First National Financial Corp

TSX:FN

Earnings Call Transcript 2021-Q4

[Operator]

Good

morning,

and

welcome

to

First

National's

Fourth

Quarter

Analyst

Call.

This

call

is

being

recorded

on

Wednesday,

March

2, 2022.

At

this

time,

all

callers

are

in

a

listen-only

mode.

Later,

we'll

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

Stephen

Smith,

Executive

Chairman

of

the

Board

of

First

National.

Please

go

ahead,

sir.

[Stephen J. R. Smith]

Thank

you,

operator.

Good

morning,

everyone.

Welcome

to

our

call

and

thank

you

for

participating.

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

MD&A.

Joining

me

today

are

Jason

Ellis,

President and

Chief

Executive

Officer;

and

Rob

Inglis,

Chief

Financial

Officer.

As

you

all

know,

Jason

succeeded

me

in

the

role

of

CEO

in

January,

as

I

became

the

company's

Executive

Chairman.

At

that

time,

Jason

also

joined

our

board

of

directors.

This

planned

and

natural

succession

sets

us

up

well

for

the

future.

Jason

is

a

proven

leader

whose

experience

with

First

National

began

in

2004,

most

recently

served

as

our

President

and

Chief

Operating

Officer

with

broad

operational

responsibilities.

Jason

is

well-known

among

our

business

partners,

well-respected

by

his

colleagues

and

will

maintain

First

National's

long-term

focus

on

providing

competitive

mortgage

products

and

good

service

supported

by

enabling

technology.

I

look

forward

to

working

with

Jason

closely

in

my

new

role.

Now

on to

annual

and

quarterly

business.

We

finished

the

year

with

a

record

MUA

of

CAD 123.9

billion,

4%

higher

than

2020.

Change

of

CAD

5.2

billion

is

large

and

represents

new

investments

in

a

sizable

number

of

single-family

homes,

multi-unit,

and

Commercial

properties

across

Canada.

We

never

forget

that

we're

lending

to

homeowners

across

the

country,

and

our

service

level

to

brokers

and

borrowers

alike

are

important

to

us.

Like

other

lenders,

we've

been

challenged

by

the

furious

pace

of

demand

over

the

past

18

months,

but

our

single-family

and

Commercial

teams

have

worked

very

hard

to

convert

opportunity

into

business,

and

they

have

done

just

that

as

First

National

set

new

annual

production

records

in

2021.

In

this

regard,

2021

did

not

turn

out

entirely

as

expected.

A

year

ago,

on

this

call,

we

told

you

that

residential

originations

would

be

at

least

in

line

with

the

record

set

in

2020

as

the

combination

of

our

built-in

advantage

over

traditional

bank

origination

channels

and

the

stimulative

effect

of

low

interest

rates

brings

more

business

our

way.

And

the

originations

were

more

than

just

in

line.

For

all

of

2021,

single-family

originations

grew

22%

over

2020's

record

to

land

at

CAD 23.4

billion,

while

Commercial

origination

was

7%

higher

at

CAD

9.7

billion,

also

setting

a

new

record.

That

said,

we

started

to see

the

toward

peace

of

homebuying

moderate

a

bit

in

the

fourth

quarter

after

the

extremes

of

2020.

As

you

may

recall,

the

impact

of

a

resurgent

economy

ignited

demand

for

credit

and

effectively

eliminated

the

normal

market

seasonality

in

Q4

of

last

year.

We

knew

demand

at

these

[indiscernible]



(00:04:00) levels

would

be

temporary

[ph]



and

advised

if

such (00:04:02)

on

our

last

analyst

call,

when

we

offered

a

residential

origination

might

be

as

much

as

25%

below

Q4

2020's

elevated

levels.

In

reality,

2021

Q4

single-family

production

was

lower

by

10%,

so

a

better

outcome

than

we

expected,

but

a

demonstration

of

the

market

slowing

down

nonetheless.

For

our

Commercial

segment,

fourth

quarter

originations

of

CAD 3

billion

were 12%

higher

than

a

year

ago.

We

expected

them

to

be

strong,

but

with

an

incredible

push

in

the

month

of

December,

we're

able

to

surpass

CAD

3

billion

advanced

in

a

single

quarter,

a

new

high

watermark.

Demand

for

conventional

mortgages

picked

up

this

augmented, our

already

strong

insured

volumes.

Mortgage

renewal

volumes

in

both

segments

were

as

expected,

single-family

renewals

were

CAD

1.5

billion

in

Q4, 10%

lower

than

a

year

ago,

reflecting

lower

available

renewal

opportunities

and

decisions

by

borrowers

to

refinance

rather

than

renew

to

take

advantage

of the

low

interest

rate

environment.

Commercial

renewals

were

CAD

902

million,

62%

higher

than

a

year

ago.

Overall,

we

put

more

business

on

the

books

in

2021

and it

was

solidly

profitable,

but

not

as

profitable

as

the

mortgages

in

2020,

when

spreads

were

exceptionally

wide,

because

of

economic

uncertainty

at

the

time

of

the

early

stages

of

the

pandemic

and

also

reduce

competition.

Going

from

a

year

of

exceptionally

wide

spreads

to

a

year

when

strong

competition meant

spreads

tightened

to

the

narrowest

they've

been

in

about

14

years

that

reduced

operating

profit

as

measured

by

Pre-Fair

Market

Value

Income.

Regardless,

2021

earnings

were

more

than

sufficient

to

support

the

common

share

dividend,

which

we

increased

last

June

to

an

annualized

rate

of CAD

2.35

per

share.

As

you

know,

we

also paid

a

special

dividend

of

CAD

1.25

in

December,

our

fifth

special

in

the

past

five

years.

All

in,

National

– First

National

declared

CAD

210.9

million

in

common

share

dividends

or

CAD

3.52

per

share

inclusive

of

the

special.

That

represents

a

growth

rate

of

42%

from

2020.

We're

proud

to

note

that

with

steady

business

growth

year-after-year,

First

National

has

increased

common

share

dividend

14

times

since

our

IPO.

Rewarding

those

who

purchased

shares

at

the

beginning

in

2006

with

a

cumulative

total

of

CAD 1.6

billion

of

dividends

and

distributions

of CAD

29.32

per

share.

