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Consistent with our forecast, and indicative of a strong commitment pipeline heading into 2025, total single family fundings increased 34% on a year over year basis. In our commercial business, our focus and expertise in the insured multiunit residential housing market drove first quarter originations up 18% reflecting both new funding growth as well as renewals. Activity in both markets was supported by seven Bank of Canada rate reductions between June of last year and March. As well as a variety of government incentives. These include the recent purchase price cap increase, and the reintroduction of a thirty year amortization for qualifying insured residential mortgages. Both changes are proving to be popular particularly in high cost cities like Toronto and Vancouver. Similarly, multi unit property developers and owners continue to take advantage of CMHC's affordable loan programs alongside time bound GST rebates for construction. Moving to our outlook, we've recently seen a downgrade in the housing market forecast from Korea, a result of uncertainty caused by the imposition of cross border tariffs and heightened risk of recession, and job loss. While this backdrop can't be ignored, First National's near term reality is different. Based on single family mortgage commitments issued and outstanding as the end of the first quarter, up significantly from last year, we expect to see year over year growth in originations continue into Q2.
9m 38s
To be clear, have not made any adjustments in our approach to pricing or credit quality to generate higher commitment levels. We are simply continuing to focus on providing good products, and responsive service to our broker partners and borrowers. In terms of credit performance, the arrears profile and our prime mortgage portfolio is relatively unchanged and remains below levels observed prior to the pandemic. Alt A arrears, however, remain elevated relative to the PRIME portfolio and are higher than the same time last year. But have fallen month over month in each of February and March. Alt A mortgages are characterized by shorter terms, and as a result, borrowers renewed more quickly into the higher rate environment of 2022 and 2023, without the benefit of five years of household income and home equity growth enjoyed by the typical prime borrower. Virtually all of the Alt A mortgages originated during the period of lowest mortgage rates between 2020 and 02/2022 have already renewed and have been servicing their mortgages at higher rates for several quarters now and are looking ahead to their next renewal which will come at lower rates. For commercial mortgages, we expect multi unit residential to be a resilient market.
11m 1s
Given the need for rental apartments, particularly affordable units. For context, however, originations and renewals amounted to a record $5,000,000,000 in Q2 last year. Which sets a high bar for comparison. Also factoring into our outlook is the fact that CMHC has also taken a more cautious view to underwriting, So, while there is still good fundamental support for the market, the environment for new CMHC originations is evolving. To summarize, the quarter featured strong growth in new and renewed mortgage production in line with our expectations, and with that growth, First National added to its foundation of recurring revenue that will benefit shareholders in future periods. Now over to you, Rob. Thanks, Jason. And good morning, everyone. Starting at the top line, 7% year over year or by $10,300,000,000 a very positive outcome considering the broader market dynamics and in the first quarter housing market seasonality. Annualized MUA growth in the first quarter itself was a healthy 4%. While higher production and strong retention are the ingredients that drive MUA, It's worth noting that new originations do not immediately contribute to earnings, which is one reason why measures of profitability did not rise with higher volumes. I'll discuss the other factors beginning with revenue.
12m 28s
Revenue increased 2% year over year despite a 2% decline in net interest revenue earned on securitized mortgages. This reflected a NIM compression of about seven basis points year over year as high margin pandemic era mortgages amortized down and asset backed mortgage paper funding costs did not immediately fall with the overnight rate cuts. As a reminder, these bank sponsored conduits generally sell longer term paper in a declining rate market, such that our cost of funds is temporarily higher. This has been accentuated with the recent Bank of Canada rate cuts. Origination for direct securitization into NHMBS CMB and ABCP programs made a large part of our strategy with about $3,200,000,000 of revenue or volume in the first quarter. Funding with securitization rather than placing mortgages with investors has the effect of deferring related revenue to future periods. As a result of lower third party underwriting revenues and lower interest earned on escrow deposits, a declining interest rate environment mortgage servicing income was lower by about 3% from the last year. Gains in deferred placement fees also lower as volumes related primarily to multiunit residential mortgages originated and sold to institutional investors for this program decreased by 6% Associated margins were also much tighter in 2025 compared to 2024.
