Good morning, and welcome to First National's First Quarter Analyst Call. This call is being recorded on Wednesday, April 27, 2022. At this time, all callers are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be provided at that time on how to queue up. Now, it is my pleasure to turn the call over to Jason Ellis, President and Chief Executive Officer of First National. Please go ahead, sir. Thank you. Good morning, everyone, and 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 risk and uncertainties and should be considered in conjunction with the risk factors detailed in our MD&A. Joining me today is Rob Inglis, Chief Financial Officer. Typically, our calls start with a discussion of quarterly progress and finish with context for the road ahead. Today, the agenda is a little different. I'll start by addressing our outlook, and Rob will then provide commentary on the first quarter. This seems appropriate as the market environment is changing rather quickly, and this is likely on your mind as it is on ours as well. We entered 2022 expecting to see a reset in Canadian housing activity brought on by rising interest rates and, with this change, lower single-family production. After four months, we have seen some evidence that this expectation is playing out. There have been two Bank of Canada overnight rate increases, and the Canadian Real Estate Association recently reported a 16.3% decline in activity in March when compared to the record activity recorded in the same month last year. The Real Estate Association's projection for transactions in all of 2022 is for a decline of 8.1% from last year. This is consistent with CMHC forecasts. Given what we know today, including what we see in our commitment pipeline, our short-term expectation is also for moderately lower origination than last year. Downside risks to our forecast include stronger than expected inflation pressures and accelerated interest rate increases. Some commentators contend that the most recent rate increases will have little impact on the new applicants getting approved at current mortgage stress test rates. That's valid, but also an argument that could be tested depending on Bank of Canada action. A counterpoint is that record immigration levels in 2022 will contribute to both purchase and rental demand. The resulting rental demand could be particularly beneficial to the multifamily residential customers of our commercial division. In terms of commercial mortgages, we anticipate that short-run originations will remain strong based on our CMHC pipeline. Here again, that may shift quickly depending on the magnitude of interest rate increases and the gulf that may develop between the perceptions of buyers and sellers with respect to commercial property values, which of course will affect borrowing activity in the market. This is a period of heightened uncertainty, but First National is prepared. From a business model perspective, we gain competitive advantage in part because of our market reach as a leader in the mortgage broker channel. This channel gives us direct consumer intelligence and access to a broad spectrum of origination opportunities. Our suite of products includes both Prime and Excalibur-branded mortgages. Our expanding share in the alt-A market will be a valuable source of growth in this environment. Our commercial segment also gains advantage because of the breadth of its product offering. CMHC and conventional mortgages provide choice for borrowers that is often lacking with other lenders. There are also funds flowing into the multi-unit sector as the government promotes affordable housing. Current market dynamics will also have a bearing on refinancing, prepayment activity, and renewals. To the degree we can predict it, I would say that as we move through 2022, the advantages of refinancing for borrowers will lessen, with a correspondingly favorable impact to the company in reduced prepayment speed on our portfolio. This should be supportive of net interest margin and ultimately create more renewal opportunities on scheduled maturities. From a funding perspective, we continue to see robust demand for First National's mortgage with institutional investors, and securitization markets remain strong. As you know, we are a mature user of CMHC's securitization program, and as we move forward, we intend to continue leveraging those programs to their fullest extent. This can come at the expense of current quarter's earnings when compared to placing mortgages directly with investors. Through securitization, we maximize the economic value of the mortgages originated and create years of future securitization, net interest margin, and cash flow for shareholders. Our Canada Mortgage Bond expertise and the preferred allocation into the program available to affordable multifamily pools, the kind that First National has been originating in the past two years, stand us in good stead going forward as we add to future sustainability and profit. I know there are a lot of moving parts in any outlook, but I will add one more: our cost structure. As you will have observed, we have given up some operating leverage by investing in the retention and growth of our workforce over the past year. This was entirely necessary given the much higher business volumes. As our new people gain their footing, leverage will improve. To ensure it does, we recruit great people and onboard them with effective training, job shadowing, and career development programs. I'm also pleased to note that First National opened its new headquarters late in the first quarter and is now operating with a hybrid work-in-office, work-from-home approach for our teams in all locations across Canada. This is a welcome return to what could be called a new normal. Now over to Rob for his report on the first quarter. Rob? Thanks, Jason. Against a changing and somewhat volatile market backdrop, First National performed as