And

people

will

recall

that

the

issue

price

was

CAD

10.

Inclusive

of

share

appreciation,

total

cumulative

return

to

IPO

investors

was

609%

from

2006

to

the

end

of

2021.

[ph]



When

we

think (00:07:40)

about

our

dividend

ratio,

the

board

typically

removes

gains

and

losses

and

account

changes

in

fair

value

of

financial

instruments.

These

gains

and

losses

are

reflective

of

the

current

bond

market

that

are

non-indicative

of

what

we

consider

core

earnings

which

are

distributable

to

shareholders.

Without

these

changes

and

the

special

dividend,

our

core

payout

ratio

for

all

of

2021

was

85%

compared

to

50%

in

2020.

Our

business

model

is

efficient.

This

is

clearly

demonstrated

in

the

management

of

the company's

after-tax,

pre-fair

market

value

return

on

shareholders'

equity,

which

was

a

healthy

39%

in

2021.

I'll

now

ask

Rob

to

give

his

financial

report

before

Jason

reviews

our

outlook.

Rob?

[Robert Inglis]

Yeah.

Thank

you,

Stephen,

and

good

morning,

everyone.

As

you

just

heard,

the

final

half

of 2021

reflected

what

we

consider

a

reset

from

the

market

extremes

of

2020.

This

has

not

only

affected

mortgage

volumes,

but

also

mortgage

spreads.

Together

with

our

decision

to

increase

securitization

to

drive

future

net

interest

margin,

this

muted

the

positive

impact

of

MUA

growth

on

revenue

and

profitability

metrics.

Looking

deeper,

2021

growth

in

MUA

was

4%

year-over-year,

while

revenue

was

up

1%

to

a

new

record

of

CAD 1.39

billion.

This

growth

was

achieved

on

higher

origination

in

spite

of

accelerated

single-family

mortgage

prepayment

activity

which

affected

both

profitability

of

securitization

and

the overall

MUA.

In

the

interest

of

time

and

because

this

is

our

quarterly

call,

I

will

now

speak

specifically

to

Q4

results.

Beginning

with

MUA,

it

grew

at

5%

annualized

in

the

quarter,

while

revenue

was

down

about

12%,

or

CAD 48

million

to

CAD 339

million.

There

are

a

few

moving

parts

to

this

story,

and

I'll

start

with

the

largest

one.

We

responded

to

the

market

environment

by

shifting

volumes

to

our

securitization

programs

which

will

benefit

First

National

in

future

periods

but

really

penalize

2020

results,

particularly

in

Q4.

Q4

placement

fees

decreased

32%

or

about CAD

32

million.

This

is

largely

a

function

of

slower

residential

origination

in

the

quarter

and

the

company's

decision

to

securitize

more

of

its

insured

Commercial

segment

volumes.

Overall,

residential

origination

volume

was

down,

comparing

fourth

quarter,

by

about

12%,

and

the

portion

of

the

sold

institutions

was

lower

by

about

19%.

As

spreads

returned

to

pre-pandemic

levels,

mortgage

volumes

sold

at

a

funded

basis

attracted

lower

per

unit

placement

fees,

and

overall

residential

placement

fees

were

lower

by

about

30%.

For

our

Commercial

segment,

like

the

previous

quarters

in

2021,

we

shifted

the

most

profitable

form

of

Commercial

origination,

that

is

the

10-year

term

insured

mortgages

from

institutional

placement

to

securitization

In

the

fourth

quarter,

the

company

allocated

about

CAD 200

million

more

of

its

10-year

insured

origination

to

securitization

than

it

did

in

2020.

This

shift

represented

about

CAD

8.5

million

change

year-over-year

in

placement

fees

for

this

segment.

The

shift

was

driven

by

a

CMHC

program

that

increased

the

CMB

allocation

for

issuers

who

lend

10-year

money

to

support

CMHC's

affordability

mandate.

First

National's

volume

in

this

area

were

strong, we'd

like

to

securitize

a

larger

percentage

of

this

product

to

create

future

margin

for

our

securitization

program

at

the

expense

of

onetime

placement

fees.

While

painful

in

the

short

run,

this

strategy

creates

value

for

First

National

in

the

form

of

income

over

the

next

10 years.

A

good

trade-off

for

a

business

that

has

an

advantage

for

the

long-term.

The

company decided

to

use

the

enhanced

CMB

allocation

to

its

fullest

as

CMH (sic) [CMHC] (00:11:57)

programs

are

always

subject

to

change.

The

fourth

quarter

gains

on

deferred

placement

fee

revenue

were

65%

or

CAD 5.7

million

lower

than

the

prior

year,

again,

a

result

of

narrower

spreads

and

our

decision

to

directly

securitize

more

of

our

multi-unit

mortgage

origination.

There

were

partial

offsets

to

these

declines.

Mortgage

investment

income

was

up

14%

year-over-year

in

Q4

or

by

about

CAD 2.2

million

as

we

held

more

mortgages

on our

balance

sheet

prior

to

securitization

and

earn

more

interest

revenue.

In

addition,

we

experienced

a

7%

year-over-year

growth

in

mortgage

servicing

income

in

the

quarter,

an

increase

of

CAD 3.4

million.

This

reflected

administration

revenue

from

growth

in

MUA

and

third-party

underwriting.

While

positive,

the

pace

of

growth

was

lower

compared

to

earlier

quarters,

another

sign

of

the

market

moderation

after

the

extremes

of

2020.

From

revenue

we

move

now

to

expenses.

Year-over-year,

broker

fees

decreased

by

13%

in

Q4,

reflecting

lower

origination

for

third-party

investors

as

I

noted

before and

discussing

placement

fees.

On

a

per

unit

basis,

broker

fee

expenses

were

marginally

higher,

particularly

as

the

company

paid

out

loyalty-based

rewards

that

reflected

the

entire

2021

record

year.

Our

expense

base

was

also

higher

in

2021

than

in

2020

on

increase

in

staffing.

Frankly,

we

were

understaffed

in

2020,

having

not

anticipated

such

a

substantial

and

abrupt

increase

in

mortgage

demand.