13m 57s
On the plus side, placement fees were up 2% on a 22% increase in placement activity. The delta reflected a shift in mix favoring renewed mortgages where per unit placement fees are lower than a new residential origination. As a reminder, on renewal with an investor client, we earn an additional placement fee and continue to earn servicing revenue over the term of the renewed mortgage. Even though the renewal fees paid by investors are lower than the initial fee, without a broker fee to net against it, it is still accretive to First National's earnings. Mortgage investment income increased 15%, primarily reflecting a larger balance of mortgages accumulated for securitization even though rates were lower year over year due to the interest rate environment. This increase was somewhat offset by a reduction in our commercial bridge loan program as we placed more of this product with institutional customers. This decision reduced the mortgage loan investment portfolio for commercial by about $50,000,000 Turning to expenses now. Year over year headcount growth of 7% was the primary reason for a 7% or $3,900,000 increase in salaries and benefits expense Some of this is related to staffing in our third party underwriting business, in advance of anticipated volumes which acted as a drag on operating leverage in the quarter.
15m 24s
Brokerage fee expense declined by 12% or $2,400,000 compared to last year, despite an increase in new volumes placed with institutional investors. On a per unit basis, fees are about 9% lower. A function of prevailing market conditions in 2024 when higher incentives were required to match some of our competitors. Interest expense increased 20% or $6,500,000 because of higher use of short term funding sources to fund the larger balances of mortgages accumulated for securitization. Interest expense also includes the cost of carry for the company's economic hedging program Other operating expenses increased by 7% or 1,400,000.0. This relates to significant technology replatforming activity to discussed on our previous calls we expect IT expenses to remain elevated in the next few quarters as we upgrade our systems and migrate to the cloud from on-site servers, we do expect to generate efficiency advantages from this higher spending. In future years. Turning now to profitability, as Jason said, Q1 pre farm market value income was 16% or $10,100,000 lower than last year. The decline was due to lower revenues in various segments of the business, against the backdrop of higher costs of operating the business. Lower revenues were recorded in mortgage servicing, particularly third party underwriting, and residential securitization income with some NIM compression.
16m 58s
The higher costs include about $1,400,000 of other operating costs largely IT related, and growing headcount in place to fund the larger residential segment volumes expected in Q2 and Q3 Looking at the bottom line for shareholders, ongoing profitability supported ongoing dividend payments and annualized rate of $2.5 per share, As is often the case, in the first quarter, dividend payout ratio against after tax pre fair market value income was elevated this time at about 98%. To sum up, the first quarter unfolded as we expected with strong funding volumes, which allowed us to add to our portfolio of mortgages pledged under securitization and our servicing portfolio This will benefit First National and our shareholders in the form of income, and cash flow in future years Based on our single family commitment pipeline at the end of the quarter, we can also look forward to year over year growth in originations in the second quarter. Now, we will be pleased to answer your questions Operator, please open the lines. Thank you. Ladies and gentlemen, we will now begin question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two.
18m 22s
If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of Etienne Richards from BMO Capital Market. Your line is now open. Hey, thank you and good morning. It's interesting to see the origination numbers in single family part of which seems driven by better renewal volumes. Yet when we look at resale activity, in large urban markets, it has not meaningfully picked up this year. So why is First National seeing higher volumes and is still relatively slow? Housing market? It's a good question. I think that there are two factors leading to our perhaps relative outperformance of the broader market. One is a higher level of engagement with some of our third party investors who have empowered us with compelling rate offerings, which has made us perhaps relatively more competitive in the conventional origination space than we were to the previous year. And as a business that perhaps has a disproportionate share of the new purchase and specifically high ratio business. We've benefited perhaps disproportionately from the changes in CMHC's rules around the $1,500,000 purchase price cap and the reintroduction of thirty year amortizations for first time homebuyers.
