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First National earnings

First National comments on underwriting partnership with BMO, says move is an “endorsement of the channel”

BMO’s decision to work with First National as its underwriting partner for its return to the broker channel served as an endorsement of both FN’s services and the channel as a whole.

Those were the comments First National President and CEO Jason Ellis delivered as part of the lender’s second-quarter earnings call.

As part of BMO’s announced re-entry to the broker channel starting in early 2024, the bank confirmed it would be partnering with First National to provide its underwriting and funding services.

In comments made to CMT at the time, Justin Scully, Head, BMO BrokerEdge, said they chose First National based on its “discipline” and 30-year track record of broker underwriting and servicing.

Ellis was asked about the partnership during First National’s latest earnings call.

“To the extent that BMO made the decision to outsource the activity of adjudication and fulfillment of the mortgage applications, I can’t speak to definitively,” he said. “But I imagine having been absent from the channel for a period of time and perhaps viewing the success of TD by outsourcing that activity, may have turned their mind to the idea.”

He added that First National is “thrilled” to have earned the mandate, which he called a “great endorsement for the channel, and we think it’s a great endorsement for the service we provide here at First National.”

And while Ellis said the underwriting and servicing deal will be a “2024 event,” he noted that “very, very heavy lifting has now been done.” He also confirmed that the underwriting partnership with BMO will be “very similar” to the work it provides to its two other counter-parties, TD and Manulife.

The future of big banks in the broker channel

Asked if he thinks it’s just a matter of time before the other big banks make their own moves into the broker channel, Ellis said there’s no indication of that right now.

“I guess there’s always a risk of having one share diluted as more and more participants enter the market, but I right now don’t have any clear indication that the other [big banks] are on the verge of making any significant changes with respect to their view of how they access the market,” he said.

For now, he said First National’s opportunity to work alongside the big banks as a service provider is “a great diversification opportunity for revenue streams in a way to leverage our core competencies of underwriting and both servicing, which we continue to provide as a third-party service as well.”

No outsized risk among FN’s variable-rate portfolio

In his prepared comments on First National’s lending portfolio, Ellis confirmed that there are currently no heightened challenges being posed by the lender’s variable-rate clients.

“The arrears rate on the adjustable rate portfolio continues to track that of the broader portfolio, with no signs of stress from higher payments presenting itself yet,” he said.

Part of the reason is because First National offers a true variable-rate mortgage, also known as an adjustable-rate, where payments automatically adjust based on changes to the prime rate, which keeps clients on their contracted amortization schedule.

He added that clients are now overwhelmingly choosing fixed-rate products, a trend being seen industry wide among new originations. First National reported that just 8% of its borrowers chose an adjustable-rate mortgage in the second quarter, down from 62% a year earlier.

“Also through the quarter, there was an unusually large number of borrowers selecting 3-year terms,” Ellis added. “I think some borrowers, perhaps advised by their brokers or on their own terms, viewed a shorter term, albeit at a higher rate, as the better strategy as they looked ahead to an earlier renewal and an opportunity to access what they viewed perhaps lower rates in the near future.”

Q2 earnings overview

  • Net income: $89.2 million (+61%)
  • Single-family originations (incl. renewals): $7.4 billion (-12%)
  • Mortgages under administration: $137.8 billion (+8%)
  • 90+ day arrears rate: 0.6%

Source: Q2 2023 earnings release

Notables from its call:

First National President and CEO Jason Ellis commented on the following topics during the company’s earnings call:

  • On stable earnings despite lower originations: “Despite lower originations overall, our business model proved its resiliency. Recurring revenue from servicing and net interest earned on our portfolio of securitized mortgages delivered expected stability to our financial results. Key to maintaining these predictable and recurring revenues is the continued growth of mortgages under administration even during periods of reduced originations.”
  • On the importance of the broker channel to the big banks: “The banks recognize the scale and continued growth of the broker channel as a source of distribution for residential mortgages. I think it continues to be an increasingly relevant place to originate. And I think demographically, younger and newer borrowers are using the Internet and nontraditional channels to access financial services generally, including mortgages…
  • On the financial impact of borrowers’ preference shifting back to fixed rates: “…there is a hedging aspect to committing on a fixed rate, which doesn’t exist on a commitment for an adjustable rate. Otherwise, our math to determine the appropriate rates on both products is similar and should result in similar outcomes for us.”
  • On lower mortgage prepayments: “Our return to more traditional prepayment speeds has been an important factor in facilitating [mortgages under administration] growth. Higher mortgage rates have reduced the incentive to refinance midterm and more mortgages are reaching maturity, resulting in more renewal opportunities.”
  • On First National’s Alt-A portfolio: “New Excalibur originations were down consistent with the overall residential experience. Arrears in the Alt-A book are flat compared to last quarter, and there has been no meaningful change in any of the average portfolio metrics, like loan-to-value, credit scores or debt service ratios.”
  • On origination forecasts: “In light of the last two rate hikes by the Bank of Canada and the marginal impact to affordability, we are reviewing our expectations for residential originations in the second half. We no longer anticipate that originations in the second half will exceed those from the same half last year. We still believe, however, that on a relative basis, the second half will compare to last year more favourably than the first half did.”

First National Q2 conference call