First

National

residential

and

Commercial

teams

worked

a

lot

of

extra

hours

to

get

through

the

increased

workload,

but

this

was

not

sustainable

for

our

people.

Accordingly,

in

2021,

we

built

up

the

capacity

to

handle

higher

volumes

with

a

30%

increase

in

FTE,

primarily

within

residential

underwriting

departments,

our

own

and

for

our

third-party

business.

With

higher

head

count,

year-over-year

salary

and

benefit

expenses

increased

21%

in

the

quarter.

This

included

Commercial

underwriting

compensation,

which

is

tied

to

volumes.

However,

these

wages

grew

in

similar

fashion

by

about

20%.

That's

at

generally

all

salaries

and

benefits

increased

by

this

rate

across

the

whole

company.

Q4

interest

expense

was

CAD 13.3

million

compared

to

about CAD

10.3 million

a

year

ago

due

to

increased

use

of

our

loan

facilities

to

fund

the

mortgages

accumulated

prior

to

securitization.

And

moving

on,

the

Q4,

Pre-Fair

Market

Value

income

of

CAD 57.2

million

was

40%

lower

year-over-year,

reflecting

revenue

expense

drivers.

We

remain

solidly

profitable

as

we

have

since

the

year

of the

IPO.

Q4

net

income

was

CAD 42

million

or

CAD

0.69

per

share.

For

all

of

2021,

First

National

earned

CAD

194.6

million

or

about

CAD

3.20

per

share.

One

final

item

of

note

and

that

is

our

capital

expenditures.

First

National

reinvest

each

year

in our

leading

technology

as

well

as

our

office

space.

Typically,

our

annual

capital

expenditures

are

in

the

neighborhood

of

CAD 7

million.

But

in

2021,

they

increased

to CAD

32

million

as

we

moved

our

Toronto

office.

First

National's

new

head

office

consists

of

over

130,000

square

feet

at

16 York

Street

in

Toronto.

The

building

was

designed

to

exceed

LEED

platinum

and

WELL

Building

Institute

guidelines

for

environmental

and

workplace

excellence

and

will

accommodate

our

needs

for

years

to

come.

With

that expenditure behind us, you

can

expect

capital

expenditures

to

return

to

traditional

levels

in

2022.

Now, over to Jason.

[Jason Ellis]

Thanks,

Rob,

and

thank

you,

Stephen,

for

your

kind

words

of

introduction

earlier. I'm

honored

to

have

the

opportunity

to

lead

First

National

and

very

grateful

to

Stephen

for

having

served

as

a

mentor.

I'm

glad

I

can

still

look

to

his

counsel

as

First

National's

Executive

Chairman.

Stephen

and

Moray built

a

great

team

and

an

effective

business

model.

I

think

we

can

continue

to

leverage

those

fundamentals

and

accomplish

what

they

achieved

in

the

past,

continuous

improvement

and

performance

that

rewards

all

stakeholders.

As

you

heard,

the

last

two

quarters

of

2021

represented

a

reset

from

the

extremes

we

experienced

in

2020.

As

we

look

ahead

to

2022,

despite

starting

the

first

quarter

with

another

COVID

lockdown,

there

has

been

considerable

momentum

in

the

economy.

We

know

that

the

Bank

of

Canada

increased

the

overnight

rate,

25

basis

points

just

as

our

conference

call

started

today

with

strong

inflationary

forces

at

play,

markets

are

signaling

multiple

rate

hikes

this

year,

which

is

a

further

signal

of

a

return

to

a

more

normal

economic

condition.

With

new

mortgages

locked

in

at

historically

low

rates

and

interest

rates

likely

to

rise

over

the

next

12

months,

it

is

unlikely

First

National

will

see

the

kind

of

mortgage

prepayment

activity

we

experienced

last

year,

which

was

a

headwind

for

2021

profitability.

Turning

to

our

immediate

business

outlook,

we

expect

Q1

residential

production

will

be

lower

than

last

year's

first

quarter,

itself

and

exceptionally

strong

period,

when

originations

were

almost

CAD

4.4

billion.

We

base

this

expectation

on

signs

of

slowing

origination

as

housing

inventories

fall

and

mortgage

rates

rise,

but

also

just

the

fact

that

Q1

last

year

was

so

unusually

active.

Based

on

our

pipeline,

we

expect

Commercial

origination

to

remain

strong

in

2022.

But

as

always,

volumes

will

vary

by

quarter.

It's

important

to

remember

that

we

are

resetting

to

the

norm,

not

to

a

depressed

state.

According

to

the

last

Bank

of

Canada

forecast,

GDP

is

expected

to

grow

around

4%

this

year

and

3.5%

next

year. We

will

also

see

the

positive

influences

of

immigration

on

the

types

of

housing

we

finance.

And

for

the

long-term,

the

demand/supply

imbalance

and

housing

stock

will

most

definitely

require

more

capital

for

construction,

another

activity

First

National

finances.

Our

priorities

in

this

new

normal

environment

begin

with

offering

a

full

range

of

mortgage

solutions

for

customers

across

both

business

lines.

This

year

sets

up

well

as

we

launch

the

CMHC

MLI

Select

product

this

month

in

our

Commercial

division.

This

is

a

new

way

of

financing

much

needed

affordable

housing.

In

Residential,

work

will

continue

in

promoting

our

Excalibur

product,

including

in

Western

Canada,

the

subject

of

our

expansion

in

2021.

These

and

other

activities

will

feed

into

our

priorities

which

is

to

grow

MUA,

the

source

of

most

of

our

earnings.

To

do

this,

we

are

very

focused

on

providing

great

service

to

our

mortgage

broker

partners

and

our

customers

as

they

shop

the

competitive

market

for

mortgages.

It's

not

possible

to

predict

competitive

intensity,

but

we

know

borrowers

always

have

a

choice

which

is

why

service

is

critically

important.

True

to

past

practice,

we

will

continue

to

invest

in

our

technology

to

enhance

service

on

both

sides

of

our

business

and,

wherever

possible,

improve

efficiency.

This

year,

we're

going

to

automate

additional

aspects

of

residential

administration,

and

we're

working

on

a

new

servicing

portal

for

Commercial

borrowers.

