First National Financial Corporation (TSX: FN) reported steady first-quarter results, matching market expectations with a 5% increase in pre-fair market value income year-over-year, reaching $62.7 million. Despite a decline in residential originations, the company saw a significant rise in commercial originations and an overall growth in mortgages under administration. The company anticipates a decrease in single-family originations in the second quarter due to increased competition but expects commercial mortgage volumes to remain stable. First National also successfully issued $200 million in new unsecured notes, highlighting investor confidence.
Key Takeaways
- First National's pre-fair market value income rose to $62.7 million, a 5% increase from the previous year.
- Residential originations fell by 20% to $3.5 billion, while commercial originations jumped by 39% to $3 billion.
- Mortgages under administration reached a record $145.1 billion, with residential and commercial segments growing by 5% and 17%, respectively.
- The company completed a $200 million issuance of new unsecured notes due to high investor demand.
- First National expects a dip in single-family originations but steady commercial mortgage volumes ahead.
- Credit quality remains strong with no realized loan losses, and the company has increased provisioning for future credit losses.
Company Outlook
- Anticipation of a decline in single-family originations due to broker channel competition.
- Expectation of steady commercial mortgage origination volumes.
- Upcoming regulatory changes could impact the mortgage market.
- Record mortgages under administration expected to sustain revenue despite short-term challenges.
Bearish Highlights
- Decrease in single-family originations placed with institutional customers, resulting in a $8.7 million year-over-year drop.
- Increase in arrears and delinquencies in the securitized mortgage portfolio.
- Tighter spreads on multi-unit residential mortgages originated in 2024 compared to 2023.
Bullish Highlights
- Commercial originations up by 39% to $3 billion.
- Net income surged by 40% from the previous year.
- High demand for new series of unsecured notes, with $1.2 billion investor demand for a $200 million issuance.
- Stable to increasing housing prices provide a safety net against potential losses.
Misses
- Decreased residential originations have impacted earnings from institutional customers.
- The net interest margin on the securitization portfolio fell by five basis points quarter-over-quarter.
Q&A Highlights
- The company is not overly concerned about losses given default due to stable or increasing housing prices.
- Provisions for credit losses may marginally impact net interest margin.
- The annual meeting is scheduled for the following day.
In conclusion, First National's Q1 performance demonstrated resilience amidst a dynamic market. The company's strategic focus on commercial originations and mortgages under administration has offset the decline in residential originations. With strong credit quality and proactive measures to address potential credit losses, First National is positioned to navigate the challenges ahead while capitalizing on its robust mortgage portfolio.
Full transcript - None (FNLIF) Q1 2024:
Operator: Good morning and welcome to First National's First Quarter Analyst Call. This call is being recorded on Wednesday, May 01, 2024. [Operator Instructions] 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: Thank you. Good morning, everyone. Welcome to our call and thank you for participating. Rob Inglis, our Chief Financial Officer, joins me and will provide his comments shortly. 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 management's discussion and analysis. First quarter results were in line with our expectations. Pre-fair market value income of $62.7 million was 5% higher than the same quarter last year. This growth was attributable to the advantages that accrue from growing mortgages under administration and our diversified sources of income, including our third-party underwriting business, despite a temporary reduction in single family originations. As indicated on our last call, originations were projected to be lower as new commitments to fund single family mortgages declined late last year. While the housing market remains very stable, pricing competition, principally among bank lenders in the broker channel has been particularly acute. First National, however, has always taken a disciplined approach to pricing, which has contributed to lower residential origination in the quarter. Including renewals, residential originations were $3.5 billion, 20% below the prior year. Commercial originations, including renewals, moved in the opposite direction, up 39% from last year to $3 billion. This reflected continued demand for insured multi-unit apartment mortgages and was in line with our expectations as we continued to fund the large number of commitments we entered into last year. As mentioned on our last call, CMHC cleared most of its application backlog late in 2023, pushing some volumes into 2024. Total originations for both segments in the quarter were $6.5 billion, equal to the opening quarter of 2023. With this performance, mortgages under administration reached $145.1 billion with residential and commercial MUA up 5% and 17%, respectively, from last year. Growth in MUA was again assisted by prepayment speeds that were slower than recent years. To put that in context, the annualized liquidation rate for our portfolio of fixed rate and HMBS between 2021 and 2022 averaged 12.8%. The pace of liquidation slowed to 5.5% in 2023 and has averaged just 3.2% year-to-date. Prepayment speeds