Against a challenging economic backdrop, First National managed to outperform in the third quarter thanks in part to continued strong mortgage originations.

In fact, the country’s largest non-bank lender said it saw single-family mortgage originations (including renewals) surge 26% year-over-year to $8.3 billion.

It explained that a surge in real estate activity in the second quarter, which coincided with the Bank of Canada’s temporary rate pauses before hiking again in June and July, drove the higher funding volumes in the third quarter.

Growth in originations came from pre-approvals in earlier periods turning into funded deals and more mortgages reaching term maturity.

“Pre-approvals originated in earlier periods converted into funded deals [in Q3] as more borrowers realized on the value of those pre-approvals, as prevailing rates continue to move higher,” President and CEO Jason Ellis said on today’s investor conference call.

“Growth was also supported by more renewal opportunities, as borrowers chose not to refinance midterm into higher interest rate environments, allowing more mortgages to reach maturity,” he added.

Commercial loan origination, also including renewals, was also up 30% in the quarter to $3.3 billion due to demand for CMHC-insured multi-family mortgages.

Expect activity to slow next quarter

While much of the funding activity realized in the third quarter was a result of real estate activity and pre-approvals from the previous quarter, Ellis said the Bank of Canada’s summer rate hikes are expected to similarly slow activity in the fourth quarter.

“In September, new application levels were well below the same month last year and fundings in the month decelerated relative to the quarter overall,” Ellis said. “The leading indicators point to a reduction in residential origination in the fourth quarter compared to Q4 last year. What we see in the housing market, generally, would suggest First National is not alone.”

Borrowers remain resilient

As for existing clients, Ellis said borrowers are continuing to hold up in the face of higher renewal rates.

This includes the bank’s Alt-A clients, who generally have shorter terms and, many of whom, have already renewed their loans.

“We’ve noticed that our retention rate has been good and that the borrowers are managing their new payments well,” Ellis said. “Fortunately, just as the adjustable rate borrowers have adapted well relative to the new rates, so have our Alt-A borrowers.”

Q3 earnings overview

• Net income: $89.2 million (+61%)
• Single-family originations (incl. renewals): $7.4 billion (-12%)
• Mortgages under administration: $141.9 billion (+8%)
• 90+ day arrears rate: 0.6%

Source: Q3 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 First National’s broker channel market share: “Anecdotally, it would seem that year-to-date, we have increased our share within the mortgage broker channel based on our year-over-year change in funding compared to what we hear some of our large broker partners describing is their own year-over-year changes. In terms of competitiveness, it’s always a fiercely competitive market and I don’t think it’s any less competitive.”
  
• On borrower resilience: “First National borrowers are generally holding up very well against the stress of higher interest rates. We did see a modest uptick in the 30-day arrears rate in the quarter, perhaps a sign that borrowers most at risk are starting to feel the effects of the most recent Bank of Canada rate increases. Nonetheless, residential arrears remain well below pre-pandemic levels.”
  
• On mortgage product preference: “Fixed rates represented 82% of new commitments issued in the quarter, compared to 48% last year.”

• On FN’s adjustable-rate portfolio: “For mortgages under administration as a whole about 1/4 of mortgages are adjustable rate where payments change with every change in the prime rate such that borrowers remain on their original amortization schedules. Once again, the arrears rate on that adjustable rate portfolio continued to track that of the broader portfolio.”
  
• On FN’s Excalibur (alt-a) clients handling higher renewal rates: “There’s little to no losses in that there’s a great deal of equity in the underlying mortgages. And other than the very small blip we saw from the peak of the market in, say, March or April of 2022, most of the borrowers enjoyed an increase in that equity while they held their mortgage. They do tend to have shorter terms and more of them will have experienced renewal into new and higher rates than on the prime book in relative terms. Fortunately, just as the adjustable rate borrowers have adapted well relative to the new rates, so have our Alt-A borrowers.”
  
• On prepayment speeds slowing: “Our prepayment speed on the existing portfolio has decelerated significantly since the pandemic and the obvious reason for that is borrowers now with relatively low mortgage coupons are not incented to break early and refinance away in what is now a much higher rate environment…Looking at our own outstanding pools, I think our annualized liquidation rate in the quarter on our fixed rate MBS was below 6%. During the pandemic, we saw that in the mid to high teens and I think the long-term average I would characterize in the 10% to 12% maybe 8% to 12% depending. So, I would say we’re actually running slower than even the long-term at this moment.”

• On the federal government’s increase of the Canada Mortgage Bond program from $40 billion to $60 billion: “For First National, an active issuer of NHA-MBS and seller into the CMB program, this means additional liquidity…This is one of the few times where I think changes have been made to the program that may have a disproportionately positive impact on the company, as the largest originator of multifamily mortgages in the country, these changes will create liquidity that will directly support our key products…I think that it’s possible that we could see, in terms of our access to quarterly CMB allocations, approximately 50% more than we had been seeing in previous years. So in absolute dollar terms I don’t know maybe $200 million to $400 million a quarter of extra CMB funding.”
  
• On the federal government’s ongoing review of the CMB program (and the potential that it will be moved from public markets to be funded directly by the Bank of Canada): “I think we’re looking ahead to a fall update from the Department of Finance in November. We’re hoping for some clarity in that as it relates to their decisions around the future of the Canada mortgage bonds. So we wait on that.”

First National Q3 conference call

earnings earnings calls First National first national conference call first national earnings first national earnings call First National Financial Jason Ellis Lender Calls lender earnings

Last modified: November 1, 2023