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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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.
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?
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.
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.
Thank you, sir. [Operator Instructions] And your first question will be from Nik Priebe at CIBC Capital Markets. Please go ahead.
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?
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.
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?
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.
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?
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.
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.
Yeah. Okay. All right. Thanks very much. That's it for me.
Thank you. Next question will be from Graham Ryding at TD Securities. Please go ahead.
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?
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.
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...?
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?
Total amount.
Total amount? Yes. So, I would say, CAD 12 billion to CAD 13 billion total securitization activity for the year, Rob?
Yeah, that makes sense. I think we've really maximized the capacity in 2021. So, hopefully, the 2022 is same thing.
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?
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.
Okay.
Percentage wise.
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?
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).
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.
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?
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.
Okay. That's it for me. Thank you.
Thanks, Graham.
Next question will be from James Gloyn at National Bank Financial. Please go ahead.
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?
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.
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?
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.
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?
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.
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"?
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.
Okay. Thank you very much.
Thank you. [Operator Instructions] And your next question will be from Etienne Ricard at BMO Capital Markets. Please go ahead.
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?
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.
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?
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...
Yeah. It was sort of like maybe not 100% growth, doubling, but in that sort of magnitude, really, great growth.
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.
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?
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%.
Thank you very much.
Thank you. And your last question will be from Geoff Kwan at RBC Capital Markets. Please go ahead.
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?
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.
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?
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.
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?
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.
Okay. Great. Thank you.
Thank you. And at this time, I would like to turn the call back over to Mr. Smith for closing comments.
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.
Thank you, sir. Ladies and gentlemen...
Thank you.
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