As

always,

we

will

maintain

a

conservative

risk

profile,

investing

in

the

most

creditworthy

mortgages

in

the

country.

In

summary,

we

believe

our

decisions

in

2021

positioned

First

National

for

long-term

success.

We

added

almost

370

talented

people

to

support

our

business

volumes

and

sustain

our

reputation

for

good

customer

service.

We

sacrificed

immediate

Commercial

segment

placement

fees,

but

created

10 years

of

future

securitization

net

interest

margins

by

electing

to

securitize

about

CAD 2

billion

of

10-year

multi-unit

residential

mortgages.

That's

about

CAD 1

billion

more

than

in

2020.

Of

course,

by

growing

our

mortgages

under

administration

in

2021,

we

can

look

forward

to

generating

income

and

cash

flows

from

our

now

CAD 33

billion

portfolio

of

mortgages

pledged

under

securitization

and

CAD 88

billion

servicing

portfolio.

I'll

conclude

with

a

thank

you

to

all

First

National

employees

for

their

hard

work

in

2021,

our

mortgage

broker

partners

for

their

business

during

these

unusual

times,

and

our

clients

for

their

continued

trust.

That

concludes

our

formal

remarks,

and

now,

we

would

be

pleased

to

take

your

questions.

Operator,

over

to

you.

[Operator]

Thank

you,

sir.

[Operator Instructions]



And your

first

question

will

be

from

Nik

Priebe

at

CIBC

Capital

Markets.

Please

go

ahead.

[Nik Priebe, Analyst, CIBC World Markets, Inc.]

Yeah.

Okay.

Thanks.

I

was

just

trying

to

square

the

tighter

mortgage

spread

environment

with

the

higher

net

interest

margin

achieved

on

the

securitization

portfolio

in

Q4. It

looks

like

net

interest

income

was

up

something

like

over

10%

sequentially

despite

securitized

mortgage

principal

being

virtually

flat.

Was

there

anything

unique

driving

that

margin

expansion

in

the

quarter?

[Jason Ellis]

No.

I

noticed

in

some

of

the

notes

that

you

guys

posted

yesterday

evening

after

our

earnings

announcement

that

that

was,

in

fact,

the

case

sequentially,

I

guess,

as

a

measurement

of

NIM

over

the

securitized

mortgages.

I

would

say

that

there's

a

CAD

33

billion

portfolio,

and,

I

guess,

it

just

may

be

that

there

may

have

been

some

older

pools

running

off

combined

with

whatever

was

going

on.

I'd

have

to

look

at

it

more

closely.

I'd

say,

though,

very

clearly

the

trend

is

current

margins

between

mortgage

coupons

and

NHA

MBS

coupons

are

compressed

relative

to

both

the

entire

book

and

what

we

would

have

seen

historically

over

time.

So

I

will

look

a

little

bit

more

closely

at

that,

but

I

would

say

the

trend

is

likely

to

see

a

tightening

in

the

overall

NIM

on

the

securitization

book

if

the

prevailing

spread

market

prevails.

[Nik Priebe, Analyst, CIBC World Markets, Inc.]

Understood.

Okay.

And

then,

on

the

expense

side,

I

think

you

had

alluded

in

your

prepared

remarks

to

the

growth

in

salaries

and

benefits

expense.

Given

the

investment,

the

pretty

substantial

investment

made

in

your

team

over

the

past

year,

do

you

expect

the

pace

of

hiring

to

taper

as

we

enter

2022?

[Jason Ellis]

Most

definitely.

I'd

say

that,

over

the

course

of

the

pandemic,

we

have

definitely

been

chasing

full

employment.

As

I'm

sure

you're

aware,

it's

a

very

tight

labor

market

generally.

And

in

particular,

I

think,

in

the

mortgage

industry

as

all

of

our

competitors

have

been

growing

at

quite

quick

paces

and

been

hiring

quite

aggressively.

But

to

answer

the

question,

yes,

I

think

that

we

definitely

should

see

a

moderation.

We've

surrendered

in

the

near-term

a

little

bit

of

operational

leverage.

But

I

think

once

we

get

settled

into

our

new

[indiscernible]



(00:24:04)

and

all of

our

new

employees

become

increasingly

effective,

that

we

should

be

able

to

claw

back

some

of

that

operational

leverage

we've

enjoyed

over

the

years.

[Nik Priebe, Analyst, CIBC World Markets, Inc.]

Okay.

And

then

just

one

follow-up

to

that.

In

the

fourth

quarter,

I

think

the

expense

was

close

to

CAD

50 million.

Was

there

anything

one-time

in

nature

in

Q4

or

is

that,

like,

true-ups

with

respect

to

year-end

bonuses

or

is

that

a

pretty

good

run

rate

for

2022?

[Jason Ellis]

I'll

let

Rob

address

that

one.

But

I

think

there

may

be

a

little

bit

of

an

extra

bump

in

the

fourth

quarter

with

year-end

true-ups.

[Robert Inglis]

Yeah.

We

paid,

Jason,

too

much

money

and

that

reflected

badly

on

me

now.

We

accrue

every

month

and

there

will

be

bonuses

probably

that

exceed

our

accrual

for

sure,

but

not

a

lot

like

we're

pretty

good

at

accruing

those

moneys.

So

I

think

it's

just

– typically, it's

going

to

be

the

run

rate.

I

think

we

really

ramped

up

a

lot

of

our

operations,

a

lot

of

hiring over

the

course

of

the

fall.

The

biggest

number

there

always

is

the

Commercial

underwriting

team,

and

they

had a

record

quarter.

They had

CAD

3

billion

of

origination.

So

they're –

and they're

going to

be

paid

a

lot

of

a

commission

in

that

quarter.

So

that

probably

is

the

only other

reason

why

it's

higher.

And maybe

it's

a

little

bit

higher

than

the

typical

run

rate,

to

be

honest.

Yeah.

[Nik Priebe, Analyst, CIBC World Markets, Inc.]

Yeah.

Okay.

All

right.

Thanks

very

much.

That's

it

for

me.

[Operator]

Thank

you.

Next

question

will

be

from

Graham

Ryding

at

TD

Securities.

