sure that we're looking at all factors, market conditions, liquidity, how it affects our net interest margin and profitability, all with a view to prudent risk management and enhancing shareholder value.

[Geoffrey Kwan, Analyst]

Okay. And just my second question was on the OpEx side. Yes, I think as you pointed out, it was a little bit lower. I think you mentioned there were some IT spend that was deferred. Just wanting to get a sense how you think about how the OpEx is going to look like for the second half of this year? And if you [ told me] that excluding any sort of Ignite-related expenses?

[Bradley William Kotush, Executive VP & CFO]

Yes. Well, we talked last quarter about being approximately CAD 65 million in aggregate non-interest expenses, and that's inclusive of some of our IT spend. So we'll work through, what I would call that, significant adjusted earnings phase. As you can see, we've narrowed the adjustments compared to prior periods. And one of the other things is, we extended slightly the period where we think for completion of Ignite to the end of Q1 next year. So that's -- I guess, the main takeaway there, Geoff, would be we think it will be closer to CAD 65 million going forward for the next few quarters.

[Operator]

Your next question is from Etienne Ricard with BMO Capital Markets.

[Etienne Ricard, Analyst]

So, there was a significant growth in originations this past quarter. Can you just help us understand how much of this growth is, on one hand, Home Capital [ reluctant ] and your underwriting standards that weren't closed since the start of the pandemic relative to, on the other hand, organic growth opportunities that you're seeing in the Alt-A space?

[Yousry Bissada, President, CEO & Non]

Clearly, the market has been hot for A and Alt-A. So the kite is definitely lifting all boats, no doubt about that. But we believe that we are getting that share of how much the market has increased. No data is out yet for the second quarter overall. But in addition, we feel that as we've released these underwriting guidelines, that's going to increase our volumes, our share. So, without knowing when the market actually grew and estimated half is because of volume growth and half is because of our continued focused service and products that we're offering right now and that will grow further. So, we grew by about 58% in our originations relative to 61% in the first quarter. So that's above, I believe, what the market has grown, that's why I'm giving that approximate [ half now ].

[Etienne Ricard, Analyst]

And on funding, you had previously shared that Oaken could represent 40% to 50% of your deposits over the next few years. Given the recent deposit raising, is this still a reasonable goalpost? And for what time period?

[Yousry Bissada, President, CEO & Non]

I think it's reasonable, but we have no goal to get there fast. We're going to do it prudently and effectively and make sure it's minimizing our cost of funds, as we do it as we grow. We said -- we always said that the target is sort of 3 to 5 years, and I think we said that a year ago and I think that's still on track. But we don't have a line in the sand saying, we better get before -- we're going to just do it prudently and in a way that continues to focus on NIM performance for the Company.

[Etienne Ricard, Analyst]

And so, do Oaken deposits -- is the cost still a bit higher relative to the brokered markets?

[Yousry Bissada, President, CEO & Non]

It is a little bit higher. So the way we compare the broker markets we have to pay a commission. And we don't -- but we have the cost of the stores and the staff. But when you compare them, it is a little bit higher, but this is just stickier. So, from a strategic [long ] point of view that helps make the costs a little bit closer, so that that has a strategic advantage for us.

[Operator]

Your next question is from Graham with TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Maybe just start on the credit front. Another quarter of fairly material releases. When I look at your ACL relative to your portfolio size, it's low versus historical levels. And then when I look at your ACL relative to your base case expected credit loss, it seem to be a smaller buffer there than pre-pandemic levels. So, I guess, my question is, is it reasonable to think that, where you're currently sitting, credit loss releases should be less material going forward?

[Bradley William Kotush, Executive VP & CFO]

Yes, is the short answer, Graham. So, I mean, if you -- if I can expand on it, if you want to -- if that's what you asked? But I think we are more than comfortable with our coverage ratio using the -- our models. And certainly, our actual experience has shown that we have been prudently provided in our main portfolios. But we had one issue last year in relation to the consumer segment, [ with that ], we're a very much in the process of exiting.And the main question I think was expectations on future releases. We have now taken out most of the general increase that we had in relation to the onset of the pandemic and a rapid movement in downward revisions to forward-looking information. So going forward, we expect to see much more normalized credit environment with provisions. There will be variability or volatility in provisions related to movements in forward-looking information. We expect those to be more moderate going forward unless there's something that happens outside of our current expectations. And we'll have -- we do plan on growing our portfolio and therefore, provisions will rise, but as a percentage should be relatively consistent.

