Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mortgages under administration grew 8% year-over-year to a record $148.2 billion, indicating strong growth and stability.
- Commercial mortgage originations, including renewals, increased by 35% from last year to $5 billion, reflecting robust demand in the insured multifamily financing sector.
- First National Financial Corp (FNLIF, Financial) added another large Canadian bank as a business process outsourcing customer, enhancing its third-party underwriting business.
- The company has maintained its relative position in the mortgage broker channel despite increased competition from a large bank lender.
- Investment income increased by 18% year-over-year to $35.7 million, driven by increased securitization activities.
Negative Points
- Pre-fair market value income decreased by 14% compared to the previous year, primarily due to lower residential originations.
- Single-family originations were down 17% year-over-year, reflecting a challenging competitive environment and higher interest rates.
- Placement fee revenue declined by 32% year-over-year due to a reduction in placement activity and a shift towards lower-fee mortgage renewals.
- The company experienced $4 million in losses on financial instruments used to hedge residential mortgage commitments, compared to gains of $31.7 million last year.
- Salaries and benefits expenses increased by 19% year-over-year, partly due to incentive-driven commercial underwriting compensation, impacting operational leverage.
Q & A Highlights
Q: Can you explain the impact of the evolving interest rate regime on your securitization portfolio, particularly regarding adjustable-rate components?
A: Historically, our adjustable-rate NHA-MBS pools had coupons based on CDOR, which often set higher than the prime rate during rate hikes, narrowing NIM. Now, with the transition to quora, the impact is moderated. While there might be a slight advantage in a loosening cycle, it won't be as significant as the disadvantage during CDOR's existence.
Q: How does First National view the impact of declining policy rates overall?
A: There are offsetting factors with lower rates. While they could stimulate housing demand and improve placement fees, they also reduce interest on escrow deposits and might increase prepayment rates. It's challenging to determine if lower rates are definitively positive or negative for us.
Q: What needs to happen for spreads and pricing in the single-family mortgage market to normalize?
A: The pressure on spreads is mainly due to increased incentives for brokers and aggressive competition from a bank lender re-entering the market. As this lender stabilizes its position, we might see pricing normalize. However, current spreads aren't terrible, just competitive in certain areas.
Q: Can you provide insights into the placement fees per unit across different categories like new vs. renewals, single-family vs. commercial, and short vs. long-term mortgages?
A: New residential mortgages carry higher placement fees than renewals, often at a two-to-one ratio. Fees decrease with shorter terms, similar to broker fees. Commercial mortgages generally have lower placement fees than residential ones, but this varies with market conditions.
Q: What is the outlook for securitization NIM given current tight spreads?
A: The residential NHA-MBS portfolio is driving sequential NIM reductions due to narrower origination spreads and accounting for hedge gains/losses. Older pools with wider NIMs are amortizing, replaced by newer pools with narrower NIMs. This trend may continue, but changes should be gradual.
Q: What is First National's total securitization funding capacity annually, and is the current level sustainable?
A: We issue around $11-12 billion of NHA-MBS annually, which is renewable assuming CMHC's programs remain unchanged. Additional funding comes from asset-backed commercial paper, which is less renewable. However, we've increased conduit capacity, providing sufficient runway for the foreseeable future.
Q: With earnings down year-to-date, can First National return to 2023 earnings levels in 2025 if spreads remain the same?
A: Origination volumes are a significant driver of earnings. The extraordinary volumes in early 2023, aided by a competitor's absence, are unlikely to be replicated. While volumes can bounce back, NIMs are not expected to increase, presenting challenges to matching 2023 earnings.
Q: Can you provide more color on the positive July commitments and their impact on Q3?
A: July commitments were significantly higher than last year, indicating a positive trend. Our share of broker-submitted commitments grew sequentially in Q2, suggesting improved year-over-year comparisons in the second half. The re-entry of a significant lender in the broker channel should normalize year-over-year comparisons.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