Please

go

ahead.

[Graham Ryding, Analyst, TD Securities, Inc.]

Good

morning.

Looking

at

your

securitization

volumes

for

the

year,

I

think

it

was

up

year-over-year

in

part

due

to

that

increased

CMB

access

around

the

affordability

like

Commercial

real

estate.

So,

I'm

just

wondering,

should

we

expect

that?

I

guess,

portion

of

your

business

to

increase?

Does

that

look

like

sustainable

and it's

CAD

13

billion

roughly,

like

is

that

a

reasonable

outlook

for

securitization

volumes

in

terms

of

capacity?

[Jason Ellis]

Hey,

Graham.

I

think

it's

fair

to

say

that

we

are

definitely

mature

users

of

CMHC's

securitization

programs,

and

our

expectation

would

be

to

leverage

those

programs

to

their

fullest

extent.

As

you

indicate,

the

allocation

protocol

for

the

10

years

CMB

program

does

afford

preferred

allocation

for

affordable

multifamily

pools,

which

fortunately,

First

National

is

an

area

of

expertise.

We're

probably

are

most

certainly

the

market

leader

in

originating

that

type

of

product.

So,

I

expect

that,

yes,

we

would

fully

leverage

the

traditional

CAD

9

billion

limit

of

total

MBS

allocation.

And

on

top

of

that,

additional

affordable

pools,

which

do

not

count

against

the CAD

9

billion

limit.

I

think

somewhere

in

the

context

of

CAD

12

billion

is

a

reasonable

expectation

in

terms

of

total

issuance.

[Graham Ryding, Analyst, TD Securities, Inc.]

Okay.

Great.

And

does

that

include

any

of

the

other

securitization

activity

that

you

do

outside

of

the

real

CMB

and

NHA MBS

at

CAD

12

billion...?

[Jason Ellis]

Yeah,

that'll

– yeah,

that

– sorry, that'll

include

amounts

into ABCP

conduits.

But

those

balances

tend

to

go

up

relatively.

I

mean,

I

guess

it's

net

or

total

amount

sold

in.

Are

you

thinking

about

net

or

total

amount?

[Graham Ryding, Analyst, TD Securities, Inc.]

Total

amount.

[Jason Ellis]

Total

amount?

Yes.

So,

I

would say, CAD

12

billion to

CAD

13

billion

total

securitization

activity

for

the

year,

Rob?

[Robert Inglis]

Yeah,

that

makes

sense.

I

think

we've

really

maximized

the

capacity

in

2021.

So,

hopefully,

the

2022

is same

thing.

[Graham Ryding, Analyst, TD Securities, Inc.]

Got

it.

Okay.

That's

helpful.

So,

obviously,

it

sounds

like

you're

anticipating

or

you're

seeing

some

slowdown

in

single-family

originations

on

the

back

of

higher

interest

and

mortgage

rates.

What

sort

of

decline

in

activity

are

you

seeing

so

far

in

2022

year-to-date?

[Jason Ellis]

Well. We're

definitely

seeing some

moderation

in

the

commitment

pipeline.

I

wouldn't

characterize

it

as

a

material

shift,

but

definitely

seeing

some

slowing.

But

what

we

do –

what

I

would

say

is

that

as

prices

continue

to

rise

in

terms

of

dollar

value,

I

would

say,

less

of

a

change

year-over-year

than

there

is

in

unit

transactions.

But

I

would

say

single-digit

kind

of

changes

year-over-year.

[Graham Ryding, Analyst, TD Securities, Inc.]

Okay.

[Jason Ellis]

Percentage wise.

[Graham Ryding, Analyst, TD Securities, Inc.]

Understood. Okay.

And

then

my

last

question

just

on

mortgage

spreads,

your

commentary

indicates

that

it

was

obviously

quite

tight

in

Q4

2021,

but

we're

now,

obviously,

in

an environment of

higher

volatility and

uncertainty

in

the

markets.

Could

this

actually

be

a

positive

for

your

mortgage

spreads

overall?

[Jason Ellis]

I

guess,

traditionally,

we've

seen

volatility

in

the

market

result

in

higher

mortgage

coupons

relative

to

other

fixed

income

benchmarks.

We

haven't – I guess,

well,

we've

seen

rates

move

up

in

the

mortgage

market

a

couple

of

times

in

the last

couple of

weeks

against

a

backdrop

where

we've

seen

actually

a

bit

of

a

retreat

in

the

risk-free

rate

in

the

form

of

five-year

Government of

Canada

bonds.

So,

I

guess,

in

the

very,

very

recent

past,

there

has

been

a

little

bit

of

a

widening,

but

we

also

see

the

spread

on

NHA

MBS

pools

widening

over

the

same

time.

So

I

don't

know

yet

whether

or

not

we're

going

to see

the

kind

of

wide

spreads

we

enjoyed,

say,

post

something

like

a

global

financial

crisis.

The

reality

is,

I

think,

as

we

come

out

of

COVID,

there's

still

a

tremendous

amount

of

liquidity

and

capital

in

the

financial

space,

which

I

think

will

still

keep

lenders

relatively

aggressive

in

terms

of

their

mortgage

coupons.

So

I

guess

if

it's

not

too

short

for

a

short

answer or

too

late

for

a

short

answer,

I

think

these

things

are

going

to

–

if

I had

to

guess,

balance

each

other

out.

I

don't

anticipate

any

significant

widening

on

the

backdrop

of

any

volatility

[indiscernible]

(00:30:29).

[Stephen J. R. Smith]

I

have

never

found

any

particular

luck

in

trying

to

predict

where

mortgage

or

mortgage

spreads

go.

I

mean,

it

tends

to

be

I

think,

just

in

general, there is --

and

there's

a

lot

of

liquidity

around,

they tend

to

be

tight

when

there's a

lot of

competition

from

the D-SIBs

which

they

all

have

big

balance

sheets and

lots

of

money.

They

tend

to

– tends

to

be

competitive.

And

I

think

that's

what

we're

seeing

now.

Probably

see

it

for

a

while.

[Graham Ryding, Analyst, TD Securities, Inc.]

Okay.

Understood.

Are

you

seeing

the

banks

as

they

reopen

their

branches?

