Earnings call transcript: First National Q4 2024 shows strong revenue growth

First National Financial Corporation (FN) reported its fourth-quarter earnings for 2024, highlighting a robust increase in revenue despite a slight decline in net interest margin. The company’s stock price saw a positive movement, reflecting investor confidence in its strategic initiatives and market position. According to InvestingPro data, First National maintains a "GREAT" overall financial health score of 3.42, with particularly strong performance in growth and profitability metrics.

Key Takeaways

• Revenue increased by 19% in Q4, showing strong growth.
• Net interest margin decreased by 6 basis points year-over-year.
• Residential mortgage fundings rose by 43% in Q4.
• Continued investment in technology and infrastructure with $13.5 million planned for 2024.
• Strong focus on third-party underwriting and mortgage servicing.

Company Performance

First National demonstrated a solid performance in Q4 2024, with revenue rising by 19% compared to the previous year. The company maintained its annual origination volume at $37.5 billion, indicating stable performance in a competitive market. Despite a decrease in net interest margin from 59 to 53 basis points, the firm continued to leverage its leadership in insured multi-unit residential housing. The company’s revenue growth trend remains strong, with a 5-year CAGR of 13% and analysts forecasting 17% growth for FY2025. InvestingPro analysis reveals 14+ additional key insights about First National’s performance and potential.

Financial Highlights

• Revenue: Up 19% in Q4 and 10% annually.
• Net interest margin: Declined from 59 to 53 basis points.
• Annual originations: $37.5 billion, unchanged from 2023.
• Mortgage Tender Administration: Increased by 7% year-over-year to $153.7 billion.

Outlook & Guidance

First National anticipates steady commercial origination volumes and continued growth in the housing market. The company plans to maintain its strong dividend payout ratio between 61% and 71%. Future guidance projects EPS growth through FY2026, with expected increases in revenue driven by strategic initiatives in third-party services and technology investments. Analysts share this optimistic outlook, with seven analysts recently revising their earnings estimates upward. The stock currently trades at an attractive PEG ratio of 0.72, suggesting potential undervaluation relative to its growth prospects. For detailed valuation analysis and more insights, check out the comprehensive Pro Research Report available on InvestingPro.

Executive Commentary

Jason Ellis, CEO of First National, emphasized the company’s strategic positioning in the housing market, stating, "We have a persistent lack of supply and a persistent demand for housing in Canada." He also highlighted the benefits of lower interest rates, saying, "Lower rates should also be supportive of activity within our third-party underwriting business."

Risks and Challenges

• Potential impact of trade tariffs on the housing market.
• Decrease in net interest margin could affect profitability.
• Increased broker fee expenses, which rose by 16% year-over-year in Q4.
• Dependence on continued growth in the housing market for sustained performance.

First National’s focus on innovation and strategic investments positions it well for future growth, despite potential challenges in the broader economic environment.

Full transcript - Fabrinet (FN) Q4 2024:

Conference Operator: Good morning, and welcome to First National’s Fourth Quarter Earnings Call. This call is being recorded on Wednesday, March 2025. At this time, all callers are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be provided at that time on how to queue up.

Now, it’s my pleasure to turn the call over to Jason Ellis, President and Chief Executive Officer of First National. Please go ahead, sir.

Jason Ellis, President and Chief Executive Officer, First National: Thank you, and good morning. Welcome to our call, and thank you for participating. Rob Ingalls, our Chief Financial Officer, joins me and will provide his commentary shortly. In addition, joining us today is Jeremy Wedgbery, our Executive Vice President of Commercial Mortgages. So if you ever had something you wanted to know about the Canadian commercial mortgage market, but were afraid to ask, today is your lucky day.

Jeremy will be sticking around for the Q and A session. I 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 risk and uncertainties and should be considered in conjunction with the risk factors detailed in our management’s discussion and analysis. For the fourth quarter, pre fair market value income was $74,800,000 or 3% below last year despite higher origination volume. In fact, we had forecast total single family residential mortgage fundings to increase in the fourth quarter and that is what happened with funded residential mortgages up 43% on a year over year basis.

