First National wrapped up a “successful” 2023 in spite of challenging economic conditions and a drop in its residential mortgage originations.
Canada’s largest non-bank lender reported a 28% rise in net income in 2023, thanks to commercial mortgage volumes offsetting a decline in its residential mortgage originations.
“Despite challenging market conditions brought on by the cumulative effect of higher interest rates, total originations including renewals came close to equalling our previous record set in 2022,” said President and CEO Jason Ellis.
“In the case of our commercial business, annual volumes were best-ever at over $13 billion, fueled by customer demand for high-quality insured multi-unit mortgage products,” he added.
“Significant” slowdown in mortgage volumes expected for early 2024
On the residential side, single-family originations for the full year totalled $24.4 billion, down 7% from the $26.3 billion in volume done in 2022. In the fourth quarter, the lender saw volumes down 20% year-over-year.
First National said it expects “significantly lower” single-family originations in early 2024 compared to the previous year “due to persistent housing affordability challenges and an increasingly competitive marketplace.”
Over the longer term, however, the lender sees higher immigration levels as helping to support demand in the housing market.
On its commercial lending side, First National expects a strong start to the year thanks to government announcements that have led to increased construction of multi-unit housing. “These initiatives, including the increase of the Canada Mortgage Bond program from $40 to $60 billion, provide a stable market for [First National]’s borrowers to use CMHC-insured mortgages for funding,” the lender said.
High interest rates had some positive impacts
Part of First National’s strong financial performance in 2023 can be attributed to the biggest factor that’s led to a slowdown in residential mortgage volumes: high interest rates.
“The higher interest rate environment, while perhaps slowing new originations, had a favourable impact on parts of our business; these include slower mortgage prepayment speeds that benefited portfolio growth, and higher interest rates that acted as a tailwind for mortgage servicing, or we earned higher interest income on escrow deposits,” Chief Financial Officer Rob Inglis said on the company’s fourth-quarter earnings call.
He noted that First National’s mortgage servicing income—which it earns from third-party agreements, such as underwriting broker-channel mortgages for TD and, as of 2024, BMO—was up 70% in 2023.
Q4 earnings overview
| Q4 2022 | Q3 2023 | Q4 2023 | |
|---|---|---|---|
| Net income | $42.7M | $89.2M | $44.2M |
| Single-family originations (incl. renewals) | $5.5B | $7.4B | $4.4B (-20%) |
| Commercial originations (incl. renewals) | $3B | $3.3B | $3.8B (+27%) |
| Mortgages under administration | $131B | $141.9B | $143.5B (+10%) |
Notables from its call:
First National Chief Financial Officer Rob Inglis commented on the following topics during the company’s earnings call:
On origination volumes:
- “We expect residential origination to open the year below Q1 2023 volumes of $4.4 billion based on a lower commitment levels in the fourth quarter, and our assessment of the ongoing impact of Bank of Canada interest rate policy on housing activity.”
- Broker fees received in 2023 decreased 20% year-over-year reflecting “lower origination volumes of single-family mortgages for our institutional investors, and a return to more traditional per unit broker fees, which were historically high in 2022 as a result of competition.”
On its alternative lending portfolio:
- “Excalibur originations were more affected by market pressures in 2023 than were prime mortgages as it was more difficult for these borrowers to qualify for credit offered at the higher mortgage coupon rates. Mortgage brokers are also still coming around the idea of First National as a lender of choice for this product.”
On mortgage arrears:
- “Excalibur mortgages continue to perform as expected with virtually no loan losses and a relatively small number of mortgages and defaults.”
- “Since the vast majority of Excalibur borrowers take 1-year terms, they have been given very little time to adapt to the new rate environment as opposed to the majority of prime borrowers who are generally locked into 5-year terms. As house prices continue to hold up well in our urban area markets of focus, defaults can usually be resolved successfully through sale.”
- Arrears for our prime fixed and adjustable rate single-family portfolios are also trending as expected, with just small upticks in arrears statistics.
On First National’s commercial business:
- “…we expect to see ongoing strength in the first half of 2024 as borrowers have responded to government incentives to build and provide financing for multi-unit properties; we have built a sizable, committed pipeline.”
- “Longer term, population growth and ongoing lack of housing supply should provide ongoing support for prices and stimulate much needed new construction of affordable rental units that First National will finance.”
On prepayment speeds:
- “On prepayment speeds, we expect these to remain near current levels until such time as we see a significant reduction in interest rates. In this environment, borrowers holding mortgage coupon rates well below prevailing market rates have very little incentive to refinance. Over time, prepayments will likely see a reversion to the mean after the past couple of years of extremes.”
On First National’s deal to provide underwriting services to BMO’s recently launched BrokerEdge:
- “It’s proceeding as planned and it’s going to be a slow start…There was a soft launch into January. In February…they grew out to a number of brokers just in Ontario. As they learn how that information flow goes and how the reporting goes, they will expand to more brokers in Ontario. And so it’ll be slow growth for the course of the year.”
First National Q4 conference call