First National Financial Corp

TSX:FN

Earnings Call Analysis

Company's Strong Q3 Performance and Dividend Hike

The third-quarter results surpassed expectations with pre-fair market value income at $95.5 million, a 98% increase from the previous year, driven by exceptional housing market activity and higher interest rates benefiting mortgage renewals. Mortgages under administration (MUA) grew by 12% annually, the fastest in 8 years, leading to record levels. Revenue metrics rose with net revenue hitting $272.5 million, marking a 6% increase from Q2. Dividends increased by $0.05 to $2.45 annually effective December, with a comfortable payout ratio. The outlook anticipates strong securitization net interest margin (NIM), good renewal opportunities, and high escrow interest income to support profitability into Q4. Additionally, persistent factors like population growth and limited housing supply are expected to underpin market prices, with a potential for less restrictive monetary policy in 2024.

Surpassing Expectations with Growth and Increased Dividends

The company presented a remarkable performance in the third quarter, with pre-fair market value income reaching $95.5 million, nearly doubling (a 98% increase) from the previous year's quarter. This significant outperformance was attributed to a surge in housing market activity and a robust pipeline of new mortgage commitments and pre-approvals prior to interest rate hikes by the Bank of Canada. Residential origination volumes expanded by 26% year-over-year to $8.3 billion, while commercial origination volumes grew 30% to $3.3 billion.

Strong Mortgage Portfolio Growth

Mortgages under administration (MUA) saw an increase, with residential mortgages growing by 8% and commercial mortgages by 14%, culminating in a total of $141.9 billion. This growth was supported by slower prepayment speeds, which have returned to more traditional levels, contributing to the overall expansion of the mortgage portfolio.

Revenue and Profit Metrics Climbing Year-Over-Year

All key financial metrics indicated year-over-year improvement, showcasing the company's resilience amidst market volatility. This positive trajectory in revenue and profits was further solidified by the Board's decision to raise the annual common share dividend by $0.05 to $2.45, slated to start with the December payout. The company's robust performance enabled the accumulation of additional retained earnings, which in part facilitated this dividend increase.

Sound Credit Performance Amid Rising Interest Rates

The company's borrowers have generally coped well under the stress of higher interest rates. Although there was a minor increase in the 30-day arrears rate, residential arrears remained below pre-pandemic levels. Moreover, fixed rates made up 82% of new commitments, which was a strong shift from the previous year's 48%, indicating a cautious approach by both the company and its borrowers against interest rate fluctuations. Looking ahead, though the company expects headwinds in the fourth quarter with a potential decline in originations, ongoing population growth and housing supply constraints are likely to continue underpinning property prices.

Maintaining Strong Revenue Trends Despite Challenges

Net revenue, excluding the impact of higher interest expenses related to funding securitization portfolios, exhibited a 6% sequential increase to $272.5 million. This improvement was despite a quarter that saw gains on financial instruments due to rising bond yields. When adjusting for these fair value-based revenues, net revenue still posted a 21% increase from the second quarter of 2023. Broker fee expenses aligned with higher single-family origination placed with institutional customers, but per unit broker fees were about 8% lower compared to the previous year. Salary and benefit costs went up by 7% year-over-year due to variable compensation for commercial underwriting and inflationary pressures, pointing to a tighter job market situation for financial services in the future.

Prepared for Future Headwinds with Confidence

The company is gearing up for lower originations in the fourth quarter but expects to retain its profitability edge from factors like wider securitization NIMs (net interest margins) and increased renewal opportunities. The decision to increase the dividend payout reflects the company's continued profitability and confidence in its ability to manage efficiency despite anticipating lower operating leverage. With a record value in mortgages under administration, the company sits on a solid foundation to generate continued mortgage servicing revenues and uphold its profitability.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning and welcome to First National Third Quarter Analyst Call. This call is being recorded on Wednesday, November 1, 2023. At this time, all callers are in a listen-only mode. But later, we will conduct a question-and-answer session. Instructions will be provided at that time on how to queue up. Now, it's my pleasure to turn the call over to Jason Ellis, President and Chief Executive Officer of First National. Please go ahead, sir.

