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Good morning, ladies and gentlemen. And welcome to First National's First Quarter 2020 Analyst Call. [Operator Instructions] This call is being recorded for replay purposes on May 13 at 10:00 a.m. Eastern Time.It is now my pleasure to turn the call over to Stephen Smith, Chairman and Chief Executive Officer of First National. Please proceed, Mr. Smith.
Thank you, operator. Good morning, everyone. Welcome to our call, and thank you for participating. Rob Inglis, our Chief Financial Officer; and Moray Tawse, Executive Vice President, have joined me from their home offices.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.It's hard to imagine that just over 2 months ago, First National reported record financial results for 2019 and a positive outlook for 2020. Since then, COVID-19 has disrupted life for every Canadian and every Canadian business, including First National, and the associate economic disruption is now being felt in every corner of the country. As an essential service, we remain on the job to assist our customers during this time of need. Since the start of the pandemic, we have not lost a step in either the single-family or commercial segments. We've continued to renew mortgages and to lend on both insured and a conventional basis. The biggest challenge to our business has been providing mortgage payment deferrals, which Rob will speak to later in the call.One thing that we have found is that we continue to have considerable liquidity as a result of our funding model, and we are making use of the various channels available to us to fund our mortgages. Internally, our team has done an outstanding job, while following our work-at-home contingency plan. Over 90% of our workforce moved off-site within a week of the pandemic declaration.If there was ever an event that tested the resilience and professionalism of First National team, this is it. I'm very proud of the work that they are performing. And I'm pleased with the strength of our IT department, continues to enable seamless secure work from home.Our call center volumes hit record highs in late March, and we had to reassign employees to help. There is still more -- there are still more calls than normal, but we stand ready to respond to our customers and partners anytime they need us. I would like to personally thank all of our call center employees who rose to the challenge to get back to the thousand of phone messages, e-mails and other [ oral ] communications over the past 1.5 months. It has been a stressful time, and you remain committed to assisting our customers in a time of need.COVID-19 has created a somewhat more negative outlook for the year. While we expect origination volumes to decline for the remaining year, this is tempered by the wider spreads that we are earning on our new originations, particularly in the CMHC multifamily area. This is not too dissimilar to our experience in the 2008, 2009 financial crisis. Overall, well -- First National is well positioned to manage through the downturn with a proven business model, scale and unwavering purpose.Turning to the quarter results. Originations exceeded our expectations. Single-family origination increased year-over-year by 53% to $2.8 billion. January to March volumes were quite strong compared to similar months in prior years. We attribute growth to strong economic conditions entering the year, our market share and a comparatively weak Q1 last year.All regions achieved growth led by British Columbia, where volumes were up 75% compared to last year. Our Excalibur program also experienced strong growth. While we expect originations to slow, First National is able to underwrite a record volume of new commitments for customers in March, which will be reflected in second quarter volumes. This is testament to our service levels, which did not drop, appreciated, during the first few weeks of working from home.Single-family renewals were also ahead of last year by 20 -- by about 20% and was helped by strong retention rates. On the commercial side, origination was up 113% to $2.6 billion. That, too, is a record-setting pace and again reflects strong economic conditions and the leverage of our expertise in the industry. Commercial market lending share data is hard to come by. But I would like -- I would say the commercial team is doing a great job of assisting borrowers with timely advice and competitive products. Commercial renewals were also ahead of last year by 26%.The quarter finished with MUA at a record level of $113.5 billion, 6% higher than a year ago and 8% on an annualized basis above year-end 2019. In a normal environment, increases in MUA typically result in increases in revenue. This was not the case this quarter, and Rob will discuss why in his remarks.Moving to the bottom line, pre-fair market value income increased 35% year-over-year. As you know, we used the figure before the impact of fair value-related changes and not IFRS 9 -- IFRS earnings to determine our common share dividend policy for the simple reason that we've never considered gains on financial instruments to be revenue available for dividend payments and likewise, we discount such losses.The dividend payout ratio on this basis was 76% in Q1 compared to 102% in Q1 of last year despite an increase to $1.95 per common share dividend in December. On an IFRS basis, the net loss in Q1 2020 was $0.05 per common share. This is the first loss incurred in our history as a public company and reflected unprecedented volatility in the bond market.I will now turn the call over to Rob. Rob?