Total origination in the quarter, including commercial mortgages was $2,100,000,000 or 26.5% higher than Q4 last year. However, nearly all the additional $2,100,000,000 was funded by securitization as opposed to placing it with investors, which has the effect of deferring related revenue to future periods. The year over year growth in residential funding in the fourth quarter is notable, especially when compared to the year over year declines in the first three quarters. As mentioned previously, the first three quarters in 2023 were characterized by the absence of the traditionally largest lender in the broker channel and higher than typical market share for the company as a result. In Q4 of twenty twenty three, that lender reasserted itself in the market and the company’s relative share of funding in that quarter fell in sympathy with this change.

Accordingly, Q4 was the first quarter of twenty twenty four with a favorable year over year comparison. In our commercial mortgage business, where our focus is insured multi unit residential housing, fourth quarter originations were up 8% reflecting both new funding and renewals. First National is the leader in the insured multi unit space and the quarter’s results reflect activity driven by CMHC incentives to build rental stock and create affordable housing. Given the broad success of its affordable loan programs and growing exposure to concentrated risk in the multifamily space, CMHC has recently taken a more cautious view in its underwriting. This is understandable, good for market stability.

Nonetheless, lower rates will provide incentive for continued activity and in the short run, we expect new commercial origination volumes to be steady. For the record and given recent media commentary on the space, First National is not a conventional lender in the new condominium construction market. Turning to our single family outlook, we expect year over year increases in single family fundings in the next two quarters. This expectation is supported by higher commitment levels entering 2025 than we had entering 2024. CMHC is also forecasting growth in the housing market in 2025 on a combination of lower interest rates and changes to mortgage rules introduced in 2024.

Tariffs to the degree they impact the economy, employment and the housing market present a potential challenge to that outlook. In the near term, however, lower rates and reduced housing activity may actually create a level of affordability that when paired with the persistent demand for housing in Canada could serve to moderate any headwinds. Beyond new origination, a priority every year is renewing mortgages. This is especially true this year as higher volumes from 2020 vintages are maturing and will be the subject of our focused retention efforts. As a marketplace risk, much has been said about a renewal cliff as those maturing mortgages carried historically low mortgage coupons.

To provide some context, approximately 75% of those First National five year mortgages advanced in 2020 were adjustable rate. At one point, those borrowers were making payments based on a prime rate of 7.2%. Of course, the prime rate is now down to 5.2% and the Bank of Canada is widely expected to cut rates further on March 12. This is noteworthy because First National did not experience a significant increase in arrears on those adjustable rate mortgages when prime was 07/20. So it is entirely reasonable to assume we will not see any change in arrears as these borrowers renew.

Lower rates should also be supportive of activity within our third party underwriting business, where we successfully ramped up capabilities for our newest bank client in 2024 in advance of higher expected volumes. We see our third party business as a sound way to leverage our platform, including Merlin technology and to add value and earning stability through diversification of revenue. All else being equal, we expect improved economies of scale as we fund higher mortgage volumes in all parts of our business. Higher investment in securitization will also continue to pay off with higher future net interest income. Now over to you, Rob.

Thanks, Jason, and good morning, everyone. Mortgage Tender Administration, the foundation for future profitability, increased 7% year over year and 8% on an annualized basis in the fourth quarter to $153,700,000,000 at year end, a new record. On a consolidated basis, annual originations including renewals of $37,500,000,000 were unchanged from 2023 as strong fourth quarter growth, which Jason described, offset relatively weaker volumes in our single family residential segment earlier in 2024. Now turning to revenue, it was up 10 on the year and 19% in the fourth quarter. Annual growth largely reflected the decision to securitize more of our mortgage originations directly.

Due to the significant size, our portfolios of mortgages pledged under securitization currently deliver about 70% of the company’s revenue. These portfolios grew 11 between 2023 and 2024. Looking now at fourth quarter revenue drivers, net interest on securitized mortgages was up marginally, again reflecting securitized mortgage portfolio growth. NIM however was lower in the portfolio 53 basis points compared to 59 in the fourth quarter last year. This is due to several factors including higher asset backed commercial paper costs.

These bank sponsored conduits generally sell longer term paper in a declining rate market six and twelve months, such that our cost of funds is temporarily higher than the current market. This has been accentuated with the recent Bank of Canada rate cuts. Second, wider margin mortgages in the company’s MBS program are maturing and being replaced with more normal mortgage spread assets. In general, the company invested in securitization in Q4 with origination activity up by 75% compared to Q4 twenty twenty three. Although per unit placement fees were similar year over year, fourth quarter placement fees were up 10% in the fourth quarter on a 9% increase in placement activity.