[Jason Ellis, executive]

Good morning, welcome to our call and thank you for participating. Rob Inglis, our Chief Financial Officer, joins me and will provide his commentary shortly. Before we begin, I will remind you that our remarks and answers may contain forward-looking information about future events or the company's future performance. This information is subject to risks and uncertainties and should be considered in conjunction with the risk factors detailed in our management discussion and analysis. Third quarter results exceeded our expectations. Pre-fair market value income of $95.5 million was 98% higher than the same quarter last year. This outperformance was driven by several factors, including an acceleration in housing market activity prior to the resumption of Bank of Canada rate increases in June and July. This temporary reignition of the market created a large pipeline of new mortgage commitments and pre-approvals.

In the quarter, pre-approvals originated in earlier periods converted into funded deals as more borrowers realized on the value of those preapprovals as prevailing rates continue to move higher. 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, including renewals, residential origination of $8.3 billion was 26% higher year-over-year.

Commercial origination, also including renewals, was $3.3 billion up 30% year-over-year on demand for CMHC-insured multifamily mortgages. With this performance, mortgages under administration reached $141.9 billion with residential and commercial mortgages under administration, up 8% and 14%, respectively, from last year. MUA growth was assisted by slower prepayment speeds.

As noted in recent quarters, these have returned to more traditional levels. The combination of MUA growth and the effects of higher interest rates drove all revenue and profit metrics higher on a year-over-year basis. Results compared sequentially to the second quarter tell much the same story. Rob will speak to that in his comments. After a weaker first half when total originations were down in the order of 14% year-over-year, we are pleased with third quarter performance and the resilience of our business model through this volatile period in the market.

That resilience reflected in consistent profitability provided the basis for our Board's decision to increase our common share by $0.05 to $2.45 annually, effective with the payment in December. In addition, the Board approved a special dividend. The third quarter was instrumental in that decision as strong results allowed us to build extra retained earnings.

When that capital is not needed for near-term growth, First National discipline dictates that we distribute it as dividends. We followed this approach for many years and believe it has served our shareholders and First National well. This is the benefit of having a capital-efficient business. I'll transition now to our near-term outlook. Although not evident in third quarter results, residential mortgage originations and applications began to decelerate after the Bank of Canada reentered the market with the July rate hike.

In September, new application levels were well below the same month last year and fundings in the month decelerated relative to the quarter overall. This deceleration continued through the early weeks of October. These monthly readings of new commitment activity translate into funded mortgages in the future. And 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. Depending on future Bank of Canada policy, Q1 may also show some weakness in origination. For commercial origination, the outlook for the fourth quarter is similar as buyers and sellers grapple with valuations in this higher interest rate environment, resulting in relatively fewer transactions.

On the positive side, policymakers have recently made 2 key moves to address the critical shortage of affordable rental housing in Canada, a market in which First National is a leading participant.

On September 14, the federal government announced it would eliminate the GST on the assessed value of completed rental units, which then triggered several provincial governments to convey their plans to reduce or eliminate the application of their sales taxes. Then on September 26, the Department of Finance announced a $20 billion increase in the annual Canada mortgage bond issuance limit. As you know, the majority of multifamily mortgages in Canada are CMHC insured, and the majority of those are funded through the Canada Mortgage bond.

Those additional funds create confidence for developers that there will be long-term funding available at the end of construction. For First National, an active issuer of NHA MBS and seller into the CMB program, this means additional liquidity. Moving to the credit side. 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. Fixed rates represented 82% of new commitments issued in the quarter compared to 48% last year. 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. To sum up, while the third quarter exceeded our expectations, we anticipate some headwinds in the fourth quarter as originations are trending toward a year-over-year decline. Despite the reduced housing activity, population growth, and ongoing lack of supply in the housing market should provide support for prices. With inflation moving in the right direction, there is also renewed hope for a return to less restrictive monetary policy in 2024. Rob, over to you.