can affect both our servicing and securitization portfolios. Higher mortgages under administration was one reason that First National's business model continued to create growth through higher net interest income, servicing income and operating profit. In turn, there was good coverage for the common share dividend, which our board increased in December to an annualized rate of $2.45 per share. Moving to our outlook for single family origination, our message is the same as it was on our last call. Today, competition in the broker channel remains fierce and our commitments to fund mortgages are down from a year ago. This signals that single family originations, including renewals in the second quarter will be lower than last year's $4.3 billion. Year-over-year comparisons will suffer because we benefited from a temporary acceleration in housing market activity during the April through June 2023 period, when there was a widespread belief that the Bank of Canada had stopped raising its overnight interest rate. Competition in the broker channel a year ago was also muted relative to what we are seeing today. This competitive dynamic has played out at various times over the years. If history is the judge, priorities invariably will switch from asset accumulation to margin management. The current instance of this cycle has been perhaps slightly more protracted than normal, but we do expect the pendulum to swing. In the meantime, our residential team will remain focused on our competitive discipline, including responsive service for our broker partners and borrowers that has made First National a market leader. For commercial mortgages, we anticipate steady origination volumes to continue in the second quarter based on a robust pipeline of mortgage commitments and as owners and developers of multi-unit residential housing take advantage of government incentives, including removal of the GST on newly completed apartment units. The challenge is that the multi-unit space is becoming more competitive as other lenders capitalize on the recent $20 billion annual increase in financing available through the Canada Mortgage Bond Program. We expect narrower mortgage spreads on CMHC insured apartment loans compared to 2023 as we move forward in the year. In response, our commercial team will continue to create differentiating value by leveraging the expertise and experience they have amassed over time to help customers navigate CMHC programs and application reviews. These capabilities are unique and distinguish First National as the market leader in the multi-unit space. Looking beyond this spring, there are some changes in regulations and public policies of note. Beginning next year, OSFI regulated institutions must limit the number of mortgages on their books that exceed 4.5 times of borrowers' annual income. This loan to income ratio will be a factor when considering new applications. While there is some expected flexibility for borrowers and relatively higher cost regions of the country, it does add to existing qualification rules. At the margin, we believe this change could increase the addressable market for non-OSFI regulated mortgage lenders and demand for Alt-A mortgages such as Excalibur. When the Alt-A space in the broker channel did not experience the same competitive dynamic in the first quarter as our prime business, our Excalibur originations were also lower as potential borrowers faced higher prevailing interest rates. Other government changes designed with first time homebuyers in mind such as 30-year amortizations and the recent increase in allowable RRSP withdrawals to cover down payments are subtle improvements to affordability for those who qualify. In combination, these moves should have a modest impact on the addressable market of first-time buyers. To further stimulate multi-unit construction, the government introduced a temporary accelerated capital cost allowance measure. This is another helpful incentive when combined with the GST waiver. Of course, the biggest incentive will come when the Bank of Canada reduces its overnight interest rate, perhaps in June or July. Now briefly to the credit side. First National borrowers continue to hold up well against the stress of today's interest rates. In the past 12 months, 90-day plus arrears on the prime book have increased from six basis points at March of last year to just seven basis points now. Excalibur arrears rates, however, have increased more measurably since Q1 of 2023. The shorter terms and faster renewal into higher rates are the likely explanation. Nonetheless, with a stable housing market, including prices, which are up 5.6% year-over-year, there were no realized loan losses in the quarter. To summarize, the first quarter featured solid growth in mortgages under administration and profitability in line with our expectations. Single family originations in the second quarter are trending toward a year-over-year decline, while multi-unit production is steady with some observed pressure on margins. On the favorable side, prepayments fees are likely to remain low as a result of prevailing interest rates, providing an offset to the impact of lower residential originations on MUA in the short run. In the circumstances, the presence of non-origination-based revenue is helpful and First National is generating it through our third-party underwriting business. In January, we welcomed our third bank client and as planned, we are expanding service on that bank's behalf to more and more brokers as the weeks go by. We see our third-party business as a sound way to leverage our platform, including our MERLIN technology and add value and stability through diversification. Rob, over to you.