management expected in the first quarter. Zeroing in on key performance indicators, total originations were up 2% from last year, which is a good accomplishment given the impact of a slower housing market on single-family originations, which are down 3% from last year's elevated production levels. MUA increased 4% year-over-year and at an annualized rate of about 3% in Q1 on origination and retention improvement. Revenue was higher by 4%, the same as MUA, largely due to the impact of CAD 27.9 million of gains on financial instruments, or about 2% lower than last year excluding this impact. Measures of profitability were satisfactory. Net income was CAD 1 million higher, while Pre-Fair Market Value Income was CAD 18.9 million lower on tighter mortgage spreads, which affected placement fee revenue and higher employee headcount and compensation expenses to support our organizational growth. Lastly, First National sustained its reputation as a high-yielding company with monthly dividend payments at the annualized equivalent of CAD 2.35 per share and a Q1 payout ratio of 67% or 108% excluding gains and losses on financial instruments. Describing these results in detail is really the job of the MD&A, but I'll comment on some of the items of interest. Because we have a robust hedging program, the company continues to protect the value in mortgages originated for securitization. With increases in interest rates, this hedging program generated gains of about CAD 150 million on holding short bonds against our committed pipeline and funded mortgages in the quarter. Because of effective hedging accounting, only about CAD 28 million of this has affected the income statement. Hedge gains have the advantage of monetizing net interest margins up front, therefore reducing the risk to future securitization cash flows. Because you often ask, I'll also highlight three expense items, starting with broker fees. In dollar terms, these increased 1% year-over-year on 5% growth in origination volumes funded with institutional investors. The increase in broker fees lagged the increase in placement activity due to product mix sold. Shorter-term Excalibur loans with lower broker fees made up a larger portion of mortgages placed. Generally, we do not see any structural change in broker expenses, which are tied to volumes and loyalty. We continue to enjoy strong market share in the broker channel and provide good compensation and good service. That brings me to staffing expenses. Salaries and benefits increased 17% to CAD 48 million year-over-year on a 22% growth in FTE. Most FTE growth occurred in the residential underwriting departments. This is understandable given the relatively high volumes we continue to process and the need to sustain our competitive edge and reputation for responsiveness among brokers, borrowers, and our third-party clients. As Jason mentioned, we lose some operating leverage until newcomers are fully acclimatized, but it's a necessary cost to bear for the long-term sustainability of the business. Finally, CapEx. We expect to spend about CAD 10 million annually. In the first quarter, the run rate was temporarily higher than that because of our move to 16 York Street in Toronto. This new environmentally friendly facility provides the room we never had at our old headquarters for things like staff training and has a logical layout for the teams in each department. It is, in short, an asset for our long-term future. In closing, we are satisfied with performance in the first quarter as MUA, the source of most of First National's earnings, increased to a record high. Our market outlook takes into account rising interest rates and the possibility of further slowing in housing and mortgage activity. We are ready. Structurally, our mortgage broker partnerships are strong, as is our channel share, giving us good access to available opportunities. Our funding sources are broad and deep. We continue to take steps to create value for shareholders over the long term through our securitization activities and have now created a CAD 35 billion securitization portfolio. We look forward to generating income and cash flow from over our CAD 87 billion servicing portfolio while focusing, as always, on the value inherent in our significant single-family renewal book. That concludes our pre-prepared remarks. Operator, please open the lines for questions. Thank you. Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please slowly press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to remove yourself from the question queue, please press star followed by two. Finally, if you're using a speakerphone, you will need to please lift the handset before pressing any keys. Please go ahead and press star one now, should you have a question. Your first question will be from Étienne Ricard at BMO Capital Markets. Thank you and good morning. Hi, Étienne. On the commercial outlook, you're guiding for strong originations near term, but a more cautious view as interest rates rise. How sensitive do you expect both your insured multi-unit and conventional originations to perform, you know, in the rapidly rising rate environment? I think that, Étienne, probably is a really great question because it's very difficult to predict. I think, at this stage, we are looking ahead to how quickly the Bank of Canada may actually accelerate or not its increases to rates. I think that as we see rates rising, the cap rates used to value commercial properties will be moving, which will probably create some disconnect between where buyers and sellers view the market. I think that the pipeline presently, though, is encouraging. There still seems to be a great deal of activity, particularly in the CMHC multi-unit space. I would say that, perhaps sequentially, the conventional part of our commercial business has moderated relative to the CMHC portion. I would say we are still looking annually to grow commercial