19m 58s
So, part of the growth in year over year in dollar terms is a larger average insured mortgage size, Mortgage units are up year over year as well, however, much of the single family increase is a function of higher average mortgage size. And for what it's worth, when I speak to the mortgage default insurance providers, Their experience has also been very constructive this quarter relative to the same quarter last year. So, I think that there is something of a disconnect between what we see the media reporting in terms of housing activity and what we're actually seeing on the ground from an origination perspective. Okay, interesting. On servicing income, you raised in the financials that the third party underwriting volumes were down in the quarter So maybe to tie it back to your comments, Jason, how do you reconcile this with the increase in single family volumes that we're seeing at First National, is it driven by the same drivers that you just mentioned? Well, can speak to First National's performance. And again, I think that we may have outperformed the market marginally just with our focus on high ratio insured mortgages, and the increase in the average size of those.
21m 26s
Our third party underwriting clients our Schedule I banks who have, I think, a more particular strength on the conventional side. So I don't think they've seen the same growth in average mortgage size. So that tailwind, I don't think was in play as much for them as it was for us. I would say that as we look ahead on our third party underwriting platform, it has a lot of operational leverage in the first quarter's traditionally from a seasonal perspective fairly small, So, combination of seasonality and what we've seen recently in their own origination activity as a lot of I would say, good traction. Their pipeline heading into the second quarter is relatively strong compared to the first. So, we're actually looking forward to seeing that third party underwriting revenue line restore itself as we move into the second and third quarter. Okay, great. Thank you very much. Your next question comes from the line of Graham Ryding from TD Securities. Please go ahead. Hi, good morning. Just on the I guess, Rob, this question for you, on the securitization NIM in the quarter.
22m 46s
It sounds like there was a few pieces that weighed on there was a pretty material drop sort of quarter over quarter year over year. Can you just elaborate on what you think is going to be a recurring theme in terms of NIM compression and what was maybe not expected to recur? It sounds like maybe the mortgage prepayment charges and the asset backed commercial paper funding cost, that may alleviate, but the first component may be an ongoing sort of headwind. Is that the right way to think about it?
23m 23s
Hey, it's Jason Graham. I'll take that one. [indiscernible] one, there's three, I would say there were three specific components that contributed to the compression that we saw in the first quarter. One was, as Rob mentioned and you highlight, some of the pools that were originated in the beginning of twenty twenty were originated at wider average gross margins. Than were typical of say the entire portfolio, and those are beginning to run off So we may see that as a theme, though you've got to remember that the maturities during any given quarter are relatively small in comparison to the $45,000,000,000 portfolio at large. So NIM will change relatively slowly as a function of that. I took the opportunity to do a bit of a role forward of the NHA MBS portfolio for several quarters. Absent any new originations, the the average NIM on the single family MBS portfolio only ticks along a couple of basis points over the next few quarters. So, don't think that's going to be a major story. I think more significant is the transient impact of the compression in the in the ABCP program? I'd say year over year, I think NIM or net interest income, I should say was about a million dollars lower compared to the same quarter last year.
24m 56s
The ABCP cost of funds compression probably was at least $3,000,000 in the quarter, and this is not going to be recurring. As the old ABCB paper reaches maturity and is replaced with new, we will see the margins in that conduit restore themselves. So I don't think that that's going to be a recurring issue. And the other I think, idiosyncratic event during the quarter was the net rate differential indemnities that we did pay on the nine seventy five type single family pools was negative in the quarter for the first time in a number of quarters. And I don't think that is actually going to be a persistent phenomenon. I think that probably reverses itself again in the second quarter based on where we see rates now. So, I think generally speaking, NIM should not be a concern going forward. Way it was in the first quarter. Sorry, that was a lot. Did that answer the question?
25m 59s
That did help. Maybe I could just follow on. So my math suggests you had 48 bps in 52 quarter over quarter and 54 year over year. So what would you sort of roughly guide to for 2025? Is 48 the run rate or it sounds like there a couple of pieces that could maybe bring that 48 up a little bit higher?