Rob Inglis: Thanks, Jason. Good morning, everyone. MUA grew 4% on an annualized basis during the first quarter, which is largely consistent with the trend over time, but slower than the rate of expansion we saw in the third and fourth quarters of last year. It's worth remembering that there is seasonality in home sales, which tends to result in lower demand for mortgages in the first quarter. Borrowers were also challenged by high interest rates, although we would hardly describe the market as especially difficult. As Jason said, elevated competition in the broker market was the main driver behind the 20% year-over-year decline in single family mortgages. Now turning to our financial results, mortgage servicing income grew 11% year-over-year to $56.6 million. This reflected the growth in MUA, higher interest on escrow deposits and the contribution of our third-party underwriting business. Net interest income on mortgages pledged under securitization increased 10% over last year to $54.1 million on multi-unit portfolio growth of 11% and single-family growth of 6%. Net interest margin once again benefited from slower prepayment speeds and a stable interest rate environment. Low rates of prepayment mean lower amortization of capitalized origination expense and other securitization led fees. Q1 NIM also reflects our success with our Excalibur securitization program. By segment, NIM was higher by $1.8 million in residential and higher by $2.9 million in commercial. Looking to the second quarter, we expect securitization NIM to perform with growing securitization in MUA. Investment income increased 8% year-over-year to $31.3 million a direct result of higher interest earned on our mortgage and loan investment portfolios and mortgages accumulated for securitization. Placement fee revenue and the gains on deferred placement fees were outliers in the quarter. Placement fees declined 12% year-over-year to $45.2 million on a 12% reduction in placement activity. While per unit fees were lower, this reflects the mix between residential and commercial. This was offset by higher revenues earned on the placement of renewed mortgages. At $5.4 million gains under deferred placement fees were 21% below the opening quarter of 2023. We earned this revenue when we placed some commercial segment mortgages with institutional investors. The decrease was the result of lower volumes for this program in the 2024 quarter. The Q1 featured gains on financial instruments as bond yields increased on elevated inflation indicators and a delay in the Bank of Canada overnight rate reductions. As a result, First National short bond position held against single family commitments was higher. Excluding these, with fair value-based revenues, net revenue was $513 million a 16% increase from Q1 2023. Now moving to our costs, brokerage fee expense in the quarter declined 31% or $8.7 million from last year on a 33% decrease in single family origination placed with institutional customers. On a per unit basis, broker fees were about 3% higher than last year, a reflection of a more competitive market. While FTE was 2% higher than last year, salaries and benefit costs increased 16% year-over-year or about $8 million. Beyond the standard annual merit increases that commenced in Q1, incentive driven commercial underwriting compensation was higher by $4.5 million reflecting substantial growth in commercial origination. In keeping with our long-term practice, we seek to operate with a stable headcount and look for opportunities to gain operating leverage through technology. Q1 pre-fair market value income, our core measure of profitability increased 5% year-over-year. Net income was higher by 40%. Our dividend payout ratio in the quarter against after tax pre-fair market value income was 81% compared to about 84% last year. Subsequent to the quarter end, we are pleased to successfully complete the issuance of a new series of unsecured notes. These notes are the fifth issuance by the company and bear a coupon of 6.261%. This transaction raised $200 million but attracted $1.2 billion of investor demand, a clear sign of confidence in First National's business model and our long-term prospects. The note issuance provides us with liquidity to fund 200,000 notes issued in 2019 that mature this November. The Series 5 notes mature in November 2027. In closing, Q1 performance met our expectations and while we see short term challenges ahead, the record value of mortgages under administration will continue to drive revenues in support of ongoing profitability. Now we'll be pleased to answer your questions. Operator, please open the lines. Thank you.
Operator: Thank you [Operator Instructions]. Your first question comes from the line of Nik Priebe from CIBC Capital Markets. Your line is open.
Nik Priebe: Okay. Thanks for the question. Just a point of clarification on the outlook section in the MD&A. I think you'd indicated you're expecting steady origination volumes in the commercial segment. Just wanted to clarify how we should interpret steady. Is that in reference to steady trends in the sense that commercial should remain strong as it has been for the past three quarters? Or does that mean flat year over year? I just want to clarify that point.