Growth in MUA pushed mortgage servicing income up by 9% year over year in the fourth quarter. Quarter mortgage investment income increased 1% year over year reflecting higher balances of mortgages accumulated for securitization. The outlier was deferred placement fees as gains declined 57% or $2,800,000 compared to Q4 last year reflecting tighter spreads on the mortgages underlying these fees related to funding sources. Moving now to costs, Q4 broker fee expense increased 16% year over year to $31,000,000 on the increase in single family placement activity. For the year, this expense was down 31% on lower single family volumes placed with institutional investors, partially offset by a 5% increase in per unit broker fees.

Talies and benefits expense increased 17% or $8,500,000 year over year in the fourth quarter and were higher by 7% year over year. The primary reason for the annual increase was 9% FTE growth in part due to staffing up of our new third party underwriting mandate. The company’s annual merit increase also led to increased employee costs. There was also a higher incentive driven commercial underwriting compensation on higher production volume. Turning now to profitability.

As Jason said, Q4 pre fair market value income decreased 3% to $74,800,000 This reflected lower deferred placement fees and a larger investment in commercial securitization, which delays the recognition of revenue. This was partially offset by greater operational leverage and residential origination as growing volumes replacement created higher revenue within our fixed cost underwriting platform. For the year, food front market income decreased 10% to $290,300,000 due to combination of factors higher investment in direct securitization programs, which delays the recognition of revenue to future periods in contrast to 2023 lower single family origination and its effect on placement fees, mortgage servicing revenue and operating leverage and lastly, higher operating costs, particularly for investments in technology, which reduced earnings by about $13,500,000 As you know, the Board increased the regular monthly common share dividend in December to an annualized rate of $2.5 and declared a special dividend of $0.5 per share. Excluding the special dividend, the common share payout ratio was 61%. If gains and losses on financial instruments are excluded, the payout ratio would have been about 70% in the quarter, again excluding the special.

For the year excluding the special dividends declared in December, the normalized payout ratio was 71%. To sum up, First National remained solidly profitable in all the quarters of the year, delivered a 33% after tax pre fair market value return on shareholders’ equity in the year and sustained its track record as a high dividend paying company. By steadily building mortgages placed under securitization and our servicing portfolio as we did again in 2024, we can look forward to the benefits that will accrue to the company for the resulting income and cash flow in future years. Now we’ll be pleased to answer your questions. Operator, please open the lines.

Thanks.

Conference Operator: Thank And your next first question comes from the line of Nick Priebe with CIBC. Please go ahead.

Nick Priebe, Analyst, CIBC: Okay, thanks. I think there was a comment that the momentum in the single family mortgage commitment pipeline remains strong, but it kind of moderated a little bit towards the end of the year. Can you just give us a sense of how that pipeline is building subsequent to quarter end into early March here? Like should we still think about single family commitments being higher year over year, but maybe by a lower magnitude than it was at the end of Q3? Is that kind of a fair characterization?

Jason Ellis, President and Chief Executive Officer, First National: Yes, Nick, that’s fair. We’re definitely seeing stronger pipeline this year in the January and February months than we did in 2024. But the sort of 40% to 50% magnitude that we saw heading into the fourth quarter is not what we’re seeing now. It’s definitely moderated from that, but still I’d call it definitely double digits.

Nick Priebe, Analyst, CIBC: Okay. And then we’re coming up on the five year anniversary of a pretty tumultuous period in the residential mortgage markets with the onset of COVID, the associated lockdowns

Jason Ellis, President and Chief Executive Officer, First National: and

Nick Priebe, Analyst, CIBC: then the subsequent resurgence of housing market activity. And just considering that the most popular mortgage term in the single family channels, the five year contract, can you remind me when you place a mortgage with an institutional investor and that mortgage is successfully renewed at the end of the term, do you earn another placement fee at renewal? I’m just wondering in that context if the volatile housing market activity five years ago might influence the pattern of earnings throughout 2025 and 2026?