[Graham Ryding, Research Analyst of Financial Services]

In terms of growing your portfolio, your originations would fall this quarter, but it looks like your -- the run-off on your residential book was also quite large and sort of weighed against your overall portfolio growth. Can you provide some color around what was driving the higher run-off? And what are you targeting? What's a reasonable expectation for overall loan growth?

[Bradley William Kotush, Executive VP & CFO]

Yes, we did have -- what we saw was much higher sales. So, when we are looking to renew the actual property was sold and no longer required financing. We think -- in our modeling that we think that will have slightly higher retention rates in the next 6 months based on the trends we're seeing today.

[Operator]

Your next question is from Nigel D'Souza with Veritas Investment.

[Nigel R. D'Souza, Investment Analyst]

I wanted to touch first quickly on these 3 reversals for provisions that you pointed out this quarter. And I understand that's due to higher repayments and that makes sense. But do you have any color on the underlying drivers for that? I mean, are the repayments moving higher because of improvements in employment? Or support that individuals are receiving from government programs? Or is it just [ self-touring ] or individuals are able to sell their real estate assets at attractive price? Any color there you could provide?

[Bradley William Kotush, Executive VP & CFO]

Well, the biggest mover relatively in the reduction of the Stage 3 was in our commercial. And that was due to repayments and similarly, or slightly differently, was some in our Stage 3 residential with lower balances or refis either with us or externally. So that's where a lot of that movement had came from and the overall allowance release on Stage 3.

[Nigel R. D'Souza, Investment Analyst]

Touching on buybacks, you've actually done some already and it makes sense that it's attractive when your share price is below your book value, but what if your shares currently above your book value per share. Is -- are buybacks as attractive as they were previously? Is that still where you'd like to prioritize allocating excess capital? Or is there any other channel that you view as attractive or more attractive?

[Bradley William Kotush, Executive VP & CFO]

Well, we continued the buybacks as an attractive option if the shares are below our view of intrinsic value. And we still believe that the shares are trading below our view of intrinsic value. So, we are focused on buybacks in the current environment. So, they still are accretive to earnings and ROE. But we'll also, at the appropriate time, consider dividends as well.

[Nigel R. D'Souza, Investment Analyst]

And if I could just wrap up on, I guess, a broader question, maybe a longer-term question. You mentioned that you expect originations to remain relatively robust in the near term, but if I look out further ahead over the next few years. With real estate prices elevated at the current moment, do you see a lack of, I guess, affordable housing as a potential headwind for immigration -- new immigration into Toronto or key markets? Or even first-time or younger homebuyers, is that something where you think affordability starts becoming an issue or potential headwind for you? Or have you thought about that differently? What's your outlook there?

[Yousry Bissada, President, CEO & Non]

So it's Yousry here, there is a lot of questions in that question. I'll try to deal with most of them. So, you're right and part of that is that, not [ pretty good ], but supply continues to be a problem. There are still more people who want homes and there is supply in Canada. The immigration numbers are expected to grow at a, I think, I mentioned in the past that typically the new immigration will acquire a house 2 to 3 years after arriving. So you can kind of chart the demand that is going to come to 2 to 3 years from now. And new immigrants are all over in terms of what they buy from CAD 10 million homes to start-up condos to -- so it's a wide range.You're right, it is obviously getting more difficult and less affordable for people. But what we've also seen is, with the lockdowns and working from home and without a doubt the hybrid going forward, where people working from the office and home is they're moving further out, which makes it more affordable. [ I think ] few years ago was to be only in Downtown Toronto or with a short commute with the subway. Now, it's not the case. They're willing to move further out as long as their employment can accommodate it. So there's a lot of rebalancing that has to happen and what's affordable. But the main driver over the next few years continues to be that demand is very, very high.The other part of unknown in that -- in your question is interest rates. Where will interest rates be? In the current levels, it's making -- it's still very affordable for a lot of, lot of people. But depending on where interest rates that could potentially, obviously, move the demand down in terms of people's affordability.So, you asked a multi-level question, did I get at the core of what you wanted, if not, please let me elaborate on whatever?

[Nigel R. D'Souza, Investment Analyst]

No. I think that was a really helpful color. And I think you touched on a lot of different factors there.

[Operator]

Your next is from Jaeme Gloyn with NBF.