Jason Ellis: Hey, Nik, it's Jason. I've got Jeremy Wedgbury with me today, special guest on the call. I'll let him address that for you.
Jeremy Wedgbury: Yeah. Thanks, Jason. Good morning. Yeah. No, I think that when we have our outlook for the year, we've got a pretty extensive pipeline. So when we look at Q2 volumes, we think from last year, we think we're going to be in line with that. And as we look later into the year, we will be continuing to fund the deals that in the run up to CMHC's increase in premiums last June. So, we think volumes will be steady to 2023 throughout the year, so consistent with 2023 levels.
Jason Ellis: The relative outperformance of new origination in commercial in Q1 is probably the outlier for the year. The majority of the 2023 origination, it was delayed due to the backlog at CMHC processing of applications will have shown itself in the first quarter. So from here out, we'll enjoy steady funding, but not the kind of year-over-year outperformance we saw in Q1.
Nik Priebe: Understood. Okay. No, that's helpful. And then just switching over to the single-family side, you talked a bit about the increased competitive pressure in the mortgage broker channel. Can you just talk a little bit about how you adapt to that? Have you made any adjustments to your own pricing and incentives accordingly? Or are you sort of comfortable seeding a bit of share temporarily just considering the compressed economics? I'm just wondering how you've been thinking about that and responding to it?
Jason Ellis: Yeah. So, the unique thing that's happening this year is the significant return to market to the traditional leader in this space in the form of Scotia Mortgage Authority. So, around this time last year and leading into this time last year, Scotia Mortgage Authority had quite deliberately and transparently stepped back from what it was usually from its usual competitive stance in the broker channel. As we moved into this year, they reversed that and the competitive pressure comes from them regaining share. Traditionally, they would have had over 20% share in the channel. And so, they're competing hard to win that back. So, to answer the question specifically, we adapt a couple of ways. We compete in the spaces where we have our greatest strengths. So, on single family that is on the insured and insurable space where we can leverage CMHC securitization programs. And I would say that we are relatively outperforming in that part of the market. On the conventional space, we're leveraging asset backed commercial paper and when profitable, making sure that we're using that securitization platform to its maximum. But in the event that the return on our investment in generating mortgages turns negative, we will seed share and step back. We've always been disciplined and certainly our principal shareholders and founders have always been disciplined in the way we approach volume. We're always going to be focused on return on equity over volume metrics.
Nik Priebe: Okay, that’s great color. Thanks very much.
Operator: Your next question comes from the line of Etienne Ricard from BMO Capital Markets. Your line is open.
Etienne Ricard: Okay. Thank you and good morning. To circle back on the competitive landscape in single family, what response are you seeing from the rest of the industry over the past few months? Are others decreasing rates and increasing broker incentives as well? Or is the expectation that this is a short-term volume initiative from the banks?
Jason Ellis: I'll answer the second half first. As I mentioned in my comments, we have seen this play out numerous times over the years. And inevitably the pendulum does swing from asset accumulation to a more thoughtful approach to margin management. So, we do expect the pressure we're seeing now from these those leading competitors to ebb. As it relates to broker compensation, all of us as lenders in the broker channel generally will be compelled to match whichever incentive is generally being provided out there. It's almost table stakes. And so, while we may not be willing to drop our mortgage coupons as low, we will generally match broker compensation incentives. And in terms of how other lenders have risen up to the challenge laid by I think Scotia Mortgage Authority, the other bank lenders in the channel, notably TD Mortgage Services and the new entrants in the form of BMO BrokerEdge, I think have risen up to meet them on rates. Mortgage finance companies like First National generally have stayed perhaps a little bit more disciplined in that respect. We continue to hold our position in the market in terms of market share behind, I believe, Scotia and TD, but are maintaining our rank relative to our peer group of mortgage finance companies.
Etienne Ricard: Great. I appreciate the details. More broadly on the housing market, multiple surveys indicate that many prospective homebuyers are awaiting actual rate cuts before moving ahead on the purchase. Are you also seeing this trend on the ground? And if so, what increase to origination activity would you expect to see once we start seeing rate cuts maybe in the second half?