Yes. Good morning, everyone. To pick up where Stephen left off, I'll start with the revenue. Despite across-the-board increases in placement fees, mortgage servicing income, mortgage investment income and net interest on securitized mortgages, revenue was 4% below last year's first quarter. This decline reflected the significant increase in fair market value losses related to sudden and significant drop in interest rates experienced in the first quarter.As you know, the Bank of Canada reduced its overnight rates 3x for a total of 150 basis points in March, offering the benchmark rate for the first time since October 24, 2018. The market followed suit and lower yields, went lower in the bond market. This had a significant impact on the short bond positions that we use to mitigate interest risk -- rate risk on our n our single-family commitments. Not to get too far into accounting standards, but with the adoption of IFRS 9, a significant portion of our interest rate management program qualified for hedge accounting, and we have documented the hedging relationships for virtually all multi-residential commitments and funded mortgages, originating for our own securitization programs.We've also done the same thing for our funded single-family mortgages and swaps used in our ABCP programs. This has reduced, but not eliminated volatility. That's because we don't document hedging relationship for our interest mitigation program used to economically hedge single-family mortgage commitments. The optional nature of these commitments makes it very difficult to establish a valid hedging relationship.In total, the company experienced losses of about $124 million on our short bond book. We applied hedge accounting on just over $57 million of those losses, leaving the remainder about $66 million in earnings. If we exclude these losses, first quarter revenue grew 13% year-over-year.Now let's look at some of the major revenue contributors. Q1 placement fees increased 70% due to the growth in origination that Stephen mentioned. We placed about $3.5 billion of new single-family and commercial segment volume with institutional investors, about $1.4 billion more than last year. As a result of higher demand, the company was also able to increase per unit commercial mortgage placement fees.Mortgage servicing income increased 18% due to the benefits of a higher MUA and more so because of higher revenue earned on our underwriting and fulfillment processing services business. Similar to First National's own Q1 experience, our initial customer in this business experienced good growth in the mortgage broker distribution channel. Net interest revenue on securitized mortgages increased 14% largely due to adding the Excalibur securitization program and growing that program over the past 12 months. We also experienced growth in commercial segment mortgages at consistent securitization spreads.Mortgage investment income increased 3%, primarily due to higher origination results, which results in more mortgages held prior to securitization.Moving on to expenses. I'll just comment on 2 significant variances. Brokerage fees were 72% higher than a year ago, reflecting the higherorigination volumes and the fact that we expensed broker loyalty programs from 2019 in the first quarter. This resulted in about a 10% increase in per unit costs. Salaries and benefits were higher by 22%, largely due to growth in our employee base year-over-year, which stood at just over 1,000 at March 31, 2020. We also paid high commission -- compensation for our commission-based employees pursuant to increased commercial origination. As Stephen noted in his remarks, First National is providing assistance to borrowers who require financial need as a result of COVID-19 disruptions in the form of mortgage payment deferrals. We have provided qualifying borrowers with 3 months of payment deferral. And in cases of extreme hardship, the company will consider granting a second 3-month extension.From an accounting perspective, these deferred mortgages will cease to amortize during this period and interest otherwise payable will be capitalized to the principle of a mortgage. So in this period, those mortgage balances will increase during the next 3 months. Payment deferrals related to $78 billion of MUA, which we manage for our institutional investors, will not require any investment from First National. And it's only where the company has securitized mortgages that will be required to fund the deferrals. This is the most significant for the company's NHA-MBS program. As an issuer, First National will be required to make timely payments on the NHA-MBS securities that is issued.At our first quarter end at March 31, the extent of this obligation was less than $500,000. This figure has grown subsequent to year -- quarter end. As at May 12, 2020, yesterday, the company had provided approximately $24.5 million of payment deferrals on the securitized and warehouse mortgage portfolio. Generally, the ratio of single-family borrowers using this facility is about 14%. The ratio rose quickly in April, but has -- the curve has flattened over the recent weeks. It's important to point out that these mortgages are not classified as delinquent or in arrears. These deferrals have been allowed by First National and will not be reported to the mortgage default insurers or the credit bureaus. As all the mortgages and NHA -- sorry, NHA-MBS pools are insured, the company is not concerned about credit losses in the program. For First National, the matter at hand is having the cash resources to fund these assets.Currently, the company's modeling shows that it has the credit lines and ability to generate cash from prime mortgage assets to fund the requirements under its securitization programs. Stephen covered Q1 earnings performance and the dividend ratio. So I will conclude with one other observation. Of the $113.5 billion of MUA, $78.5 billion is on our institutional investors' balance sheets, and there is no credit exposure retained by the company. Of the remaining $35 billion, $2.7 billion are uninsured, it's our belief that the composition of MUA will mitigate potential credit losses in the post COVID-19 era.Now here's Moray with our outlook.