origination year-over-year. What's the mix between CMHC and conventional? I would say we are still predominantly a CMHC lender, but the mix between conventional and CMHC has been shifting towards conventional. Not to suggest that conventional would be more than CMHC, but what I mean to say is that the overall diversification of the product suite has been moving to more balance. I'd have to get back to you, Étienne. Off the top of my head, I can't tell you the split between insured and conventional last quarter. Actually, I have. Predominantly insured. I have some numbers for you. Oh, do you have it, Rob? Yeah. Like in, you know. Thanks. Before the pandemic, it was maybe, you know, 65% CMHC and 35% conventional. During the pandemic, it swung, you know, 90% CMHC because nobody wanted to do anything that was not insured by the government. Q1 of last year, I think we went back to sort of the norms of 65% insured and 35% conventional. In Q1 2022, I think we're at 85% insured. Because really, you know, it's dropped off the conventional. The people that are investing in that are kind of like, "Yeah, I see rates going up. Where are spreads? I don't know." Uncertainty breeds inactivity. Okay, we're back at 65%, 35%. No, 85%. 85%, 15% right now. For the first quarter. I'll clarify my statement earlier. We had. Last year, we introduced what we called our core conventional products in the commercial department on the strength of strong investor support. Definitely saw very, very constructive growth in the conventional commercial space. However, I would say, most recently, specifically in the first quarter, conventional commercial lending moderated relative to CMHC. We're still looking for growth this year overall in both our CMHC and conventional books. Understood. Shifting towards single family, how do you expect the Excalibur program to perform in this environment? In other words, should we expect Excalibur to perform better given immigration activity and economic reopenings for the self-employed? performance in terms of origination volumes or performance in terms of arrears performance? Originations. Yeah. Well, I think we're still very much in a growth phase with the Excalibur program, and so we're looking forward to significant growth in those origination volumes throughout the year. We've already begun our expansion out west with sales and underwriting staff in our Vancouver office, and we're seeing good traction there. I think that despite perhaps the overall market calling for moderation in origination volumes, the Excalibur platform should be a source of growth for us this year. Great. Thank you for your comments. Thank you. Next question will be from Geoffrey Kwan at RBC Capital Markets. Hi. Good morning. Just on the institutional placement fee rates, are you seeing any changes, you know, even directionally on where they're going? Also can you refresh the rates that your institutional funders pay? Is that a fixed kind of basis point over the term of a contract, or are they, say, potentially, like, influenced where interest rates are at? It's a combination of both, Jeff Kwan. The overwhelming majority of what we place with investors from our single-family production is fixed. At the time we originate the mortgage commitment, that commitment is allocated to a designated investor, and that investor bears the subsequent interest rate risk associated with the committed mortgage. To that end, those mortgages attract a fixed placement fee with the investor. A much smaller portion of the single-family is sold as a portfolio of loans once they've been funded. In that case, you would have a more variable placement fee. That was the dynamic we saw, having a significant influence on earnings during 2020, especially as we originated mortgages, saw interest rates fall, and then sold those mortgages at significant premium to the investors. On the commercial side, it is more of a variable concept where the spread available on the mortgages relative to the CMB execution will drive those placement fees. It is a mix. To sum it up, I guess single family, mostly a fixed placement fee, and on the commercial mortgages a little bit more variable based on the spreads available in the market. Okay. That's helpful. On the underwriting side, have there been any tweaks just, you know, given it seems like the market's starting to slow, but also too has there been anything on the underwriting side that's changed just given where home prices are and the increased potential for fraud to be happening? I mean, it was something that OSFI had flagged some issues within the industry recently. No, we certainly haven't detected any kind of trend as it relates to any kind of fraud, you know, whether it's fraud for shelter or otherwise. We've made no explicit changes to our underwriting or eligibility criteria. I'd like to think that we've always, you know, underwritten, you know, cautiously, and we haven't made any specific adjustments. No. Okay. Then just my last question was, on the other expenses line, it's increased noticeably the last few quarters. You flagged, I think, kind of hedging expenses in Q1, but just wondering, is this a reasonable run rate, or how do you think that this line on expenses might evolve in the upcoming quarters? Yeah. I'll touch on one major component of it, and then I'll see if Rob has anything else to add. You mentioned hedging expenses. With the growth of our origination and the scale with which we fund mortgages through securitization, we've been running a fairly large hedge book. As the market started anticipating Bank of Canada rate hikes, obviously we saw five-year government bonds move out ahead of those increases. What we had was a very, very low repo rate on our short bond position relative to an increasing short yield on those five-year bond hedges. That just created a much higher cost to carry those hedges, and that definitely had a significant impact on