[Robert Inglis, executive]

Thanks, Jason, and good morning, everyone. MUA Increased 12% on an annualized basis during the third quarter, which is the fastest rate of annualized growth we've seen in about 8 years. Notwithstanding slow origination in Q4 for both business segments, we still expect MUA to finish the year at a record level, supported by renewal retention and historically low prepayment speeds.

Turning now to financial results with a focus on the sequential Q2 to Q3 comparisons growth in the portfolio included Alt-A and the commercial segment combined with higher rates, which led to a 12% increase in absolute net interest income on mortgages pledged under securitization. Net interest margin benefited from slower prepayment speeds and a relatively stable interest rate environment, where rates of prepayment mean lower amortization of capitalized origination expenses and other securitization that is fees.

Looking now to the fourth quarter, we expect securitization NIM to remain comparatively strong relative to Q3 and to last year. With higher residential origination volumes sold to institutions and stability in per unit fees, Q2 and Q3 placement fee revenues increased sequentially by 14%. Gains on deferred placement fees, which we earn in originating and selling commercial mortgages to institutional investors increased 7% between Q2 and Q3, reflecting strong volumes of origination for this program.

Investment income showed the largest sequential increase, up almost 40%, a direct result of higher interest earned on our mortgage and loan investment portfolios and the mortgages held for securitization. Selecting growing MUA mortgage servicing income was higher by 2% sequentially. This reflected the continued benefit of higher interest on escrow deposits and comparatively solid success in the marketplace by our third-party customers for whom we provide underwriting services.

Excluding the impact of higher interest costs incurred to fund the securitization portfolio, net revenue was $272.5 million, a 6% sequential increase. The third quarter featured gains on financial instruments as bond yields increased and the value of the company's short bond position held against single-family commitments increased. However, excluding these fair value-based revenues, net revenue was $254 million, a 21% increase from Q2 2023.

Turning to the other side of the ledger, broker fee expense in the quarter reflected higher single-family origination placed with institutional customers. Per unit broker fees were about 8% lower than last year when the company offered additional incentives in a more competitive market. On a sequential basis, per unit fees were comparable to those paid in Q2. While flat to Q2, salaries and benefit costs increased 7% year-over-year in Q3.

At the same time, FTE was 7% lower year-over-year due to attrition, which did not need to be addressed. This divergence reflects higher incentive-driven variable compensation for commercial underwriting as well as inflationary pressure on annual merit increases. Looking ahead, a weaker job market and financial services appears to be on the horizon. And with it, less competition for talent and a return to a more normal wage inflation levels. As a general policy, First National employees great talent invest in the training of its people and seeks to operate with a stable headcount.

Jason mentioned Q3 pre-fair market value income increased by 98% year-over-year, our core measure of profitability was also up 6% between the 2 quarters. Dividend payments in the third quarter were made at an annualized rate of $2.40 with a payout ratio against net income attributable to common shareholders, about 44% or 52% if you exclude the gains and losses on financial instruments.

The pre-fair market value payout ratio was 61% through the first 9 months of 2023. Clearly, First National's track record of ongoing profitability provided ample support for the Board's decision to increase the dividend to an annualized rate of $2.45 commensurate with the December payment. This is the 17th such increase in distribution since our IPO 17 years ago.

In closing, we do expect to see lower originations in Q4 with the impact on our efficiency levels from lower operating leverage. However, a lot of the good things that contribute to outperformance in Q3 should persist, including wider securitization NIMs, higher interest on cash held in escrow, increased renewal opportunities and retention rates. And of course, the record value of our mortgages under administration will continue to drive mortgage servicing revenues in support of ongoing profitability. Now we'll be pleased to answer your questions. Operator, please open the lines.

[Operator]

Thank you, sir. [Operator Instructions] And your first question will be from Nik Priebe at CIBC Capital Markets.

[Nikolaus Priebe, analyst]

I was just wondering if you could help expand on or clarify some of the changes that have been announced or being contemplated for the CMB program. So the annual issuance limit was increased, that's constructive. But then on the other hand, there's an unrelated review of the program ongoing, the outcome of which is unknown. Can you just help us tie all this together and better understand what it might mean from First National standpoint and your ability to grow origination volumes?