Thanks, Rob. Good morning, everyone. I'd like to echo Stephen's comments by thanking our employees for the rising to the challenge of working from home and add a big thanking to our partners, mortgage brokers and investors for your ongoing support and commitment to our borrowers.On our last call in February, I said that the prevailing mood here was of optimism. While we are optimistic by nature, our outlook has obviously shifted to be more cautious. It is very difficult to forecast in this environment and because it's not possible to estimate the length and severity of this crisis, it's also not possible to reliably estimate the impact it may have on our financial results. So my comments will be qualitative in nature.In short term, origination volume already originated will be strong as mortgage commitments issued in Q1 transform into funded mortgage in Q2. However, we are -- however, we move into the latter part of quarter 2, we expect origination volumes will decline, perhaps significantly, but due to what we are forecasting is low home buying activity. Our commercial segment also expects some softening in the trajectory, as strong commitments recorded in the first quarter give way to possibly slower originations as the year progresses.While there -- our commercial property types that are not interested by current investors' appetite, there is still a robust market for multifamily insured mortgages. Multis have always been the commercial segment's primary focus.CMHC has also introduced a new 3-year term CMB this quarter. This is a result of investor interest and will provide new products for First National that we believe will be a particular interest for renewing mortgages and for borrowers who do not want to lock in for longer term, giving a new option for our customers. In the near term, the company may be faced with changing securitization margins as financial markets volatility recovers. The capital markets have already begun to return to normalcy, but may not return to pre-pandemic conditions for some months. This will depend on the degree of successive government interventions and the timing of an economic restart.These are unprecedented times, and we are taking nothing for granted, but we do know that the total lockdown can't go on forever. As we saw following the international credit crisis a decade ago, wider credit spreads should develop after the pandemic and First National will be well positioned to benefit. We are grateful to the government and the Bank of Canada for putting forward significantly monetary and fiscal support as these will hopefully bridge the gap for everyone. And if there is one silver lining for borrowers, it's that all-in mortgage rates are extremely attractive.In closing, I would like to simply say that First National is open for business. We continue to enjoy strong relationships with mortgage brokers and our diverse funding sources. We will continue to generate income and cash flow from our $33 billion portfolio of mortgages pledged under securitization and $78 billion service mortgages, while focusing on the value inherent in our significant single-family renewal. We look forward to better times and to everyone on this call.
[Operator Instructions] Your first question comes from Geoff Kwan with RBC Capital Markets.
I was wondering -- you talked about the wider spreads, and we saw that happen during the global financial crisis. Just wondering on the institutional placement side of your business, how should we think about how that wider spreads? How much you're able to keep of that? How much of that might get shared with some of your institutional partners?