that expense line. Going forward, as the Bank of Canada and overnight rates catch up, so to speak, with the five-year yields, we should see that moderate. A flatter curve between the overnight and five-year will definitely help that. Rob, what were some of the other major contributors to that? Yeah, I think, you know, when you have an increase of, say, 20% in headcount, you have to buy the computers and stuff, right? So definitely, the depreciation of equipment, et cetera, has been higher than it was before. Moving to 16 York, our new facility, it's fantastic, but it costs more money than the old place at University Avenue. So the, you know, brand-new leaseholds there, you know, brand-new equipment. You leave a lot of stuff behind, so that's added to that expense line. So, you know, CAD 1.5 million maybe in the quarter that'll be there, you know, ongoing, I think. Just generally with the pandemic, not over, but a little bit over, people are traveling more. I think, we had our sales conference for our commercial guys. They all got COVID, but they had a good time. That cost about half a million bucks. It's kind of a one-time thing. You know, those things kinda add up for all those discretionary expenses dissolved in 2020, now they're kind of coming back. Got it. Thanks. Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please slowly press star followed by one on your telephone keypad. Your next question will be from Graham Ryding at TD Securities. Hi. Hi, good morning. Hey, Graham. You okay? Okay, great. Yeah, I got you. You got a question on just how the placement fees work. Just to make sure I understand your commentary there. When you say it's a fixed fee, are you referring to that being a fixed placement fee at commitment as opposed to it being a fixed fee for perhaps like a period of time, like the next six-12 months? I just wanna clear that up. Yeah, sure. We have purchase and servicing agreements with an array of third-party investors. They don't change very often. The fee they would pay to us is, you know, that fixed fee as a percentage of the mortgage principal, is set in advance. It's pretty constant. It doesn't change very much. We allocate the commitment to them. They manage that risk, and we then earn that placement fee on any of those committed mortgages that do fund. It's not a very volatile number. It tends to be pretty constant. Okay. Does that answer the question? Yeah. Yep, that helps. Okay. My second question would just be on the credit front. Now, I know you guys don't have a lot of direct credit risk, but you do indirectly because you obviously your mortgages are going to people that are putting them on their balance sheet. Can you just talk to me about, you know, sort of maybe the level or the magnitude of your concern here that we're in a pretty high inflationary environment, and could the rising rate sort of outlook ultimately lead to a recession and a credit cycle? Where is your sort of barometer on that risk? Right. Well, I mean, the most obvious barometer is what we're observing right now in the moment. Of course, we're not in a recession yet. Our arrears rates are at absolute record lows. There's very little activity in terms of arrears on the book right now. Looking ahead, one of the advantages of the tremendous run up we've had in housing prices is that even on our conventional book, you know, at most 80% loan to value, in recent years if you look at some of the statistics in the market, a lot of those borrowers have added material amounts of equity, you know, as a result of housing prices increasing. Directly or indirectly, I don't think we view the risk of losses as significant for First National in any respect. As far as my view on, you know, overall economy, obviously employment is the most critical thing when it comes to the performance of your mortgage book. We're at record low or record high employment levels right now. I'm not seeing anything on the horizon that would suggest that that's going to change materially. One thing we did observe during the pandemic certainly was that the earlier impact or the most significant impact to employment seemed to happen on individuals that were not homeowners. We'll see what that plays out like if we do face any headwinds going forward. Okay. Just my last question would just be, you know, there was some commentary about the market being competitive and putting some pressure on margins in the quarter. Sort of when you think about what you originated in March and April, you know, have you been able to maintain that level of margins, you know, for your securitization NIM and placement fees, or are you seeing any further margin pressure there as well? Yeah. I think things have generally leveled off here. I think most recently, as I observe, you know, Canada rates and other benchmarks versus our mortgage coupons, we probably had the opportunity to catch up a little bit. One thing about rates going up is that mortgage coupons tend to be a little bit sticky chasing them up. I feel like, you know, the market overall has done a good job of closing that gap. I think that we're probably where we're going to be, I think, for the balance of the year. Okay. That's great. That's it for me. Thank you. Thank you. Next question will be from Jaeme Gloyn at National Bank Financial. Please go ahead. Yeah. Thanks. Good morning. I just wanted to first dig in a little bit more on the expense side. In terms of the hedging costs and the, I think it was like a CAD 7 million increase year-over-year, how could you break that down between the cost that's attributable to the steeper curve and the cost that's attributable to just running a larger hedge book? Oh, uh- I can just go ahead a little bit here. Yeah. The steep curve. I mean, we've always had a large hedge book. I mean, for the last three or four years doing, you know, CAD 15 billion of stuff for both things. You know, we always have, like, you