Jason Ellis: Yes, it's difficult to put an actual estimate on how that might affect origination volumes. But I do think that there is a tailwind that could moderate our conservative outlook on residential originations in the form of Bank of Canada Action. I agree with you. I think a lot of borrowers continue to wait on the sidelines, in anticipation of movement by the Bank of Canada. So, I would say if there is a silver lining to our outlook, I think it's twofold. One, if the leading competitors in the broker channel, the leading lenders do moderate their rate competition that will be constructive. And then secondarily, once the Bank of Canada signals its clear intent and begins its reversal of monetary policy, I think we'll see buyers reenter the market. So, I do think there's a bit of a potential upside to that outlook, but we have to see those things happen first.
Etienne Ricard: Great. Thank you very much.
Operator: Your next question comes from the line of Graham Ryding from TD Securities. Your line is open.
Graham Ryding: Hi, good morning. You noted you were seeing higher spreads year-over-year for your residential placements. What's driving that higher yield? Because I'm just surprised when you're talking about higher competition from the big banks offering discounted rates, what's behind sort of the year-over-year growth in those residential placement fee yields?
Jason Ellis: Yes. So the placements in the first quarter generally mortgages that were committed towards the end of last year and very beginning of the quarter. At that time, there actually still was reasonable spread in some of the mortgage space, combined with the fact that we were able to place some of those mortgages with investors who have a dynamic pricing model that allowed us to capture some of that additional spread and upfront premium. So, as we move through the quarter, newer originations increasingly -- newer commitments were increasingly being issued at tighter and tighter spreads. So I would say that all else being equal, as we look at the second quarter, the placement fee on average will be smaller than it was in the first quarter. So there's always that lag effect. So what you see in placement fees in the first quarter generally are a function of commitments issued in the fourth quarter and so on. Hopefully that squares that for you.
Graham Ryding: Yes. Understood. And then you also, made reference to just you're expecting some pressure or you're already seeing perhaps some spread pressure on the commercial side. Is there anything you can quantify there relative to what you would have seen with commercial spreads in 2023 or even Q1?
Jason Ellis: Yes, sure. I'll let Jeremy address that for you.
Jeremy Wedgbury: Yes, I think I would say that the very positive impact of the CMB increase by the federal government in late 2023 had the impact of adding supply, if you will, to the market. Each originator has -- each lender has more capacity and that’s really just driving the spreads down. So, we think that competition is going to continue to drive spreads and we're seeing pretty significant changes in the market currently and that’s been going on for the last 30-45 days. And we think it will continue just based on these larger volumes that are available to ourselves and our competitors.
Rob Inglis: So, without perhaps divulging sensitive pricing data, it's fair to say that the spread over the cost of funds on a multi-unit residential mortgage originated as we move through the year maybe as much as 30% tighter than it was in 2023. However, in the immediate quarters to come, we're still going to be funding mortgages that were committed some time ago in the then prevailing wider market. So, we don't believe we'll see the impact of these narrower spreads until we get closer to the end of the year.
Graham Ryding: Understood. Okay. And then, one [Technical Issues] Quarter over quarter.
Jason Ellis: Are you there? I think that's Graham. Oh, it's I was right. It's Graham. Yeah. Sorry, Graham. You cut off there for a sec.
Graham Ryding: Can you hear me?
Jason Ellis: Oh, yeah. I got you back.
Graham Ryding: Okay. One last, if I could. Just your net interest margin on your securitization portfolio, it looked like it dropped about five basis points quarter over quarter according to our math. Any color on what was driving that?
Jason Ellis: Yeah, I'd say I agree with your numbers spot on. There isn't a singular factor that I can point to. There's so much happening in that securitization portfolio. As you think about the mix of say, prime conventional residential and Alt-A Excalibur, as well as the mix of residential generally and commercial mortgages. There's the evolution of historical hedging gains and losses that are being amortized as legacy MBS moves closer to maturity. Similarly upfront securitization expenses flowing through. So, there's so much happening in there that I honestly can't point to any individual thing. It could be that there was a cohort of securitization that was put on at wide spreads happened to roll off at the same time, newer MBS going on, was it a relatively narrower spread. So, I don't see anything systemic in that. I think it's just the evolution of a lot of moving parts. That said, given the environment we're in now that we've described both in the single-family market and in the commercial market, it may be that over time, we may see a little bit of continued pressure on NIM. However, it will move very, very slowly. The portfolio is $40 billion now, so that should change quite gradually over time.