I would say on balance from the institutional partners, we won't participate in the wider spreads there. Where we do participate in the wider spreads would be on one on the single family, where we're securitizing it into a product like NHA-MBS. So that's where we participate in wider spreads. And in particular, in the multifamily area, we were starting to see wider spreads develop in the early part of Q1 just because of the general demand -- supply and demand issues, but has accelerated quite a bit in the latter part of March and April as a number of our competitors left the market. So spreads in the multifamily area are quite a bit wider than they were earlier, and we'll start to see that to some extent in Q2 and Q3 early earnings. And the spreads with respect to single-family are wider, but that pricing set by the bank market. So to the extent that -- and they're a little bit more difficult to predict, but we are seeing that now.
Okay. And then on Excalibur, you disclosed you've got another bank partner on securitization side. Can you talk about like how much there is of unused capacity between those 2 programs? I know you've got -- also got institutional, but just wondering on the securitization programs in particular. And then also, are there -- if they decided that they didn't want to fund any of these types of mortgages, what is that provision? Like how much notice would they have to give that they would...
So I would make -- just to say, you're saying we've seen none of our institutional partners showing any indication that they want to back away from funding either prime or Excalibur mortgages. So we don't see anything in that regard. And I don't think I want to comment on the extent of our unutilized securitization lines with respect to Excalibur program, that's...
Are you able to say if they decided that they just didn't want to fund new originations, like...
I haven't -- we haven't seen any indication that any of our institutional partners have shown any indication they don't want to continue to fund Excalibur.
Okay. Just my last question.
Yes.
Yes, no, I was just wondering, those on the bank side, on the bank securitization side.
On the securitization side?
Yes. Like they have to give you like 30 days notice that, hey, we're not...
No, no, those commitments -- on securitization programs, they're generally revolving 6 months. So there's a 6-month notice period. So they could get up to a period and say, we don't want to fund anymore, we don't want to increase or we don't want to renew it. So they would...
6 months.
6 months, yes.
Okay. Perfect. And just my last question was on the mortgage servicing side, I'm just trying to understand the leverage you have there just given that, as you referenced, you're getting more calls in and whatnot. You -- I think you kind of talked about and generally, companies do it in terms of reallocating existing employees to areas that are of needs. But maybe thinking about it another way, like if you use a scale of 1 to 10, where 10 would represent we need to hire new employees to handle increased demand in a certain business function, whether or not it's the servicing department or whatever, like where on that scale would you be today in terms of how close you would be?
Yes, we haven't had to hire any new employees, and I don't foresee that. What -- I would say that we experienced the same type of -- we experienced probably the same influx that every other, say, [ the subset ]. So what -- it was really almost an IT effort to develop apps that you can put on your website that people can deal with that and then people fulfill it in. And once we dealt that from an IT area, we were able to clear up the backlog fairly quickly. And we now, I'd say -- probably in the last 2 weeks, I'd say almost the curve is flattened, where we're getting new requests in, but actually, we're getting quite a few requests for people wanting to reverse payment deferrals because I think the way the program is being rolled out, because I think a lot of people thought it was free, so either you didn't have to pay your mortgage payment or there's no interest charge. I don't think -- I think there was certainly a segment of the population who didn't understand that it was being added to your mortgage and that you'd be paying interest on.
Your next question comes from the line of Graham Ryding with TD Securities.
You mentioned to the $2.7 billion of MUA that you've got credit exposure to. Is that -- is that related to the conventional mortgages that you've funded through asset-backed commercial paper?
That's correct.
Okay. Got it. And can you give us some color on sort of what the typical loan-to-value is on that portfolio?
No. I wouldn't know. I would say -- I would say it wasn't -- it's not material relative to -- it wouldn't be materially different from the rest of the conventional portfolio. A portion of that is Excalibur. I think about -- I don't know actually whether we disclose how much is Excalibur, but a portion of that is Excalibur. But it would mirror our portfolio as a whole.
Okay. Got it. But it's obviously less than 80% because these are compressions.
Oh, yes. All less than 80%.
Okay. And then on the deferrals side of things, my math suggests it's roughly about -- just under -- about $43 million a quarter is what the sort of cash investment is that you're having to pay for these deferrals, is that right?