26m 25s
Yeah, I would say, obviously, I can't predict the future, but I do believe there is a chance to repatriate a couple of basis points largely on the normalization of the spreads in our ABCP conduits. [indiscernible] I would say a normalization of those net indemnity payments on the single family MBS pools. So, I think there's a couple of beeps that we could catch up on. Okay.
26m 54s
That makes And then and then the only contrary to be to that would be again over the next couple of quarters, we do have some legacy pools rolling off that had sort of early pandemic era wider spreads. So, we'll see how well we can replace those with new issue.
27m 12s
Right. Okay. And then my next question would be on the placement fee side. I realized that there was a mix [indiscernible] this quarter, you had higher sort of, volumes of renewals. Relative to sort of new residential volumes. But when you look at sort of your per unit fees on those renewals and your per unit fees on your new originations, Were those lower year over year?
27m 43s
I think what you guys don't get the benefit of is, I guess, some of the separation of placement fees and the like. I think there's a really good outcome this quarter that gets lost in the mix, and it kind of goes to your question. When I look at our single family residential placement fees, relative to our broker residential broker fees in the quarter, that net, the net of our residential placement, net of the residential broker fees actually expanded by 30% in the quarter versus the same quarter last year, or was about a couple of million dollars wider and that's a function of a couple of things. One, our per unit broker fee on new originations was lower in the quarter compared to the same quarter last year. And that was specifically attributable to the fact that we were not paying as much bonus compensation to mortgage brokers for high ratio insured mortgages. And it's a function of the fact that on the placement side, a slightly higher percentage of the mortgages placed relative to the same quarter last year were renewed mortgages, where the placement fee, the per unit placement fee is in fact lower but the broker fee is zero.
29m 4s
So, combination of things. Better year over year per unit broker costs, and a slightly higher percentage of the residential mortgages placed were renewed mortgages. So, the per unit placement was lower but the net between those two things was wider And structurally, that's the thing that we're going to enjoy going forward for the rest of the year. Okay.
29m 30s
That's great. If I could sneak in one more, just feel like I'm getting a little bit of a mixed message from you on the multiunit side. On the one hand, the CMHC's increased funding from $40,000,000,000 to 60,000,000,000 but then on the other end, they sound like they're tightening up tightening up their underwriting a little bit. So pulling those two pieces together, what is your outlook for sort of steady volumes this level or does one outweigh the other? Yeah, I'll turn it over to Jeremy to answer that one, but just before I do that, I do want to highlight the fact that again, as we deconstruct placement fees and deferred placement fees, In the first quarter, a couple of large ten year deals that were slated to be part of our ten year securitization in Q1 did move into the second quarter, So, I think a little bit of again, an anomaly there in terms of period over period deferred placement fees. But as far as CMHC's stance on credit, I'll turn it over to Jeremy. Yeah, thank you. Good morning. In November of last year, CMHC made some changes to their program They'd had a very strong performance, I guess, you could say over the last couple of years with their select product that they created to add to supply in Canada.
30m 55s
They pulled back. They went essentially more risk off, I would say. And so that is likely the comment that you kind of heard us talk about and talk about with our customers. It's had more of an impact on the construction side of the business where they've limited some of their loan to cost and they've added a few other sort sort of guardrails to it, like the bonding of sub trades. So we would say that certainly on the term side, we don't really see CMHC's changes as having too much impact on our term business and our outlook for 2025. We do think it will have an impact on our construction book, which has been really strong. But, you know, we think that there was still continue to be an appetite. There is still a lot of supply that is being considered in Canada, and we're going to have to just work really hard to make sure we're in front of the right borrowers that will continue to go forward. So as much as yes, CMHC has gone a little bit risk off, we don't think it's gonna have a huge impact on us.
31m 58s
Probably worth also just tying into the tail end of that, the fact that we have such a large CMHC insured construction book, that even if new term transactions were to moderate, we have a natural pipeline of constructions that construction deals that as they come online will transition into new term mortgages for sale into the CMB. So, a nice built in pipeline there.