[Jason Ellis, executive]

Sure, Nik, it's Jason. So first of all, the ongoing contemplation of moving the Canada mortgage bond out of public markets and over to be funded directly by the Bank of Canada through the subsequent issuance of regular government bonds is completely separate and distinct from the recent announcement to increase the size of the program. So I'll break them down into 2 pieces.

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. Separately, the increase of the annual CMB program from $40 billion to $60 billion is exclusive for the securitization of multifamily mortgages.

And the intention, as it's been described, is to increase the 10-year CMB issuance in November from the usual $4 billion to as much as $8 billion and then to increase the 5-year CMB issuance from a typical $5 billion to $6 billion or more if they aren't able to issue the full $8 billion of tenure in November.

In support of this additional CMB capacity, CMHC also provided an additional $5 billion of underlying NHA MBS guarantee fees, again, exclusively for the use in the creation of multifamily pools. So what does this mean for First National. This is 1 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 one of our key products.

[Nikolaus Priebe, analyst]

Okay. And you would typically maximize your allocation to that program on an annual basis, is that correct?

[Jason Ellis, executive]

Yes. We're -- we make maximum utility of CMHC securitization programs and the underlying guarantee piece.

[Nikolaus Priebe, analyst]

Okay. That's helpful. And then just 1 other question for me. I was hoping you could refresh us just on the decision-making process around the special dividend. I believe in the past, there's been a discussion around a minimum level of equity that you kind of target holding in the entity. Is that still the case today? Or how should we think about capacity to pay a special dividend going forward?

[Jason Ellis, executive]

Yes. So it's not that there's an absolute dollar amount, which represents minimum equity. It's more about a minimum amount of, call it, surplus equity that puts us in a position to either grow with opportunities or respond to contingencies that require additional cash so it's not that we're targeting a certain amount of equity, but we're always making sure that we have sufficient amount of unrestricted liquidity available to us. So Rob and I work with the Board to think about the right amount of liquidity to move into the next year with. And then if we have equity beyond that, as we typically do, we will distribute it back to the shareholders.

[Nikolaus Priebe, analyst]

Understood.

[Operator]

Next question will be from Etienne Ricard at BMO.

[Etienne Ricard, analyst]

Given the strong origination numbers in Q3, would you have a sense as to how your market share is trending in the broker channel? And do you believe the environment today is less competitive as the banks face higher capital requirements?

[Jason Ellis, executive]

So we used to have a fairly clear view of our share in the broker channel as Finastra, which is the platform that most brokers used to use to deliver their applications would publish market share based on the data they had. They stopped doing that, I think, in June of last year. And so we've lost that very clear line of sight in terms of our 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.

So I think that we generally feel as though we've gained some share this year. In terms of competitiveness, it's always a fiercely competitive market, and I don't think it's any less competitive. If we think about the banks as competitors both directly in the broker channel and/or indirectly as competitors through the branches and their mobile mortgage specialists. I think that additional capital, additional reserves against potential losses and the like, may force them to move rates up relative to their cost of funds, which would then perhaps allow mortgage finance companies like First National, a little bit more latitude in terms of exploring alternative securitization funding strategies like term RMBS. So we'll see how that trend continues. But ultimately, it is a competitive market and remains so.

[Etienne Ricard, analyst]

Okay. And just to circle back on changes to the CMB so if we look at the total securitizations today, it's about -- I think you're originally about $13 billion on an annual basis. As a result of the changes brought forward, where do you expect this capacity to move to.

[Jason Ellis, executive]

Sorry, repeat the question 1 more time? I'm not sure I fully understood it.

[Etienne Ricard, analyst]

Yes. So if I look at over the past 12 months, the total number of securitizations you've done it's approximately $13 billion. I'm just...

[Jason Ellis, executive]

NHA MBS? Of everything, including ABCP. Okay.

[Etienne Ricard, analyst]

Correct, yes. So I'm just trying to get a sense as to how much -- where this will move to as a result of the increase CMB Capacity.