Graham Ryding: Okay. So, there's no reason why we shouldn't necessarily be viewing this quarter as a reasonable run rate with maybe some slight pressure over time. Is that.
Jason Ellis: Yeah. Yeah, I wouldn't be it would be, it wouldn't it would be inappropriate to forecast continued five basis point declines quarter-over-quarter.
Graham Ryding: Okay. Thank you.
Operator: Your next question comes from the line of Jaeme Gloyn from National Bank Financial. Your line is open.
Jaeme Gloyn: Yes, thanks. First question, just curious on the Excalibur. You talked about the 90 days arrears rate in your, I guess, the core prime conventional portfolio, but didn't make mention of the actual rate increases on that on Excalibur. I understand no realized losses, but just curious if you can frame the deterioration in 90 days plus arrears rates in the Excalibur portfolio?
Jason Ellis: Yes, sure. About a year ago that would have been about 15 basis points and now it's around 45 to 50 basis points. Put that in context, that's about 40 to 45 loans on over 10,000.
Jaeme Gloyn: Okay. Very good.
Jason Ellis: The other thing to remember on that just for just to add some extra context, the Excalibur program is limited to more liquid primary and secondary markets. So to the extent we do have a default, what we're finding is borrowers have lots of liquidity and plenty of opportunity to sell properties. So, we're really -- we're not concerned, we're monitoring it, but we're not concerned by the evolution.
Jaeme Gloyn: Yes, understood. In terms of the spread environment today, it sounds like things are getting tighter, both single family and commercial. How is this affecting the decision to place with institutional investors versus securitize? Is it pushing more towards securitization, less towards investors or vice versa? Maybe a little bit more color on how you're thinking through that?
Jason Ellis: Yes. So we look at that literally every day. We think a lot about return on equity here at First National. And when we think about the upfront cash investment of securitization fees, origination fees and the like against the future cash flow securitization, we have a hurdle rate in mind and we'll measure that always against the upfront fee available to us from a meantime, given the new access to allocations into the Canada mortgage bond, exclusively for multifamily, we still believe that it is our best opportunity to maximize our access directly into those programs, and we'll continue to do that until it pivots. But it is something we look at closely all the time and it is subject to change quarter-over-quarter. I will though put an asterisk on that. One of the things that's been very important to First National over the years is the relationship with our investor partners. We will commit and work with them consistently through different spread cycles, higher cycles and lower cycles. We won't select against them inappropriately. And I think that's one of the reasons we've enjoyed such long lasting and strong relationships.
Jaeme Gloyn: Understood. On the commercial side, we're talking about more competition and more lenders coming into, let's say, the market because of the certainty around some of these programs, including the increased CMB. Is the competition affecting your, let's say, your access to the CMB in any way where, I guess, what I'm thinking is some of these larger players are taking up more of the CMB allocation than previously, and thus, that's impacting your ability to access that. Is there any anything along those lines that we should be thinking about with the commercial, or has that not had any effect?
Jason Ellis: I would say not yet any real measurable effect. I think we continue to enjoy an allocation into the program consistent with what we expect. But it is a pie and the way CMHC allocates into the program is quite equitable. It's literally the amount of funding available divided by the number of people hoping to sell into it. And then they repeat that cycle over and over once they've run out of allocation. So obviously more participants means smaller pieces of pie. But right now, the real impact isn't that these marginal participants, largely the form of the aggregators at the banks, they're not doing tremendous volumes, but they are willing to compete at the narrowest margins. So, I'd say the impact right now is more on pricing in the market as opposed to access to liquidity.
Jaeme Gloyn: Very good. Thank you.
Operator: [Operator Instructions]. Your next question comes from the line of Geoffrey Kwan from RBC Capital Markets. Your line is open.
Geoffrey Kwan: Hi, good morning. I just wanted to start off with that prior question, I think Graham had on the securitization and yield. So are you suggesting that versus what we saw the five-basis point decline quarter-over-quarter, As you look through the rest of this year in terms of your crystal ball that we may see some slight obviously maybe not as much as what we saw in Q1, but slight pressure and then some stabilization and maybe some improvements as we head into 2025 or I just want to make sure I'm understanding how you're describing it.