Are

you

see

them

take

back

any

market

share

within

the

mortgage

broker

channel

or

otherwise?

[Stephen J. R. Smith]

Well,

I

think

they

recovered

a

lot

more

quickly

at

the

branch

level,

just

generally

through

their

mortgage

sales

force.

I

wouldn't

say

there's

a

shift

in

or

out

of

the

mortgage

broker

channel.

I

mean,

our

model

typically

is

we

just

put

on

volume

so

that

when

we

do

get

wider

spreads,

it's

very

operationally

efficient

right

to

the

bottom

line.

So,

in

many

ways,

what

we're

doing, we're

seeing

some

stronger

volumes,

stronger

MUA,

stronger

Commercial

that

will

start

to

support

the

income

over

time.

Certainly

doing

the

securitization

where

we

take

income

over

time

is

good

for

the

long

term --

long-term

health

of

the

company.

[Graham Ryding, Analyst, TD Securities, Inc.]

Okay.

That's

it

for

me.

Thank

you.

[Stephen J. R. Smith]

Thanks,

Graham.

[Operator]

Next

question

will

be

from

James

Gloyn at

National

Bank

Financial.

Please

go

ahead.

[Jaeme Gloyn, Analyst, National Bank Financial, Inc.]

Yeah.

Thanks.

So,

first

question,

similar

vein

is

that

last name

from

Graham.

Just

in

terms

of

the

Canadian

national

resale

market,

it seems

like

dollar

value

of homes

sales

is

still

positive

year-over-year

over

the

last

few

months,

which

should

indicate

that

originations

remain

strong.

So,

they're

kind

of flat

to

maybe

down

is

the

way

I'm

interpreting

your

guidance.

Does

that

suggest

there's

some

market

share

giveback?

Or

is

there

some

mix

impacts

that

we're

not

seeing

beneath

the

surface

when

you

give

this

outlook

for

Q1

2022?

[Jason Ellis]

Yeah.

I mean,

I

guess

the

macro

picture

in

terms

of

mortgage

broker

channel

share

of

the

overall

market,

it's

tough

to

say.

There's

not

a

lot

of

really

clear

visibility

on

that,

but

I

don't

think

that

I'm

seeing

any

material

change

in

the

broker

share

the

overall

market.

In

terms

of

First

National's

share

within

the

broker

channel,

don't

anticipate

any

deterioration

in

that

this

year.

I

will

concede

that

in

2020,

for

a

couple

of

quarters,

we

had

remarkable

share

probably

sort

of

a

short

peak,

the

highest

we've

seen

in

a

long,

long

time,

and

that

has

returned

to

normal,

but

that

has

happened

gradually

over

the

last

four

to

six

quarters.

So

I

don't

anticipate

any

material

change

in

our

share

in

the

channel

or

the

broker

channel

in

the

entire

market.

[Jaeme Gloyn, Analyst, National Bank Financial, Inc.]

Okay.

Fair

enough.

Shifting

to

the

Commercial

outlook.

And

just

want

to dig

in

to

the

commentary

that

the

growth

still

looks

robust

given

the

pipeline.

So

when

we

think

about

the

Commercial

book

originations in

multi-unit

and

Commercial

was

just

under

CAD

10 billion,

would

that

outlook

be

more

near

term

for

like

Q1,

Q2,

where

we

maybe

had

some

softer

numbers

in

the

multi-unit

Commercial

space

in

Q1

2021?

Or

does

that

sort

of

apply

to

the

full

year

and

running

off

this

really

strong

Q4

print

in

the

Commercial

book

for

originations?

[Jason Ellis]

I'd

say

that

we

are

probably

expecting

at

the

best

of

our

ability

to

predict

at

a

relatively

comparable

year

in

Commercial

originations.

Obviously,

like

you

indicate,

came

off

a

very

strong

fourth

quarter.

But

as

we

indicated

in

the

comments,

the

pipeline

is

robust,

and

there's

nothing

to

suggest

that

we

would

have

any

material

change

in

that.

Quarters

can

vary

though,

especially

with

the

Commercial

mortgages,

where

large

deals

can

sort

of

swing

principal

volumes

from

one

quarter to

the

next.

But

generally

speaking,

I'd

say

that

year-over-year

should

not

be

materially

different.

[Jaeme Gloyn, Analyst, National Bank Financial, Inc.]

Okay.

Great.

Thank

you.

Going

back

to

single-family.

Just

want to

get

a

sense

as

to

how

refinance

activity

has

trended

recently,

especially,

as

we're

starting

to

see

mortgage

rates

back

up.

Is

there

– is

that

refinance

activity

still

high

as

maybe

some

borrowers

are

pulling

forward

some

of

their

decision-making

to

get

ahead

of

rising

rates?

Or

what

are

you

seeing

in

terms

of

that

trend?

And

how

do

you expect

that

to

flow

through

in

2022?

[Jason Ellis]

Yes.

So,

I

would

say,

over

the

last

couple

of

weeks,

we've

probably

seen

the

tail

end

of

that

as

we've

had

a

couple

of

announcements

of

fixed

rates

going

up.

We've

seen

a

rush

in

terms

of

pre-approval

volumes

and

things

like

that

as

borrowers

look

to

get

in

and

refinance

existing

properties.

But

I

would

say

as

we

move

through

2022,

the

incident

of

refinance,

the

advantage

of

refinancing

to

borrowers

will

lessen.

And

I

think

that,

that

will

have

a

favorable

impact

on

the

First

National

in

terms

of

a

reduced

prepayment

speed

on

the

existing

portfolio.

I

view

that,

generally

speaking,

all else

being

equal,

as

a

bit

of

a

tailwind

for

2022.

So,

as

rates

do

go

up,

I

do

expect

to

see

prepayment

speeds

lower,

which

means

less

deterioration

of

our

principal

in

our

securitization

pools,

which

should

be

supportive

for

NIM

and

create

more

renewal

opportunities

as

mortgages

come

up

for

maturity.

So,

I

would

say,

generally

speaking,

prepayment

speeds

lower,

which

is

constructive

for

us.

[Jaeme Gloyn, Analyst, National Bank Financial, Inc.]