know, CAD 3 billion of notional hedge on. It's just a steep rate curve. I mean, I think recently the repo gives you almost less than. Well, maybe they give you a little bit of money for borrowing the bond or before it used to be a certain margin there. Now with a steep yield curve, you're hamstrung there. I would say too that, you know, we're getting higher coupons relative to the interest we're paying to the banks on the borrowing, and that shows up in mortgage investment income. You see then it was up like CAD 6 million. It's sort of like, yeah, you know, we have higher hedge costs, but yeah, we're making more money here. They kind of offset. Okay. Got it. With respect to the employee costs, headcount, obviously a big driver, but are you seeing an increase in, let's say, like the average cost per employee? Are there actual salaries increasing, and what kind of rate would that be sort of running at? I think the pressure on the salary and benefit lines has been a combination of things. Certainly, with this labor market, there's been an investment in both retention and recruiting. In terms of putting a number on the sort of, you know, year-over-year compensation per head, I don't have that at the top. You know, Graham probably put that or Jaeme, pardon me, in the 5%-6% range. I'd have to circle back on that. The pressure has definitely been a function of increased head count, but you know, retention has contributed, I think, overall. Okay. Understood. Next question is on the securitization margins. The commentary this quarter seems to be fairly consistent with the commentary last quarter about future margins will face a little bit of pressure. That should alleviate as prepayment speeds slow down and return to normal. Am I reading that right? Like, we should still continue to see maybe a couple of beats of securitization margin pressure here for a few quarters until everything sort of normalizes? I think we're still. I mean, like I said a moment ago, I think that we've seen a good catch-up on mortgage coupons in the last sort of two-four weeks. It's the challenge is the fact that mortgage coupons tend to move slow relative to the benchmark, right? It's that problem of catching up over and over as rates continue to move. I feel like the biggest moves in the sort of five-year part of the curve have been expressed. I think a lot of what the Bank of Canada is planning to do was already built in there. My hope is that we're currently at a point where I think that those securitization margins will stabilize from here on out in terms of new originations. It's a question of the schedule of stuff running off, and I don't have it at my fingertips. I think it's fair to assume there may be a couple of basis points of pressure in the coming quarters, but I don't think it should be a material change going forward. Right. I'll just add a couple things on prepayment. There's two things in prepayment. There's, you know, the aspect of penalties versus your penalties to the pool. As we described back in the pandemic, it was highly negative because yields are so low. Well, now it's gone back to sort of regular. The payout pays us a penalty, we keep that, and there's no cost to pay on the pay down of the MBS. But at the same time, prepayment affects the amortization of the capitalized costs, right? We have to pay a broker to originate a loan. That gets capitalized. If it runs off faster than we thought it's gonna run off, that amortization gets higher. We've seen that all through 2021, and it started off in 2022. It's still high, but we feel that someone's got to stop here because people have mortgages at 1.8%, 2%. They can't move anywhere else for advantage. Housing activity will slow down. Prepayment will slow down, which means the amortization of those upfront costs will also slow down towards amortization, which should help us. Prepayment has those two aspects, one of which or both of which should get better as we go. Okay, good. That's good color there. Last question for me is tied to the dividend. Typically I would have expected a dividend increase or a small dividend increase. At this stage it looks like the April dividend is still in line with where it's been the last several quarters or months, I guess, the monthly dividend. Is there anything to read into the, I guess the lack of a dividend increase at this point, or is there, or maybe I'm missing something on the timing? No, nothing to read into it. I think we'll continue to characterize ourselves as a high dividend paying company, and I think at this stage we're just letting this year play out and see how things look. I think that our general feeling about our dividend policy hasn't changed. Okay. Just taking a little bit more of a conservative approach to start 22. Right. It was difficult in 2021 to set the dividend rate, and I think, you know, we knew that 2021 wasn't gonna continue forever and ever. It's gonna slow down. We wanted to make a sustainable rate for the next year or so, and we did that. I think the CAD 2.35 was like a huge increase over the previous rate. Maybe we overdid it a bit in terms of the increase, but we're still comfortable this year in covering that dividend rate. Of course. Okay. That's great. Thanks very much. Thank you. At this time, Mr. Ellis, we have no other questions. Please proceed. Thank you. Just a moment. Sure, I'll be with you in one minute. Should I do it? Thanks, operator. No, I'm good. You got it? Yeah, I got it. Sorry, I logged out and lost track of my sign-off here. Apologies. Thank you, operator. As there are no further questions, I'll remind you that our executive chairman, Stephen Smith, will host our annual meeting of shareholders on May 5th at 9:30 A.M. We look forward to that and to reporting our second quarter results this summer. Thank you for taking part in our call, and have a good day. Thank you. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Enjoy your day.