Jason Ellis, President and Chief Executive Officer, First National: So yes, we do. If the mortgage at origination was placed with an institutional investor, typically we hope to renew that mortgage and for the benefit of that investor, renew that mortgage with that same investor, at which point we do earn an additional placement fee upon renewal and we continue to earn our servicing strip. Of course, there’s no broker fee to be paid on the renewal. So even though the renewal fee paid by the investor is lower than the initial fee without a broker fee to net against it, I would say, I don’t know, Rob, would the net renewal fee from a placement perspective end up being comparable to or even slightly better than the initial net placement fee? I think it would be definitely higher.

I mean, there was no broker fee. Broker fee is pretty expensive if you ask me. So this is a real gravy for our business if we can retain the customer. Yes. So I think it’s definitely a tailwind into the second half.

You’ll recall, of course, there was a quite a pause in housing activity for the first couple of months, Nick, in 2020. So as we move into the second excuse me, the second half of this year and into next year, we’ll definitely see a much higher renewal opportunity set. And that could have quite a positive impact on our placement fee line.

Nick Priebe, Analyst, CIBC: Yes, that’s interesting. And maybe just on that same theme, Canadian bond yields are traveling downward. Can you just remind us what impact that could have on placement fees like per unit placement fees as well? Would you earn higher per unit placement fees in future quarters on fixed rate mortgages that might have been originated with higher contract rates in the current period? Like is that also going to be a tailwind to per unit placement fees in 2025?

Jason Ellis, President and Chief Executive Officer, First National: No. Actually one of the things that we like about the placement part of the business is that we allocate the mortgage to the investor on new origination at the moment the commitment is allocated to the broker and borrower. And at that moment, the investor takes on all of the related interest rate risk. Similarly, at about one hundred and twenty days prior to renewal, we will send out the renewal offer to the borrower. And again, at that moment, that renewal risk, both the funding and interest rate risk portions of it, are with the investor.

So we earn a fixed fee in both cases regardless of where spreads are. So you won’t see any volatility in that respect. Well, maybe a little bit like there are some other small pockets where, yes, we may sell a funded portfolio of loans, but that represents a very, very small percentage of our placement activity. The overwhelming majority of placement activity for single family mortgages is on a fixed fee basis.

Nick Priebe, Analyst, CIBC: Right. Okay. All right. That makes sense. That’s it for me.

I’ll pass the line. Thank you.

Conference Operator: Your next question comes from the line of Etienne Ricard with BMO Capital Markets. Please go ahead.

Etienne Ricard, Analyst, BMO Capital Markets: Thank you and good morning. Given the elevated macro and political uncertainty, how do you expect consumers to react to the ongoing trade war? And I mean, is there a case to be made that lower bond yields could actually support activity levels or would you expect great tensions to weigh consumer sentiment for real estate transactions?

Jason Ellis, President and Chief Executive Officer, First National: Yes. As I mentioned in the earlier comments, I’d probably say that, obviously early days with the initiation of the tariffs just yesterday, difficult to say for certain one, how long they will actually last and what the impact will be. That said, assuming they do persist, it’s reasonable to assume that there will be pockets of the economy manufacturing in Ontario and Quebec in particular that may suffer disproportionately. I think after some lag of time that could result in employment and some arrears activity in the portfolio, but that’s definitely down the line. Nearer term, I think that the consumer may be cautious and decisions to buy that next house may be put off until there’s some clarity.

But to your point, I think that both the monetary and fiscal responses from the Bank of Canada and the federal government, so lower rates and support could result in actually an element of affordability that could encourage some housing activity.

Graham Ryding, Analyst, TD Securities: I

Jason Ellis, President and Chief Executive Officer, First National: think it’s important to remember that excuse me, it’s important to remember that we have a persistent lack of supply and a persistent demand for housing in Canada. So I think this is this may actually create an affordability bubble, which may encourage activity. So we’ll have to wait and see how that plays out. But just a reminder for everyone, of course, First National is largely an asset manager. The mortgages we retain for securitization are insured for the most part and conventional mortgages are generally sold to third party balance sheet.

So from a credit perspective, not much exposure to think about.

Etienne Ricard, Analyst, BMO Capital Markets: And have you seen changes in the risk appetite from competitors?