[Jason Ellis, executive]

In an idealized situation, assuming we do continue to have the scale to originate mortgages to maximize our utility into the CMHC securitization programs. I imagine that the typical allocation received on a 10-year CMB for an individual participant has tended to be around, say, $200 million to $300 million to the extent that the amount of CMB capacity is increasing by what, 50% perhaps that translates into 50% more capacity in 5- and 10-year CMB.

So let me reset the question or reset the answer here. 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. I'm just -- this is back of the envelope.

[Operator]

Next question will be from Jaeme Gloyn at National Bank Financial.

[Jaeme Gloyn, analyst]

Yes. Thanks. First question, I just wanted to dig in on the origination volumes, which were, of course, really, really strong. And obviously, outperforming what it seems like the housing market equity would suggest that maybe your peers given your market share comments. But I guess are you seeing maybe looking -- digging into a breakdown here, are you seeing more people refinancing with larger mortgages? Or could you offer maybe some color in terms of how much of that origination number is renewal clients versus new customers coming to First National? Just trying to dig into that outperformance relative to others.

[Jason Ellis, executive]

So the new origination relative to renewed mortgages, that ratio has been relatively steady for a number of years now, and this quarter didn't change from that traditional ratio. So our relative outperformance such that it wasn't driven by new origination or renewals specifically. In terms of the split of new origination between purchases and refis, I don't know. I don't have that in front of me, but I have no reason to believe that we originated more purchases or refis relative to each other than we normally would.

The 1 thing we have seen, as Rob mentioned, is that 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. So if I were to draw some sort of potential conclusion from that, maybe overall refinancing activity in the market has slowed down. But I don't know off the top whether or not our numbers show that.

[Jaeme Gloyn, analyst]

Okay. Following on that last comment around prepayment speeds, and I think it was Rob mentioning that wider NIMs or, I guess, NIMs at these levels would persist? Is it -- does it really just come down to the prepayment speeds at this point that would sustain these securitization NIMs at around 59, 60 basis points. And I guess I just want to understand the commentary in the MD&A suggests that we've approached more traditional levels, but are we running below more traditional levels? Or is it kind of rate at normal?

[Jason Ellis, executive]

No. I guess to be fair, traditional understates it. I did take a peek the other day at our fixed rate NHA MBS portfolio, CMHC has a great set of statistics on NHA MBS prepayment speeds both industry-wide and by issuer. 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. But -- so I would say we're actually running slower than even the long term at this moment. The small offset to that, for what it's worth, is on the adjustable rate MBS portfolio. Those liquidation rates are actually a little bit above long term and that's a function of borrowers that aren't actually prepaying and leaving, but are rather exercising their privilege to convert from an adjustable rate to a fixed rate and over the course of the year, we saw a little bit more of that than you would typically.

And when a mortgage converts, it's forced to liquidate from the MBS pool. But fortunately, it doesn't leave First National. So 1 of the things that's been driving NIM is, one, compared to the really, really fast prepayment speeds during the pandemic, where Rob was forced to accelerate the amortization of capitalized costs faster than scheduled. We're seeing a little bit of the opposite of that now. So it's really had a significant impact.

[Robert Inglis, executive]

And I'll add too, it's interesting before when this prepaid in the pandemic the cash from those prepayments goes into trust for 30 days, whatever it is between receipts and with that we pay off the bondholders on the MBS side, if I was earning sort of less than 2% on the overnight rate 2 years ago. Now it's earning 5% because SEDAR rates are so high. So when all prepayments happening before, it was like a loser. You're getting 2% on your cash, your asset and you're paying 3% on the MBS side. Now it's the opposite. You're paying 3% on the MBS and you're getting 5% of that cash sits in trust, a lower amount of cash, but you're carrying it positively.

[Jaeme Gloyn, analyst]

Right. And so just getting back to the first part of the question is like the wider NIMs and sustainability, is it really around prepayment speeds that we should be tracking for how that should progress? And at these, like, let's say, at 6%, if that holds, like there shouldn't be that much more expansion in NIM from here. Is that a fair comment? Or are there other factors.