Yes. That would be the number. I think we have about 100 -- Rob, correct me if I'm wrong, but I think when I looked at the numbers last, it was about 14% deferrals for NHA-MBS, that would go to about $14 million and change per month. So it's $43 million a quarter.
Yes, that's it.
Okay. And then is this primarily going to be funded from your credit facility? Or what are the levers that you have here if you...
Well, it would be funded from our cash resources. One of our cash resources includes our credit facility in addition to earnings, too. We have adequate cash resources to be able to fund this.
Okay. Now does that include the 14%, does that include the asset-backed commercial paper portion? Or is this just your NHA?
No, this would just be the NHA-MBS, that doesn't include the asset-backed commercial paper portion.
Are you having to fund any deferrals on that side of your business?
No. That ends up. It's -- in a sense, you don't pay that you just -- because that comes back to us. So it ends up being a receivable on the balance sheet.
Okay. Understood. And then my last question...
Or an increase to the mortgage, which ends up being financed by the ABCP. So actually now, I think -- I think it ends up being financed by the ABCP.
Right. Okay. And then my last question, if I could, just the losses that you took on the financial instruments in the quarter. Is that a -- is that an actual realized loss that you will look to recover over time through higher net interest income? Is that the right way to think about it?
The losses that we would record would be realized in unrealized losses at the end of the Q, and we would anticipate -- we would anticipate recovering that over time from the mortgages that are funded as we have. And any time we recognize those losses, as you know, over the years, depending on the capital markets, some quarters, we have gains and other quarters, we have losses.
Right. So the offset here is you've obviously funded mortgages with wider spreads that are going into your securitized book?
Correct. Correct.
[Operator Instructions] Your next question comes from Jaeme Gloyn with National Bank Financial.
I apologize if you addressed this in the opening remarks, but just looking for a little bit more color around application volumes in April and May so far on both single-family and commercial.
Right. So this would be -- this would be numbers we would -- wouldn't normally share, but what we would say in April compared to last year, single-family application volumes were down about 40%. And we would say for the first 7 or 8 days of May, application volumes are down about 30%. I think I would say we're -- if we had a sentiment here, we actually feel pretty good about the application volumes in May. Last May was a strong month for -- last May of 2019 was a strong month. So we feel fairly good. We're seeing some markets as showing a fair degree of strength in terms of -- they don't seem to be down that much. We're surprised at the amount of purchases that we're still seeing. So we feel fairly good about that.On the single -- on the commercial side, we'd say conventional commercial lending, just generally all the investors are on the sidelines right now. And I'm just waiting for things to stabilize. But what we see -- we continue to see substantial strength in our multifamily business. And a lot of demand there and a lot of demand at considerably wider spreads than we experienced precrisis. So it's very similar to 2009, 2010 period. And we had great numbers in 2009, 2010. We were a smaller player then and now we're probably the dominant player in multifamily. And in many ways, that's helping us because a number of our competitors just dropped out at the end of March, we continued to lend. And our expertise and understanding, I think we're picking up share because I think people -- there's a tendency for people to go with proven relationships, improving relationships that can fund. So I'd say we're -- going forward, we're trying to -- we're -- I'd say, certainly more optimistic than April 1, and we think there -- difficult to predict, but we certainly think the -- we're encouraged by these numbers. And we're also very encouraged by the wider spreads.
Okay. And I really appreciate that extra color. In terms of -- and you sort of talked about market share on the commercial side building. I'm curious on the single-family side as well in terms of market share, obviously, record numbers in Q1. Did you -- is there anything you can comment on the competitive dynamics around maybe the banks stepping back or any other players stepping back that allowed you to achieve those numbers?