Jason Ellis, President and Chief Executive Officer, First National: No, I’d say the market as much as it’s ever been. I think maybe as I’ve said in previous quarters, mortgages, especially residential mortgages and to a lesser degree, but even CNHC insured multifamily mortgages are close to commodities. And so I’d say the market is always competitive. It’s always characterized by one or more participants sort of leaning into it a little bit. But I don’t see any difference in the way people are lending right now.

I’m certainly not seeing people shrink their credit box. Someone may ask the question yet, but one thing we haven’t talked about is the new loan to income portfolio metric that it obviously regulated lenders will be measuring against. As rates continue to fall, the possibility of loan to income being the limiting factor on loan amounts becomes more realistic. So that too may be a little bit of a headwind as rates go lower. We’ll have to wait and see.

Etienne Ricard, Analyst, BMO Capital Markets: Okay. And with the stress test removed for uninsured mortgage renewals, what impact has this had on renewal rates?

Jason Ellis, President and Chief Executive Officer, First National: It hasn’t been measurable. Our experience was even before that change, our borrowers were what we were doing is we were actually testing them against the prevailing qualifying rate at renewal and we were finding the overwhelming majority of our conventional borrowers were qualifying regardless of whether or not they needed to be requalified. Wage inflation between 2020 and today has been significant. So most household incomes are higher. So we actually weren’t finding that that was a material barrier to borrowers making a decision to move lenders if they wanted to anyway.

So it hasn’t been a significant factor.

Etienne Ricard, Analyst, BMO Capital Markets: Great. Thank you very much.

Conference Operator: And your next question comes from the line of Graham Ryding with TD Securities. Please go ahead.

Graham Ryding, Analyst, TD Securities: Hi, good morning. Could you maybe you made some comments just about the impact on NIM from your cost of funds being temporarily higher. Can you quantify what that was? And then maybe Rob just give us a bit of an outlook for what you’re expecting for NIM in 2025?

Jason Ellis, President and Chief Executive Officer, First National: I will try to address that. It’s hard to say. I mean, we get a cost of funds from the bank sponsored conduits and it’s like it is what it is, but we’ve noticed that it’s not dropping as fast as the bank can overnight would drop. And we talked to them, they said, oh, yes, we sold six months

James Gloyn, Analyst, National Bank Financial: notes

Jason Ellis, President and Chief Executive Officer, First National: in five months, those will be redone or you’ll get the better rate. So it’s definitely a significant and that’s not overly significant, but it’s a number that’s a real number. I can’t really say what it is worth, but maybe two basis points. It’s only on our ABCP book and different conduits have different durations that kind of thing. So definitely it’s going to last.

And I think if the Bank of Canada cuts rates because of the tariffs etcetera in the next six months, it will be an ongoing thing until we reach the bottom, whatever that is. Yes. I mean the average duration of the outstanding commercial paper in the conduit tends to be around six months. So there’s a stickiness to the cost of funds as that older paper flows through as Rob said. It is a symmetrical phenomenon of course, when rates next start going up, we’ll enjoy a comparable inflation of NIM as paper issued and lower rate environment sticks around while the Bank of Canada increases rates.

But yes, I don’t see the effects getting worse. I mean, it is what it is. And as Rob says, our ABCD conduits represent a relatively small percentage of the securitized portfolio. So maybe three basis points for the next little while.

Graham Ryding, Analyst, TD Securities: Okay, understood. And then just in terms of your funding mix, so in 2024, there was a notable shift towards more waiting towards securitization. I think you did about 41% of your funded volume was securitized, whereas the last five years, I think it was closer to 30%. So how are you thinking about the outlook going forward? Is this the right mix and around $15,000,000,000 I think is what you did last year.

Is that are you at your capacity there or is there more room to secure test further than that?

Jason Ellis, President and Chief Executive Officer, First National: So, I would say we are mature users of CMHC securitization programs. So we tend to use almost all of the available allocation of NHA MBS guarantee fees and certainly our entire allocation into the Canada mortgage bond. So that obviously we used to its capacity. There’s still room to grow the ABCP conduits. Next year, I would expect that the mix between securitization and placement will be similar.

However, we are seeing a good level of engagement from our balance sheet investors, which suggests we may shift a little bit closer to that long term average of placement. So I also know that Jeremy on the commercial side did increase our where we did increase our securitization activity on the multi book year over year. That may persist, but you’re not going to see a violent shift, I guess is the bottom line. It’s going to migrate a little bit between the longer term average and where it was this year. But a little bit of mean reversion, I guess is the best guidance I can give.