[Jason Ellis, executive]

That's probably a reasonable outlook. Yes, it's hard to imagine getting much more of a lift from that phenomenon from this point on -- the higher interest rates help -- sorry...

[Jaeme Gloyn, analyst]

Are there other factors beyond prepayment that would drive the NIM much higher than we are today.

[Jason Ellis, executive]

I mean there's a lot of variables that go in to influencing NIM, but I would say that -- the most important 1 that we should talk about, of course, is the spread on the new mortgage originated against the underlying cost of funds of either the ABCP or the NHA MBS into which is being funded but because we are dealing with such a mature portfolio of $39 billion of mortgages under admin even a period of relatively tight or relatively wide spreads at origination will only just nudge NIM slightly.

It's really as we move through cycles as periods -- extended periods of tight spreads run off the book and/or the opposite, wider spreads run off. So it should be a general gradual movement. It's tough to see things really move it as swiftly as it's moved other than this really whipsaw in prepayment fees that we've experienced from the lows of the pandemic in terms of rates to today.

[Jaeme Gloyn, analyst]

Great. Great. That's very helpful. One last 1 and I'll requeue. Part of the -- what was driving the securitization upside is the success in the Excalibur program. And 1 of the comments around Excalibur is that from the MD&A is that there's almost no loan losses. And that's pretty easy to understand why there's almost no loan losses there at this point.

But I'm curious is if you have any data on delinquencies in that portfolio and how those borrowers that are on typically shorter-term mortgages are performing from a delinquency standpoint or a rear standpoint, given the higher mortgage payments you'd be facing today versus a year or 2 years ago?

[Jason Ellis, executive]

Yes. So as you suggest, it's easy to understand the fact that there are -- 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 '22, most of the borrowers enjoyed an increase in that equity while they held their mortgage. They do tend to have shorter terms and you're right, 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. We've noticed that our retention rate has been good and that the borrowers are managing their new payments well. That said, there is a slight separation between the 30-day arrears rate in the Alt-A book, and the comparable rate in the prime book, as 1 would expect, given the nature of some of the borrowers that said, it is well below what we provisioned against and much lower than anything we would have cautiously predicted. So far, the Alt-A portfolio is holding up extremely well, and we're not seeing any canary in the coal mine warnings on it.

[Jaeme Gloyn, analyst]

It's great. Thank you very much.

[Operator]

[Operator Instructions] And your next question will be from Graham Ryding at TD.

[Graham Ryding, analyst]

Maybe just on a similar theme. I think you made some comments at the beginning of the call, which I didn't quite catch around sort of arrears trends deteriorating slightly. Is there anything you can quantify on what you're seeing, maybe both in your residential and commercial books?

[Jason Ellis, executive]

Yes. I mean, deteriorating is a strong word. Nothing to speak of really in commercial. Our 90-day -- no, sorry, the 30-day arrears rate. So if you really want to make it as tough as you can make it, the 30-day arrears rate on the residential book at the end of the second quarter was 12 basis points. At the end of the third quarter, it was 14 basis points. So that's about as explicit as I can be on that. It's higher -- deterioration maybe was the wrong word. And the 90-day rate is -- yes, the 90-day rate is like unchanged and it's less than 6 basis points.

[Graham Ryding, analyst]

So lower than what we're seeing in the mortgage market overall in Canada in your portfolio?

[Jason Ellis, executive]

We've traditionally enjoyed an arrears rate that as far as we could tell, compared favorably to that, that you could see from, say, the banks. I don't know where the banks are at -- the CBA data, yes.

[Graham Ryding, analyst]

Yes. Okay. Okay. That's helpful. Last quarter, there was an offset within your interest expense. So I guess the question probably for Rob, but you're getting some carry benefit that was sort of offsetting your overall net interest expense. Was that a factor in the quarter? And if so, was there anything that you would flag?

