The first two months of the year started with a bang for two of Canada’s key broker-channel lenders, but the lending environment quickly changed with the arrival of COVID-19.
Both Home Capital and First National reported strong starts to the year, which have mostly carried their first-quarter earnings performance. First National reported a 53% year-over-year increase in single-family originations and a 20% jump in renewals. Meanwhile, Home Capital mortgage originations were up 33% in the quarter.
On the flip side, net income at First National fell $2.3 million in the quarter, marking the lender’s first-ever quarterly loss. Home Capital was basically flat year-over-year, up just 0.4%.
Both earnings calls provided interesting insight into how each lender has reacted to the COVID-19 pandemic, including offering mortgage payment deferrals on billions of dollars worth of mortgages.
More highlights from the conference call transcripts from Home Capital and First National are below. The comments in blue deserve particular attention.
On First National’s significant increase in single-family originations, Moray Tawse, Executive VP, said this: “We attribute this growth to a strong economy in January and February, prior to COVID-19, and our growing market share.”
Over 90% of First National’s workforce moved off-site within a week of the pandemic declaration.
Notables from its call:
Pandemic Reaction: “Since the start of the pandemic, we have not lost a step in either the single-family or commercial segments. We’ve continued to renew mortgages and to lend on both insured and a conventional basis,” said Stephen Smith, CEO. “The biggest challenge to our business has been providing mortgage payment deferrals.”
2020 Outlook: “COVID-19 has created a somewhat more negative outlook for the year. While we expect origination volumes to decline for the remaining year, this is tempered by the wider spreads that we are earning on our new originations,” Smith said. “While we expect originations to slow, First National is able to underwrite a record volume of new commitments for customers in March, which will be reflected in second quarter volumes.”
First Net Loss Ever: Smith addressed the company’s -$2.3 million net loss in the quarter, or $0.05 per common share. “This is the first loss incurred in our history as a public company and reflected unprecedented volatility in the bond market.”
Higher Expenses: “Brokerage fees were 72% higher than a year ago, reflecting the higher origination volumes, and the fact that we expensed broker loyalty program from 2019 in the first quarter. This resulted in about a 10% increase in per unit costs,” noted Robert Inglis, Chief Financial Officer. “Salaries and benefits were higher by 22%, largely due to growth in our employee base year-over-year, which stood at just over 1,000 at March 31.”
Mortgage Deferrals: “We have provided qualifying borrowers with three months of payment deferral in cases of extreme hardship, the company will consider granting a second three-month extension,” Inglis said. “From an accounting perspective, these deferred mortgages will cease to amortize during this period, and interest otherwise payable will be capitalized to the principal of a mortgage. So in this period, those mortgage balances will increase during the next three months.”
Inglis added: “These mortgages are not classified as delinquent or in arrears. These deferrals have been allowed by First National and will not be reported to the mortgage default insurers or of the credit bureaus.”
Smith confirmed the cost to First National for deferring mortgage payments works out to roughly $43 million per quarter.
April Applications: Smith confirmed that single-family applications were down about 40% in April. (But) we actually feel pretty good about the application volumes in May…We’re seeing some markets as showing a fair degree of strength in terms of – they don’t seem to be down that much. We’re surprised at the amount of purchases that we’re still seeing. So, we feel fairly good about that.”
Home reported net non-performing loans as a percentage of gross loans at 0.36%, a five-month low, and down from a peak of nearly 0.50% reached in 2018 and 2019.
Home increased its provisions for credit losses to 0.70% of gross loans in Q1, up from 0.09% in Q4 2019. This translated into a $91.3 million allowance for credit losses compared with $62.4 million at the end of 2019.
Uninsured single-family mortgages originated in Q1 had a weighted average loan-to-value (LTV) of 70.3%. The average LTV across the portfolio of uninsured single-family mortgages was 61.3%, both in line with levels reported at the end of 2019.
Notables from its call:
Financial Strength: “We entered this pandemic environment with a strong capital position. We were also well-positioned from a liquidity perspective with a high volume of liquid assets and relatively low balances of near-term liabilities,” said CEO Yousry Bissada.
On the transition to working remotely: “Our technology upgrades from 2019 have given us flexibility to address the operational challenge of dealing with COVID-19. We were able to move our people off premise efficiently and without business disruption because we had migrated a substantial percentage of our banking system and data to the cloud throughout 2019. Similarly, going paperless in our underwriting and funding groups last year enabled a rapid transition to working remotely,” Bissada said.
Changing Employment Situations: “As we emerge from the lockdown conditions, whenever that happens, there will be a lot of new borrowers that have experienced a change in employment or income,” Bissada said. “Borrowers with varied and complex individual circumstances that require a more personalized approach to underwriting. This is exactly what we do. Not only do we have the expertise that comes from 30-plus years of experience in precisely this type of borrower, but we have availability, liquidity, capital and the strongest balance sheet in our industry.”
Jump in Provisions: “…revenue was almost entirely offset by higher provisions for credit losses this quarter compared with 2019, which reduced earnings by $0.33 per share,” said Chief Financial Officer Brad Kotush. “We considered it necessary to take a substantial increase in provisions to reflect the change in macroeconomic assumptions resulting from COVID-19.”
On Originations: Kotush noted that the year started strong in January and February, with originations up 33% compared to Q1 2019. “Towards the end of the quarter sales activity in our major markets began to slow,” he said. “Typically changes in transaction volume will take some time to flow through to changes in funding volumes, so it is logical to expect originations in the second quarter to decline from past levels.”
Deposits: “It is an important feature of our liquidity risk management that 85% of our Oaken deposits and 95% of all our deposits are in the form of term funding rather than demand deposits,” Kotush said. “We saw a slight net migration of demand deposits to term deposits during the quarter and that trend has continued into the second quarter.”
Mortgage Deferrals: “We do not expect these deferrals to have a significant impact on our liquidity and we are treating these loans in accordance with regulatory guidance,” said Kotush.
Of the mortgages Home has granted payment deferrals to, “86% are uninsured in terms of value and in terms of the number of loans it’s 78% uninsured,” Kotush confirmed.
Kotush confirmed an analyst’s calculations that mortgage payment deferrals had been granted on $3.6 billion worth of classic uninsured mortgages at Home, or 28% of its classic mortgage portfolio.
How Deferrals Were Granted: “Our bias was to grant the deferrals now and we granted them for a 2-month period,” Kotush said. “We’re now approaching a round of where people who were granted initial deferrals are maybe asking for further deferrals. And we’re taking up the criteria, looking for more enhanced rationale for why they haven’t been able to make payments.”
Changes in Underwriting Standards: “Typically you look at what people made in the past and the probability of them continuing to make that in the future. Obviously in this environment we do more work on that. We will take into account the government subsidies. We have also restricted some of the LTVs, even within certain segments. We’ve lowered how much LTV we will lend,” Bissada said. “In terms of the types of jobs and so on, clearly the ones that are dependent on high people-gathering we’re looking at closer, restaurants or a business where concerts… So we’ve tightened to ensure a higher quality of business. But the framework of where we will lend, to whom we will lend, is the same.”
April Mortgage Activity: “It’s been surprisingly more active than we thought. What has changed—I think it’s quite public—is the amount of sales in major cities have gone considerably down,” Yousry said. “However, refinancings, which means people renewing from one institution to another or our own portfolio, borrowing more money, has gone up, almost offsetting what we would have expected in sales.”