32m 24s
What would your mix be between construction lending and term multi So in the quarter, we did $2,700,000,000 of new business. And of new business. The construction component of it would represent advances in the quarter of about a half a billion dollars, So that's, you know, we're on average, I think we're putting out new advances in the range of $2,000,000,000. But overall, so obviously more business going towards the term. I think that I would say term would typically be about 75% overall versus the construction side of it. That would be the way think about our advances. But I don't always sort of put it in those terms.
33m 19s
That is helpful. Thank you. That's it for me.
33m 25s
Ladies and gentlemen, as a reminder, if you would like to ask a question, If you are using a speakerphone, make sure you lift your handset before pressing any keys. Your next question comes from the line of Jaeme Gloyn from National Bank Financial. Please go ahead.
33m 50s
Yes, thanks. Good morning.
33m 53s
Just wanted to follow-up on the net placement fee [indiscernible] to track and just sort of, benchmark the performance because it's obviously difficult to to guess the mix of funding. What I've noticed is that, Q1 tends to have a higher net placement fee margin if I'm taking the revenue versus the expense Is that something that you would expect to be consistent this year since we're digging into those details a little bit more?
34m 27s
Sorry, I'm not aware of a correlation between the quarter and net placement fees.
34m 34s
If there is, I think it's coincidental Definitely be a mix of renewal versus new, I guess. The new is typically I guess, a lower in Q1. Yeah, but originations are lower. Kind of follows the renewals should be you know, Yeah, I'm not, so what is it you're seeing in particular, or over how many Q1 have you seen this, James? Let's say going back to 'twenty one at least.
35m 3s
If there's anything that jumps to mind, Rob, have you in Q1, do you ever perhaps we benefit from the over over allocation or accretion of any kind of expected broker expenses that you then release back in Q1 if they didn't materialize? Like annual volume bonuses that we may have accrued for that maybe we didn't pay out, Do those Yeah, typically we like to over accrue, guess, or be conservative in the year. And then Q1, we take back any positives where falling bonuses aren't as high as we we budgeted in the previous year. So there's a little bit of that, but I mean, it's not like a big, big number. I don't think it's where we know. We know what we're doing. Yeah, I would say though, if there were to be a theme as we roll through the rest of this year, and the cohort of twenty twenty originations, especially as we move into the second part of the second quarter and beyond. That cohort of originations was so strong in 2020 that all else being equal, the mix of mortgages being placed with our institutional investors, will be relative to history perhaps a higher concentration of renewed mortgages, which means there won't be broker fees.
36m 29s
So that net of placement against broker fees should have a fairly strong trend to it as we move through the year. Because of that change of mix.
36m 41s
Yeah, no, I agree with that point and yeah, it's a fair I think it's a fair assumption. We'll see how it plays out. Take maybe I'll take a little bit of that offline then and just sort of, like, dig in a little bit to make sure we're we're on the same page. The other question I just wanted to clarify as well was just going back to the securitization discussion and around the mix shift. So the 2020 mortgages coming off, and then some narrower spread mortgages from what's say, like, '22, '23 where rates are moving higher. That's your your commentary was that's gonna be a couple of beeps of drag on the on the NIM. You know, Is that like for the year or for sort of each quarter going forward for the next for the next few I look at it. So what I did was I I took all of the outstanding nine seventy five type NHA MBS and I looked at the gross margins at origination for each of our pools outstanding So, the weighted average mortgage coupon less the MBS coupon and I just rolled that whole portfolio forward. And what I found was that the sort of average gross margin is around 100 basis points, and it didn't move significantly over the next couple of quarters.
38m 12s
Again, I think just because it's a part of a much larger portfolio, Now, of course, a big question is what kind of gross margin will we be replacing those maturing pools with in the coming quarters?
38m 26s
I noticed that you used some colorful language, Jaeme, in your quick take to describe our mortgage spreads as off the leash this quarter, I think that you were probably referring to what's that?