Okay.

Great.

Last

thing,

if

I

may,

as

I

look

at

placement

fee

revenues

as

a

percentage

of

mortgages

originated

and

sold

to

institutional

investors,

about

a

10, 11

basis

points

step

down

quarter-over-quarter,

I

would

assume

some

mix

is driving

that

as Commercial

was

less

of

a

component

of

mortgages

sold.

But

maybe

you

can

frame

this

quarter's

performance

in

terms

of

the

forward

guidance

or

any

outlook?

Is

this a

quarter

that's

reflective

of

what

we

should

expect

going

forward. Obviously,

this

can

move

around

quite

a

bit.

But

how

would

you

characterize

this

quarter

relative

to

a

"normal

quarter"?

[Robert Inglis]

Jaeme,

it's

Rob. I'll

[ph]



speak (00:37:52)

to

that

a

little

bit.

So,

in

2020,

we

had

a

huge

write-off

in

the

first

quarter

on

hedging,

because

we

had

a

pipeline

that

government

[ph]



kind

of (00:38:04)

bonds

went

down.

So,

when

we

sold

those

mortgages

that

actually

did

close

from

those

commitments

in

Q4,

let's

say,

there

was

a

huge

placement

fees

on

that

stuff.

We've

written

off

sort

of

the

bad

stuff

and

it

was --

the

par

was

low

when

we

sort of made

extremely

large

gains

there.

In

2021, it's

almost

the

opposite,

spreads

tightened

in,

those

mortgages

that

we

had

to

place

on

a

capital

markets

basis

were

that

much

tighter.

So,

when

you

compare

those

two

quarters,

I

think that's

what you're

seeing

is

that

that margin

compression

and a

little

bit

was

the

Commercial

side.

[indiscernible]



(00:38:41)

everything

that

we

do,

that's

10

year

pretty

well.

So,

less

Commercial

and

a

tighter

spread

will

–

placement

fee

will

make

it actually a

little

bit

better.

But

basically,

I

think

it's

that's

sort

of

a

capital

markets

change from

2020-2021

that

you're

seeing.

[Jaeme Gloyn, Analyst, National Bank Financial, Inc.]

Okay.

Thank you

very

much.

[Operator]

Thank

you.

[Operator Instructions]



And

your

next

question

will

be

from

Etienne Ricard

at

BMO Capital

Markets. Please

go

ahead.

[Etienne Ricard, Analyst, BMO Capital Markets Corp. (Canada)]

Thank

you,

and

good

morning.

On

securitization

margins,

what

benefits

are

you

expecting

relative

to

Q4

levels

as

prepayments,

indemnities

normalize

in

the

rising

mortgage

rate

environment?

[Stephen J. R. Smith]

I

think

we're

going

to benefit

by

three

ways

as

prepayment

speeds

slow,

Etienne.

First,

as

I

mentioned

a

moment

ago,

obviously,

principal

balances

will

be

more

stable

and

the

amount

securitized

will

grow

along

with

originations

and

more

of

a

lockstep

as

we

might

expect.

So,

obviously,

higher

principal

will

result

in

higher

NIM.

Secondly,

through

2020

and

periods

of

2021,

we

did

go

through

periods

where

the

indemnity

prepayment

penalty

payable

to

the

MBS investor

was,

in

fact,

higher

than

the

prepayment

penalty

received

from

the

borrower

on

the

mortgages

which

created

an

additional

drag

on

NIM.

And

finally,

because

of

the

exceptionally

high

prepayment

speeds,

the

principal

paying

out

faster

than

modeled,

Rob

was

required

to

reverse

some

of

the

capitalized

acquisition

expenses

associated

with

those

securitized

mortgages,

which

created

a

third

drag

on

NIM.

So,

while

I

probably

will

stop

short

of

trying

to

put

a

dollar

value

on

those

things

now,

as

prepayment

speeds

normalize,

I

think

that it

will

definitely

be,

all

else

being

equal,

a

meaningful

tailwind

to

NIM

over

the

course

of

2022.

[Etienne Ricard, Analyst, BMO Capital Markets Corp. (Canada)]

Okay.

Great.

On

Excalibur,

could

you

provide

an

update

on

the

rollout

of

this

program?

And should

we

think

about

Excalibur

in

the CAD 1

billion

to

CAD 3

billion

range

in

terms

of

origination

activity?

[Stephen J. R. Smith]

Yeah. And

so

Excalibur

continues

to

be

a

tremendous

success.

As

I

mentioned

in

my

comments,

we

did

expand

out

to

Vancouver

this

year,

and

we'll

continue

to

cautiously

add

other

geographic

locations

as

we

can.

I

would

say

that

it

is

definitely

growing.

Our

Excalibur

program

grew

– Rob,

do

we

have

a

sense

of

sort

of

the

growth

of

Excalibur

year-over-year?

Perhaps

as

much

as...

[Robert Inglis]

Yeah.

It

was

sort

of

like

maybe

not

100%

growth,

doubling,

but

in

that sort

of

magnitude,

really,

great

growth.

[Stephen J. R. Smith]

Yeah.

So

I

don't

think,

at

this

point,

we're

splitting

it

out

in

terms

of

our

origination

volumes,

but

it

continues

to

be

a

source

of

growth

in

origination

for

us,

but

a

cautious

growth

at

that

as

things

have

generally

been

for

First

National.

[Etienne Ricard, Analyst, BMO Capital Markets Corp. (Canada)]

Understood.

On

the

regular

dividend,

the

payout

appears

to

be

trending

a

bit

above

the

60%

to

70%

target

range

that

we

have

talked

previously.

Are

you

comfortable

in

potentially

raising

this

target

range

going

forward?

[Stephen J. R. Smith]

I

think

we

addressed

this

maybe

on

the

recent

call.

We

have

a

lot

of

debate

internally

whether

60%

to

70%

is

the

appropriate

number

or

whether

70%

to

80%

should

be

a

higher

number.

I

don't

think

the

board

is

uncomfortable

with

necessarily

a

higher

number.

In

some

ways,

we've

done

specials

for

the

last

five

years.

And

I

think,

to

some

extent,

that

certainly

has

reflected

the

cautiousness

that

we've

had.