Well, that's -- I think that's a good question [indiscernible]. I think a couple of things, we had a tough quarter in Q1 2019. So the numbers are strong there. I think we had good rates at the latter -- we had good competitive rates in the latter part of Q1 '19 and into the early parts. So I think we picked up share. So maybe the bank stepped back a bit. I think it's more of -- we've just been more competitive with our products. And yes -- I mean in all -- in any market share business, and it really doesn't matter in our industry or in any others, you go and you see you have a dominant -- a dynamite quarter and we're up, let's say, 53%. And you think, oh, great, we're going to get great share, and then you find out the whole industry is up 40%. I see a move where our share, let's say, 16%, we moved up to 16% or 16.5% or 17%, we'd be delighted.
Right. And if I could just dig in maybe a little bit more in terms of the origination activity. Would you be able to share any color on how much would be related to new mortgages as opposed to refinancing competitors' mortgage?
Oh, I would say, I guess, when we look at the business, transfers in are not a big factor. And I think I haven't looked at the transferred in numbers, Jaeme. But what I would say -- I would infer by the fact that our retention rates are up that I think this is an environment where people aren't moving right now just because of all the difficulty and they're focused on different things. So I would say, but the measure that we would be looking at would be the split between refinances and purchases. And we are finding purchases surprisingly strong.
Okay. And last one for me then just as it relates to some of the credit risk that's in the business, can you offer your thoughts on the -- on how we should be thinking about credit risk in the bridge loan portfolio, maybe some color around LTVs, quality of underlying borrowers.
Yes. So the bridge loan in the 2.5 is about 100 -- it's 150 Rob or Moray, is that the number?
Yes, around there.
And Moray, you can step in if you wish, but we, of course, looked at the bridge loan portfolio, and it's -- we're very comfortable with the quality of all these individual mortgages and the covenants. So we don't -- we don't see any -- we don't have any concerns about the bridge at all nor do we have any concerns about the $2.6 billion that we have on our own. I mean there's a tendency, I think -- remember, that's 2% of our total assets that are admin. I mean you could -- I mean you take -- you just -- you apply -- you apply numbers, let's say, you had a 20% default and 30% on the -- you have to have -- you have to have some pretty severe results where you're going to have losses on that book that we're having the impact upon the company.
I think you've got to look at what we use that bridge portfolio for. I mean there's loans on there that are to publicly traded REITs. Usually, we're just trying to bridge a period to get to a CMHC mortgage at the end. So maybe there's a mortgage coming due. We haven't got the certificate yet. But typically, they're very high quality borrowers. All borrowers, we have a lot of experience with. It's not the typical mezz book where we're out trying to build that mezz book. That mezz book there is really just to accommodate our top-rated customers to give them some cash, while another mortgage comes due until we notice. But we use that book typically to build to a CMHC takeout mortgage, and CMHC is still very, very accommodative and is very bullish on their doing of new apartment building loans.
Yes. I think there's a lot of terminology turnaround. We use the term mezzanine, bridge. I think the better term is bridge. They're really a short-term loan to take out. So we have good security with strong covenants. And we're not chasing -- we're really not chasing yields here. This isn't like you're doing the mezz 4 or 5 or -- it's more of a bank loan than it's a mortgage loan.
And just to confirm, there's no payment deferral request so far in that -- in any of that commercial book, right?
No. No. No. None of that. And just on the CMHC multifamily, there's -- I think we've had some requests, but I don't know that we've granted any payment deferral request on the multifamily...
Most of the requests -- Stephen, I think that most of the requests have been sort of what we call the very small multifamily, which we don't really even really do anymore, more are sort of like 4 to 10, 12 units. And we really haven't been in that business for 3 or 4 years. Most of the rent payments that have been coming in from -- we've talked to almost every one of our large borrower clients. And the amount of rents to be coming in sort of seem to be from a low of about 75% for very few to the average is between 85% and 95% and no large loan or large borrower has requested any deferral or think that they will need it at this time.
There are no further questions at this time. I will now turn the call back over to Mr. Smith for closing remarks.
Thank you very much for operating. Thanks, everyone, for joining us today. We look forward -- I think we have an AGM coming up, Rob, but I think that's going to be perfunctory, I guess, given these times. And we look forward to seeing everyone at our next call for where we report Q2, which will be in the final week of July. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.