Graham Ryding, Analyst, TD Securities: Okay. That’s helpful. I will re queue.

Conference Operator: Thank you. Your next question comes from the line of James Gloyn with National Bank Financial. Please go ahead.

James Gloyn, Analyst, National Bank Financial: Yes, thanks. Good morning. The commercial mortgage originations maybe for 2024 and Q4, can you give us a sense of the breakdown of the CMHC insured product versus conventional mortgages in this year compared to previous years? Like are we just are we running almost entirely CMHC insured or maybe just a little sense of how that’s been flowing?

Jeremy Wedgbery, Executive Vice President of Commercial Mortgages, First National: Yes, for sure. Good morning. So it’s Jeremy speaking. Yes, I mean, I would say the bulk of the activity for us in the fourth quarter with CMHC Insured, there’s been tremendous demand for that product, both on the term side and on the construction side. Whereas on the conventional side, it’s been a more challenging business for us and the use of third party funds has proven to be more challenging than it may have been in the past for us.

So we’ve really focused our activity in the CMHC space and it’s probably accounted for something like 90% of our overall activity. I would expect to see that continue in 2025 at that level.

James Gloyn, Analyst, National Bank Financial: Okay. And following on that, what how do the commissions on CMHC activity compare to conventional activity paid to your originators?

Jeremy Wedgbery, Executive Vice President of Commercial Mortgages, First National: I mean, that’s a different approach than it is on the single family side. They’re in house originators that we have that we compensate to generate the product. So it’s totally different than it is on the single family side and it’s an internal cost structure.

James Gloyn, Analyst, National Bank Financial: No, of course. And that’s I mean, this is obviously the commercial mortgage originations have been strong for the past couple of years and we’re seeing that flow through salaries and benefits. And I’m just curious like is the commission paid to your internal staff? Is it similar for a CMHC product as it is for conventional? Or is there a different commission structure?

And just trying to get a sense as to like is that like as conventional comes back, it doesn’t sound like it’s coming back in 2025 anytime soon, but if it comes back, is there something that would accelerate that salaries and benefits line as commissions pick up? Or just trying to get a sense as to like is there less commissions paid to CMHC originations versus conventional? That’s kind of what I’m trying to get to.

Jeremy Wedgbery, Executive Vice President of Commercial Mortgages, First National: Yes, I would say it’s pretty consistent between conventional and insured. I think really what you’re seeing, if there’s a growth in that line item, it’s really commensurate with the growth in the overall volume. So we were up 15% year over year. So you would tend to see that cost go up. But yes, between conventional and insured, it would be fairly similar.

Jason Ellis, President and Chief Executive Officer, First National: There’s a variability to it too, which is probably fair to say that the sales team is motivated to originate mortgages that spreads over call it the minimum required to generate excess. And so they do have the ability to

Graham Ryding, Analyst, TD Securities: do

Jason Ellis, President and Chief Executive Officer, First National: better if they’re able to originate at a wider spread. So there’s a little bit of optionality there. But big picture is it’s the same approach insured or conventional. I would say we’re doing probably more ten year CMHC, right? So ten year they get paid more than it would on a five year and conventional I think is typically shorter term.

But that’s a good point actually. So it is the comp is basis points. And so the longer the duration of the product, the more dollars that is. And of course, we tend to show those in the quarter originated from origination expense and earn it back over the life of the loan.

James Gloyn, Analyst, National Bank Financial: Okay. Okay. That’s good. I appreciate that color. Shifting to the I guess to the balances and mortgages under administration, if I’m focusing on single family first, kind of back post COVID, and sorry, even pre COVID, I should say.

How should we kind of think about that runoff rate? Is there an increase in prepayment activity going on? Is it just like there were shorter shorter maturity dates like three and four year mortgages that are kind of flowing through at this point? Like what’s driving that a little bit higher? And is that something that we should expect to continue in 2025 and 2026 where that sort of runoff rate is a little bit more elevated in single family?

Jason Ellis, President and Chief Executive Officer, First National: I think two things maybe. I think prepayment speeds are generally the same this year as they were last. They’re probably even still a little bit lower than the long term averages. However, I would say our retention rate on renewals in 2024 was lower than the long term average by a number of percentage points. We found, as I think most lenders did this year, there was enhanced activity around competition for renewed mortgages.