I

would

think

–

I

think

you

could

certainly make

the

case

that

if

you're

doing,

it's

about

five

years

in

a

row,

maybe

the

payout

ratio

is

not

inappropriate.

So

I

don't

think

we're

going

to

have

an

issue

if

the

–

or

concern

if

the

payout

ratio

gets

up

over

70%.

[Etienne Ricard, Analyst, BMO Capital Markets Corp. (Canada)]

Thank

you

very

much.

[Operator]

Thank

you.

And

your

last

question

will

be

from

Geoff

Kwan

at

RBC

Capital

Markets.

Please

go

ahead.

[Geoffrey Kwan, Analyst, RBC Dominion Securities, Inc.]

Hi.

Good

morning.

Just

going

back

to

the

residential

side,

you

talked

about

obviously

some

of

the

cooling

activity

off

of

elevated

levels.

I'm

curious

where

you're

seeing

it,

whether

or not

it's

by

region,

urban

versus

rural,

by

housing

type,

by

homebuyer

type

or

any

other

way

that

you

analyze

the

market?

[Jason Ellis]

No.

Hi,

Geoff.

It's

Jason.

No,

I

would

say

off

the

top,

I

don't

have

any

glaring

evidence

that

there's

anything

significant

in

terms

of

a

shift

in

geography

or

borrower

type.

I

guess,

based

on

my

comments

earlier,

if

I

went

back

and

looked,

I

would

say,

in

terms

of

loan

purpose,

we

may

see

a

slightly

elevated

percentage

of

refinance

activity

relative

to

purchase

activity,

but

I

don't

have

that

in

front

of

me.

Otherwise,

I'd

say

at

the

margin,

anecdotally,

we've

had

some

favorable

numbers

in

our

Calgary

office

suggesting

that

Alberta

is who's

sort

of

long

suffered

in

the

housing

market

relative

to

the

rest

of

the

country

has

had

done

maybe

at

the

margin

relatively

better

in comparison.

But

no,

nothing

stands

out

as

noteworthy.

[Geoffrey Kwan, Analyst, RBC Dominion Securities, Inc.]

Okay.

And

then

on

the

Excalibur

product,

more

broadly

in

the

Alt-A

market,

I

think

there's

been

kind of

one

to

two

rate

increases

from some

of

the

players

in

that

part

of

the

market

so

far

this

year.

I

know

you

tend

to

target

more

like

the

higher

end

of

the

Alt-A

part

of

the

market.

But

just

wondering

if

you've

looked

to

implement

some

rate

increases

this

year?

And

if

so,

what

might

have

been

the

blended

rate

increase

that

you've

put

through?

[Jason Ellis]

Yeah.

No.

The

Excalibur

rate,

the

Alt-A

mortgage

coupons

generally

in

the

market

proved

to

be

very

sticky

throughout

the

pandemic

with

a

slow

and

steady

squeeze

on

the

margin

between

the

typical

Alt-A

coupon

and

whatever

your

underlying

benchmark

was,

whether

it was

swaps

or

Canada's.

But

we

have

moved

rates

up

recently,

both

on

the

prime

and

on

the

Alt-A

side.

So,

in

terms

of

magnitude,

the

mortgage

coupons

haven't

moved

up

as

much

as

our

cost

of

funds

has.

So,

we

have

not

recovered

the

margin

to

where

it

was.

But

in

terms

of

the

actual

blended

rate,

I

would

say,

our

lowest

coupon

in

the

Alt-A

program

through

much

of the

pandemic

was

in

the

context

of CAD

2.79

plus

the

lender

fee.

I

think

it's

probably

25

basis

points

higher

now,

but

I'd

be

honest

with

you,

Geoff,

I'd

have

to

double

check

on

that,

but

that

sounds

about

the

right

order

of

magnitude.

[Geoffrey Kwan, Analyst, RBC Dominion Securities, Inc.]

Okay.

And

just my

last

question

was

on

your

positive

outlook

on

the

Commercial

originations

for

the

year,

how

would

you

describe

the

competitive

environment

today?

And

then

also

within

your

view

for

the

year,

like

what

parts

within

[ph]



Commercial

multi-unit

residential

(00:47:06) do

you

see

that

strength

coming

from?

[Jason Ellis]

Well, fortunately,

we've

developed

an

expertise

in

the

CMHC

multifamily

side.

And

some

of

the

largest

developers

and

owners

come

to

us

for

that

expertise.

As

we

see

CMHC

roll

out

its

new

affordable

program.

Fortunately,

we're

well-positioned

to

offer

good

advice

and

continue

to,

I

think,

grow

our

leading

position

on

CMHC

multifamily.

So

I

do

see

opportunity

for

growth

in

the

CMHC

multifamily

side.

But

perhaps

more

significantly,

last

year,

we

launched

our

core

conventional

program

on

the

Commercial

side

of

the

business

with

some

very

strong

institutional

investor

support.

I

think

a

re-diversification

of

our

Commercial

business

by

expanding

our

conventional

lending

activity

has

been

a

real

source

of

growth,

and

I

think

that

we

can

continue

to

look

forward

to

more

of

that

next

year.

So

I'd

say,

as

a

split,

we'll

probably

see

conventional

grow

in

relative

terms

to

CMHC

multifamily,

but

I

still

think

there's

room

for

our

multifamily

to

grow

from

where

it

is

now.

[Geoffrey Kwan, Analyst, RBC Dominion Securities, Inc.]

Okay.

Great.

Thank

you.

[Operator]

Thank you.

And

at

this

time,

I

would

like

to

turn

the

call

back

over

to

Mr.

Smith

for

closing

comments.

[Stephen J. R. Smith]

Thanks,

operator.

As

there

are

no

further

questions,

we

look

forward

to

reporting

our

first

quarter

results

this

spring.

Thanks

for

taking

part

in

our

call

and

have

a

good

day.

[Operator]

Thank

you,

sir.

Ladies

and

gentlemen...

[Stephen J. R. Smith]

Thank

you.

[Operator]

...this

does

indeed

conclude

your

conference

call.

Once

again,

thank

you

for

attending,

and

we

ask

that

you

please

disconnect

your

lines.