[Robert Inglis, executive]

Yes, that's still the case. I mean, Canada's for 5 years now, it's a 4% yield kind of thing, I think -- every day. But on the short end, when we're boring the bonds to fulfill the repo agreement or exceed rates in the 5%. So we're basically picking up a 1% margin on the short Canada's. And those are short Canada's, right that are against single-family commitments, the ones that are against multifamily commitments and funded mortgages go through OCI.

So only the bit that -- last year, the bit that funds mortgages just kind of converts the mortgages to float, which matches our funding from the bank syndicate.

[Jason Ellis, executive]

Yes. But it's fair to say, structurally, just the shape of the curve from overnight repo to 5-year government bond yields. Obviously, during the pandemic, that was positively sloped and resulted in negative carry on our book of $2 billion plus of short bonds, that carry is reverse now. So that is just structurally a nice tailwind that we've enjoyed.

[Graham Ryding, analyst]

Okay. So is that the math that we should roughly do, $2 billion of sort of hedging short bonds and whatever that carry is -- is that how we should think about it on a quarterly basis.

[Robert Inglis, executive]

It could change. It could change. I mean on the balance sheet, we described sort of the total amount of short bonds and it could be as high as $3 billion in some seasons. So if you want to think about that, though, in totality, you need to remember that if we're short 2 billion or 3 billion bonds as the case may be, some of those shorts are against mortgage commitments where the only math is the overnight repo versus the yield were short. Some of those hedges are against funded mortgages. So you also have to think about the cost to carry those mortgages on our balance sheet while we wait for securitization compared to the coupon on those mortgages we earn prior to securitization. So you've got mortgage carry and then you've got hedge carry.

[Graham Ryding, analyst]

Okay. And does that all fall into your interest expense line?

[Robert Inglis, executive]

Yes.

[Graham Ryding, analyst]

I guess what I'm trying to get out with this is just next year, if we start to see the yield curve flatten out and you don't have this carry benefit. Is it going to be material to your interest expense.

[Jason Ellis, executive]

Yes. It adds up just as it's been materially constructive this year.

[Graham Ryding, analyst]

Okay. On the third party, you signed up a third bank for third-party fulfillment. And I can't remember when that started. So I guess my first question is, was that in your servicing income in the quarter? And if so, like is that partnership or that client arrangement sort of fully ramped up?

[Jason Ellis, executive]

Yes. So we're pleased that Bank of Montreal selected First National provides underwriting services for its reentry to the broker channel. BMO has announced that BMO BrokerEdge is scheduled to launch in the beginning of 2024 so no, there is no revenue yet from that. However, all the heavy lifting in support of that launch and providing the services is behind us now. So at this stage, we look forward to starting that business with them, and we've begun hiring in support of it.

[Graham Ryding, analyst]

Okay. Excellent.

[Operator]

Next question will be from Geoff Kwan at RBC.

[Geoffrey Kwan, analyst]

Just wanted to follow up on Graham's last question just now you've got 2 of the big banks. You've got a smaller bank that are outsourcing their broker entering to you. Is -- are you able to say like is the fee rate that you're charging them, are they identical? Or are they like how different or not are they? And then also, two, is now that you would have 2 of the big banks in a smaller bank, like those volumes should be quite significant when you get to kind of a run rate.

Is that something you'd be able to report in terms of the originations you're doing through the third-party outsourcing at some point down the road?

[Jason Ellis, executive]

I think at this stage, it doesn't meet, I think, tactical materiality thresholds that would compel us to disclose it separately. And I think for the time being, it will continue to be part of our overall servicing revenue line. So there are plans to strip it out and report it separately partly for the benefit of our counterparties own proprietary information. With respect to the terms of the contracts, I'll put that under the category of proprietary as well and not comment, but I will say that the services we're providing for both are virtually identical.

And in a competitive market, you can imagine that the terms would be quite competitive as well.

[Operator]

And at this time, I would like to turn the call back over to Mr. Ellis for closing comments.

[Jason Ellis, executive]

Okay. Thank you, operator. We look forward to reporting our Q4 results on March 5. Thank you for participating and have a great day.

[Operator]

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.