High Mortgage Volumes Helped Drive Q3 Results for First National And Equitable Bank
Strong mortgage volumes and a continued re-opening of the economy helped drive third-quarter results for two of the country’s key mortgage lenders, despite tightening interest-rate spreads.
It’s going to become increasingly difficult, however, to beat year-ago levels due to record mortgage activity in late 2020 and early 2021. First National warned that mortgage originations in the fourth quarter could be down up to 25% compared to a year earlier for that reason.
“We expect new origination to be lower in the fourth quarter than they were last year, which I think is understandable considering that last year’s Q4 was exceptional,” said Jason Ellis, President and Chief Operating Officer. “However, if this outlook holds, single-family volumes would still be more than 20% above 2019 levels, which puts this in perspective.”
Equitable Bank also posted strong results in the quarter, including a 20% year-over-year increase in alternative single-family originations and a 259% jump in reverse mortgage balances.
Highlights from the conference call transcripts from First National and Equitable Bank follow below. Key comments are highlighted in blue.
Chairman and CEO Stephen Smith noted that First National saw strong demand for mortgages in the third quarter amidst changing market conditions. “…mortgage spreads narrowed quite substantially from normally high levels last year and, as a result, our traditionally strong profit metrics reduced despite higher business volumes.“
“I think traditional seasonality will return to the market, but in 2021 we’re also seeing market activity levels adjusting back to somewhat more normal levels after the pace of the past year,” Smith added.
Commenting on the decline in mortgage renewals, Smith said this: “…we think this is a result of fewer opportunities as more borrowers have chosen to refinance their mortgages to take advantage of the low-rate environment.“
First National’s mortgages under administration reached a new high, rising 4% year-over-year, though Smith noted, “the level of prepayment activity somewhat muted the impact of our higher originations.“
“Mortgage spreads have narrowed over the past six months, a sign of renewed competition brought on by greater economic stability compared to last year,” Smith said. “In fact,spreads are now as narrow as they were before the great recession of 2008.“
Q3 revenue was down 5% year-over-year due to lower revenues on placement transactions, spread compression and a change in product mix, noted Robert Inglis, Chief Financial Officer. “Most significantly, the mix change featured ashift in borrower demand in favour of 5-year mortgages at the expense of 10-year money. A year ago we were doing more 10-year business as borrowers locked in historically low rates,” he said. “Placement fees are directly linked to the term of mortgages and as such,all else being equal, 5-year mortgages provide approximately 50% lower revenue on a per-unit basis. Of course, a five-year mortgage is renewed opportunity in five years.“
Asked how First National expects renewal volumes to trend over the foreseeable future given that rates are now rising, Jason Ellis, President and Chief Operating Officer, said this: “I think the entire industry saw elevated prepayment speeds related to early refinancing or early renewal activities as borrowers sought to lock in these lower rates for extended terms.As rates start to go up, the relative value of a borrower engaging in those activities will be reduced. So, I certainly anticipate that First National, as most lenders, will benefit as rates start to rise and prepayment speeds lower. This will be reflected in both renewal opportunities and retention.”
Asked what steps First National has taken to help drive renewals higher, Ellis added this: “We’ve adopted a much more modern approach to renewals withdigital signatures and automated renewal practices, which makes the process much easier and reduces the resistance to the renewal from the borrower’s perspective. So, I think we’re embracing both technology and customer service to make sure, we’re maximizing utility of those renewals.”
Ellis was asked about the fact that most of the recent growth in staffing has been within residential underwriting. “As you’ve seen, the origination volumes were at record-levels over the last couple of years and necessarily required hiring both on the First National side and through the outsource underwriting we perform for our third-party clients.The advantage going forward will be that upon initial adjudication of new applications, we’ll maintain our turnaround time for the brokers and the fulfillment age post-adjudication as we’re reviewing documents will be that much more efficient. And even if the market moderates from those highest levels that we’ve seen in recent months, we believe that our staffing levels are appropriate now to deliver great service levels, but not overstaffed in any respect.”
Loans under administration (retail): $40.2 billion (+13%)
Net interest margin: 1.83% (+14 bps)
Reverse mortgage loans: $175 million (+259%)
Notables from its call:
Reverse mortgage balances are up 259% compared to a year ago due to “expanded market share driven by an evolving channel strategy.”
“In 2022, we are targeting reverse mortgage asset growth of more than 150%,” said President and CEO Andrew Moor.
The bank saw a 20% year-over-year increase in alternative single-family originations, amounting to $2 billion, which was a key driver of Q3 earnings. This is three times the originations compared to just a year ago.
Equitable bank expects another 15-20% growth in its single-family loan portfolio next year, under the assumption housing activity “will return to a more normal cadence post-pandemic.”
“Return to the office of many workers and Canada’s plan to welcome up to 420,000 permanent residents next year will help big city real estate, where the bank has a very strong franchise and constructive view of risk,” Moore added.
EQ Bank deposits as of Q3 stood at $6.9 billion, 60% above 2020 levels. Moor noted that digital transactions were up 99% compared to a year ago.
Equitable Bank issued $350 million of covered bonds in September at a spread of 15 basis points over euro mid swaps, “which translates to this becoming the lowest cost of wholesale funding in our stack, more than 55 basis points cheaper than GICs,” said Chadwick Westlake, Chief Financial Officer. “We were very pleased to earn participation by more than 40 net new international institutional investors across 15 countries, resulting in a three-times oversubscribed first issuance.”
“Arrears in our personal bank and commercial bank are also expected to remain low withmid-term annualized loss rates of 1 basis point to 2 basis points for mortgage portfolio,” Westlake added. Gross impaired loans were down 21% compared to a year ago.
Asked about Equitable Bank’s outlook for 2022, Moor said, “We don’t really build in any rate expectations…[but] as prime rates increase, for example, we wouldn’t follow lock-step in the EQ Bank side of things. So there may be some reasonable NIM [net interest margin] to be captured if you do see prime go up that hasn’t been factored into any of our projections at this point.“