[Jaeme Gloyn, Analyst]

First question is on the sale of, I guess, the whole loan sale program. Huge step up this quarter, and I apologize if I missed it in the prepared remarks. [Technical Difficulty] I don't think we're expecting that CAD 400 million in this quarter. So what is the outlook for volumes on that front?And then a follow-up on the rates or the gain on sale rates on those mortgages sold. Is this quarter indicative of what we should expect? Or, I mean, the previous 2 quarters were significantly higher than that on lower volumes. So just a little bit of framing of the strategy and the financial impacts.

[Bradley William Kotush, Executive VP & CFO]

Jaeme, we did do better than we had expected in the last quarter. It may be that amount would be what we'd expect in the next half. So, that's where we would be modeling that.And the other question is, I think there was a mix there when you were mentioning with that gain on sale was higher or maybe I misunderstood your question.

[Jaeme Gloyn, Analyst]

Yes, so let me just clarify your response to the first question. So, when you said last quarter, you mean the Q2 CAD 400 million, that's above what we should expect in Q3, Q4 each or in aggregate? And then I'll follow up on the rate.

[Bradley William Kotush, Executive VP & CFO]

In aggregate.

[Jaeme Gloyn, Analyst]

Okay. And then on the rate, what I would say -- in Q2, the rate looks like it's about 60 basis points and in the previous 2 quarters on [ granted ] on much more volume, it was north of 200 basis points. And so, just wanted to get a little bit of more insight as to the rate closer to 60 basis points on a go-forward basis or is that something -- is there something else that's driving that lower?

[Bradley William Kotush, Executive VP & CFO]

I think that going forward rate is something that could be used. And part of that -- and again, I'm trying to make sure that you're using the securitization gain, as well as the whole loan sale gains.

[Jaeme Gloyn, Analyst]

I was breaking it out individually. But maybe we can take it off-line and just talk about some of the specifics on that front. But I think I've got a pretty good sense there. Shifting back to the net interest margin or, I guess, the spreads, net interest spread this quarter. We're seeing a little bit of a step-down, maybe makes sense. Just wanted to get some more granularity as to what you're seeing on the rate side in single-family -- core single-family and commercial loans. Is that rate side, on the asset side still declining in a competitive environment? Or are we starting to see some stabilization on mortgage rates?

[Yousry Bissada, President, CEO & Non]

It's Yousry here, Jaeme. On Alt-A, it's pretty steady, has some minor adjustments here. [ Alt-A ] is still very competitive. That's obviously a much bigger [ plot ] and very competitive. We're also seeing some competition and it's affecting our NIM slightly is on renewals as we already discussed on this call, there are a lot of sales, so a lot of mortgages left, maybe in the existing market because people sold their homes, but we remain competitive on renewals, we varies a bigger rate fight there.

[Jaeme Gloyn, Analyst]

And did you see that continuing into Q3 as well? We've got the fair characterization.

[Yousry Bissada, President, CEO & Non]

Yes, I think so. I think for Q3 and Q4 and possibly as well as on the origination side, everybody -- there is huge competition for mortgages, we're very pleased we're keeping our own and keeping the NIM up and so on. But there is a lot of competition on rates and service and products and so on.

[Jaeme Gloyn, Analyst]

Last one for me. Just wanted to dig into the credit releases or, I guess, the change in risk parameters and models. So if I'm looking at the sub-pack, Page 19 and the single-family component, and this is something that's been consistent over the last several quarters, and I just want to get a little bit more clarity as to what would be the change in risk parameters that would cause the significant decline in Stage 1, but at the same time, increases in Stage 2 and Stage 3 provisions or allowances, I guess?

[Bradley William Kotush, Executive VP & CFO]

Yes, as we worked through those models, Jaeme, we continue to refine the risk parameters or items that would go through in relation to LTVs, the expectations of repayment probability of default, those are kind of factories that will go into that. And as well moving to Stage 1, it's only 1-year loss rather than lifetime, although on average we do have, in the classic book, the average life we have estimated around 14 months.

[Operator]

[Operator Instructions] And there are no further questions at this time. I'll now turn it back over to Yousry Bissada for closing remarks.

[Yousry Bissada, President, CEO & Non]

Thank you, April. We're pleased with our performance this quarter and excited about the balance of the year. We see good prospects for our residential and commercial lending business. We look forward to bringing an enhanced digital experience to our Oaken customers and developing our funding options beyond the retail deposit market.I send my thanks for the work done by the entire Home team who continue to bring the best of their creativity and enthusiasm to work every day.Finally, we're planning an Investor Day in the fourth quarter of this year. You should be receiving a save the date notice sometime next month. If health conditions allow, I am very much looking forward to seeing as many participants as possible in person.To all the participants on the call today, thank you for your interest in Home Capital.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.