38m 42s
I don't know my language. Oh, Well, at least it was in the National Bank Quicktake. But anyway, I think it have been referring to the table that Rob produces in the MD and A which simply captures on the last day of the quarter, the insured mortgage coupon versus the prevailing five year government of Canada bond, And certainly that was lower when it was measured than it was at the same time in the last quarter. But for what it's worth, over the entire quarter, the day to day to day average mortgage coupon versus the prevailing exit strategy of a fully priced NHA MBS yield, was actually right on target. So, the last five years that spread of insured mortgage coupon to MBS yield has been 98 basis points And in Q1, all of our insured mortgage origination ends day over day over day compared to the daily MBS yields was 97 basis points. So, I don't think the new origination spreads are quite as dire as they were perhaps thought to be.
40m 5s
Understood on that. On that point. I guess there's still also a factor from the hedging and when the mortgages are actually placed So is that still That is absolutely right. Yeah. So, it makes it difficult to know with great precision because there's accretion of new issue discounts on the MBS pool price when they were issued, There's the outstanding gains and losses that have been amortizing There's the idea that yes, there were hedging losses incurred at the time of origination five years ago that were encouraged during the commitment period that were expensed at the time and did not form part of the capitalized amounts being amortized into NIM. So it is difficult to predict with perfect precision what's going to happen as those old fools run off. But from what I can see with full transparency and clarity in terms of that gross margin, I'm not expecting anything significant.
41m 10s
Okay. I'll leave it there. Thanks, guys. Appreciate it.
41m 16s
I'll take an opportunity maybe just to address I'm just going to address one other thing and Jim I'm not dumb it on you, but you did comment on how servicing missed big in the quarter I would say this about servicing, because again, I don't think you guys get the benefit of the details in our reporting, but when I think about our servicing, not just residential but commercial, there's really two parts to it. Or three parts. There's core servicing, which is core business activities, the fees we receive from both the borrowers and from our investors who purchase mortgages from us. And those core servicing activities were up 7% in the quarter compared to the same quarter last year.
42m 4s
As Rob mentioned, we do include our third party underwriting fees as part of that servicing line. Those were the most significant piece of the year over year change.
42m 15s
Combined with the fact that prevailing interest rates are so much lower that the passive float interest we earn on those collections in the servicing book were lower as well. So, I mean, again, that will persist for a couple of quarters while rates are lower, but the core business of servicing has certainly grown as expected with MUA.
42m 39s
And while we're overall we would have liked to have seen better bottom line numbers this quarter, This business continues to be a function of growth in originations, renewals and growth of MUA, which will drive a persistent growth in servicing revenue and net interest income going forward. So generally speaking, I think we feel much more positive about the quarter than may have otherwise been perceived out there.
43m 7s
And that's it.
43m 9s
There are no further questions at this time. I'd like to turn the call over to Mr. Jason Ellis for closing comments. Sir, please go ahead. All right. Thank you, operator. We look forward to hosting our virtual annual meeting of shareholders on May 13, and reporting our second quarter results in July. Thank you for participating and have a good day.
43m 32s
This concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Key Insights
Total single family fundings increased 34% year-over-year, and commercial originations rose 18%, driven by strong demand, government incentives, and Bank of Canada rate cuts; the company expects year-over-year growth in originations to continue into Q2 based on a robust commitment pipeline.
Revenue grew 2% year-over-year despite a 2% decline in net interest revenue on securitized mortgages, with NIM compression of about 7 basis points due to amortization of high-margin pandemic-era mortgages and temporarily higher funding costs.
Mortgage investment income increased 15% due to a larger balance of mortgages accumulated for securitization, while expenses rose mainly from a 7% increase in headcount and ongoing technology investments; brokerage fee expense declined 12% despite higher volumes.
Q1 pre-fair market value income was down 16% year-over-year due to lower revenues in mortgage servicing and residential securitization, as well as higher operating costs; the dividend payout ratio was elevated at about 98%, but ongoing profitability supports continued dividend payments at an annualized rate of $2.50 per share.
Management expects NIM to stabilize or improve slightly in coming quarters as transient funding cost pressures abate, and sees continued strength in multi-unit residential lending despite some tightening by CMHC; a higher mix of renewals (with lower broker fees) is expected to benefit net placement margins through the rest of the year.