A lot of the banks through their traditional distribution channels were enticing borrowers to switch from their existing lenders with extraordinarily low rates combined with cash back offers. So I think that put a little bit of pressure on what would maybe look like prepayments, probably more like lower retention rates. We’re working on that this year. And then there’s one other thing, which isn’t transparent to you guys in the numbers, but there’s a legacy portfolio of Due to a transaction in the market about five or so years ago, that contract was repatriated by the lender. As a result, that legacy portfolio has been running off as mortgages matured over the last five years.

We’re into sort of the last $4,000,000,000 or $5,000,000,000 of that portfolio. And I think it might be maturing now at sort of a faster pace as we get to the end of it. So that has been a little bit of a headwind to MUA growth on the residential side. That will be pretty much done in the next couple of quarters. So you’ll probably see residential MUA all else being equal start to accelerate as that sort of headwind is exhausted.

James Gloyn, Analyst, National Bank Financial: Okay. That’s interesting. For sure. Just wanted to follow-up on the competition for renewals. Would that be that would be similar to what you were seeing on the direct origination side where the banks were competitive on originations and now like the commentary is that that has normalized.

And so is the view that competition for renewal book has normalized as well or do you still see the banks maybe more actively competing for a renewal product versus a new mortgage origination product?

Jason Ellis, President and Chief Executive Officer, First National: Yes. I think it will definitely persist. When I say normalized, what I was trying to get at and it’s convoluted, I was just trying to say that in the fourth quarter of this year, we were finally now comparing it year over year against a quarter that was fairly comparable in the sense that it was a quarter in which the largest traditional lender in the broker channel was fully active in the fourth quarter a year ago. And so going forward, our year over year comparisons will be to a market where all of the biggest players in the broker channel were participating as normal. Normal means though highly competitively.

But there’s no question that the largest lender when they returned to the broker channel, returned very, very aggressively. And I think that there has been some moderation in the level of how much they’re discounting rates relative to the rest of the market. So we’ll see. But I mean, the pendulum at the large lenders tends to swing between asset accumulation and margin discipline on a frequent basis. So honestly it can change from quarter to quarter.

It’s very difficult to predict. Our job here at First National as so called monoline is to make sure there are always at or around the leading edge of rates because it’s what we do and we need to be there for the brokers and we will continue to be there.

James Gloyn, Analyst, National Bank Financial: Okay. That’s very helpful. Last one, just wanted to make I just wanted to clarify. I believe Rob you mentioned there was like $13,000,000 in IT and infrastructure spend throughout 2024. Is that something we should think of as being completed and done and sort of one tiny where that comes off the books in 2025?

Or was that just like rebasing a new run rate for what’s required on a sustaining basis for IT and infrastructure?

Jason Ellis, President and Chief Executive Officer, First National: I wouldn’t call it a long term run rate, but I would say some of the major replatforming infrastructure work we’re investing in right now is not yet complete. So I would say that OpEx will be elevated again in 2025, not necessarily significantly higher than it was last year, but we continue to do some significant work in support of the future growth of the business. So you can look for something like that again this year certainly.

Graham Ryding, Analyst, TD Securities: Okay. Thank you.

Conference Operator: We have a follow-up question coming from the line of Graham Ryding with TD Securities. Please go ahead.

Graham Ryding, Analyst, TD Securities: Yes. There was a comment by Jason just about CMHC tightening up somewhat. It’s underwriting for the insured construction lending. So I guess this question is either for Jeremy or Jason, but just to be clear, the loans that they are underwriting insured construction, those are for purpose built rental. Is that correct?

And then secondly, are they just being more cautious here given the softness in the condo market and just their concern over there being some sort of indirect correlation there?

Jeremy Wedgbery, Executive Vice President of Commercial Mortgages, First National: Yes, for sure. That’s a really good question. In November of twenty twenty four, I would characterize it as CMHC going into a risk off mode. Their construction program was really could be deemed as somewhat aggressive over the last several years with the intention of spurring supply and they were very successful at that. All the way through that period, we had been seeing rents rise all the way through.

And of course now we’ve seen a total moderation and even a decline in rents in some markets, in particular on new products. So yes, I would say in November, they went risk off and they started to limit the loan to costs that they would provide. And that’s been a pretty substantial change to the way that they’re underwriting that.

Graham Ryding, Analyst, TD Securities: And do you expect that to have an impact then on the volumes of CMHC construction lending that you think you will be originating next year?

Jeremy Wedgbery, Executive Vice President of Commercial Mortgages, First National: I definitely think it will impact to a certain extent. We’ll still continue to do CMHC construction deals. They’ll be more modest on the loan to cost. Where you will also be making efforts to pivot to provide our best developer clients, the ones with the deepest balance sheets and the experience with the ability to get a leverage to a leverage point that makes sense for them to continue to construct. And I can tell you that there’s still a fairly good proportion of our customers that do intend to build through this period.

The tariffs will be interesting to see how that impacts that going forward. But I think that actually what we’ll start to see and we’re actually somewhat pleased with it also is a bit of a diversification of our funding model. So we’ll probably start to see more conventional construction take place in addition to the CMHC. So I think that volumes will probably stay the same, but the makeup will be a little different and it will be split more regularly between CMHC and conventional, which is an end goal of CMHCs.

Graham Ryding, Analyst, TD Securities: Okay. That’s helpful. Jason, just can you give us an update on the arrears in your residential portfolio? How are they tracking both for the prime and the Excalibur Saudi business?

Jason Ellis, President and Chief Executive Officer, First National: Yes. So prime as of the end of the fourth quarter remains unchanged from previous quarters. I think the ninety day plus is at eight or nine basis points and it’s been there pretty much all year. That continues to be a couple of basis points lower than it was in 2019 before the pandemic. So there are no signs of stress in the portfolio, including,

James Gloyn, Analyst, National Bank Financial: as

Jason Ellis, President and Chief Executive Officer, First National: I mentioned during my prepared comments on the adjustable rate portfolio that would have felt the full brunt of the higher rates partway through their term when prime was highest. On the Excalibur side, we did see rising arrears rates throughout 2024. I would attribute that largely to the fact that the Excalibur borrowers tended to be in that one, two and three year terms and they were renewing their mortgages much more quickly into a much higher rate. So I don’t think that they had that time to adjust with higher household incomes the way I was describing our prime borrowers had over the five year term. In January and February, we have seen the ninety day plus bucket level off and the thirty to sixty day bucket actually fall.

So that looks like the beginning of the end of elevated arrears in the Excalibur program. Losses continue to be rounding errors as notwithstanding the slightly higher arrears rates. There’s a lot of equity in those properties and we lend in primary communities, bedroom communities of the GTA and the GBA. So there’s lots of liquidity for the properties. And we tend to be we continue to be well over provisioned for any sort of potential losses.

So no issues there and it looks like the Excalibur program is leveling off, which is great.

Graham Ryding, Analyst, TD Securities: Okay, great. And one more if I can be greedy, just the fulfillment program that you do for third parties, it drives some fees within your mortgage servicing income line. How many institutions are you doing that for now? And do you see much room to increase that or bring on new mandates?

Jason Ellis, President and Chief Executive Officer, First National: Yes. So we have three SCED one banks currently actively being serviced and much to my sometimes surprise only because it is always remarkable to me that a bank would outsource a core competency like mortgage underwriting. We continue to receive reverse inquiries and work with potential counterparties to grow that business. I love that third party business. It is a terrific way for us to sort of leverage what we’re really good at and use our proprietary underwriting technology and diversify our revenues away from our own origination fortunes.

So that is definitely an area for growth. And similarly on the third party mortgage servicing side, we are launching with a new mortgage finance company in the spring. So we’ll look forward to growing that third party portfolio as well.

Graham Ryding, Analyst, TD Securities: Okay. That’s great. That’s it for me. Thank you.

Conference Operator: Thank you. And I’m showing no further questions at this time. Mr. Ellis, back to you for closing comments.

Jason Ellis, President and Chief Executive Officer, First National: All right. Thank you, operator. We look forward to reporting our first quarter results this spring and hosting our virtual annual meeting of shareholders on May 13. Thank you for participating and have a good day.

Conference Operator: Thank you. And ladies and gentlemen, this concludes today’s conference call. Thank you all for participating. You may now disconnect.

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