Jason Ellis: So, I don't have an explicit forecast, Jeff, in front of me. I did note the same decrease quarter-over-quarter, as Graham mentioned. However, I have no reason to believe that that is the beginning of any kind of trend, nor is there anything systemic in the evolution of the portfolio of securitized mortgages that would suggest that, that pressure on NIM will continue at that pace. So, I would say, my best assumption right now is that we should be in a relatively steady state. But as we exit 2024 and into 2025, as more and more originations this year at narrower spreads begin to populate the portfolio of securitized assets, we may see some further pressure on NIM as we roll into 2025.
Geoffrey Kwan: Okay. Got it. And just my other question was on the -- I know it's not significant in the big picture, but there was the a noticeable increase in terms of the arrears and delinquencies and the securitized mortgages. You did increase your ACLs for it. But I'm just trying to understand, I guess, what you're seeing, in terms of what's driving that increase? Is it, you mentioned you do it in more of the larger markets, but are there certain cities specifically you're doing? Is it in urban versus suburban? And are you seeing it being driven by job loss versus higher rates at renewal or just borrowers that are having trouble coping with the mortgage payments and inflation and non-mortgage debt thing they have?
Jason Ellis: Yeah. Fortunately, the job market is still very, very solid and loss of employment, I don't even think is in the top 10 right now. I think borrower overextension in the sort of exit interview with defaulting borrowers is the primary cause right now, as they are wrestling with the higher rates, specifically in the Alt-A portfolio, where your one and two-year terms typically mean a higher velocity to renewal, without as much time for household incomes to rise up to meet the new higher rates. But despite that -- and then in terms of trends or specifics around, I couldn't -- I mean, you got to remember, it's still only 50 mortgages. Like, it's not enough to really even put together a really thoughtful analysis on where the defaults are coming from. But it -- they're all liquid markets. So, we're just -- we're not seeing losses given default and housing prices are stable to increasing, as I mentioned. So, it's not something we're concerned with. Certainly, Rob has made sure that we've added a little bit of cushion to our provisioning, just given the trends we're seeing. But I don't have anything more to say on it than that other than it just does seem to be over extension by borrowers into this higher rate environment that may be causing this shift.
Geoffrey Kwan: Okay. Thank you.
Operator: Your next question comes from the line of Graham Ryding from TD Securities. Your line is open.
Graham Ryding: Yes. Might be a question for Rob. Just higher operating expenses quarter-over-quarter, there was a bit of a jump there. How much of that is sort of recurring and maybe how much of it is one time in nature?
Rob Inglis: A little bit of both, I think. I mean, I think a lot of it was technology based. In this environment, there's always, you know, things to do in technology. We're rewriting some operating software and new code kind of thing that's expensive. Even, like, the basic Microsoft (NASDAQ:MSFT) licenses we get for Excel, Word, etc., are sort of expensed, I think, in the first quarter of the year, even though they could be over the course of the year or so. But, so I would say half and half, if that's a good answer.
Graham Ryding: Yes. That's helpful. And then just a follow-up from Geoffrey’s last question. Where do those PCLs flow through, that are related to your, securitization portfolio? Does that come through your NIM?
Jason Ellis: Yeah. The NIM revenue gets, you know, offset by them.
Graham Ryding: So, will that possibly be a factor in the in the five-basis point quarter-over-quarter decline material or that’s PCLs?
Rob Inglis: A little bit. I mean, I think it's a pretty small bit of that, right, because Excalibur is only about smaller portfolio. I've heard of thinking back to Q1 2023, but typically what happens is we set aside too much money and then by the end of the quarter or the year, we look at it again and say, oh, yeah, these moors have paid out. They've gone back from delinquent to fine and we reversed. So recently we haven't reversed those provisions. We just said, okay, what we have now is correct when we go forward. So that will have a little bit of impact negatively, I think, in Q1 2024 because we haven't reversed anything.
Graham Ryding: Understood. Okay. That's helpful. Thank you.
Operator: There are no further questions at this time. I would like to turn it back to Jason Ellis for closing remarks.
Jason Ellis: Okay, thank you. First National host its annual meeting tomorrow at the TMX Centre in Toronto beginning at 10 AM. We look forward to seeing you should you attend. Thank you for participating, and have a great day.
Operator: Thank you very much. This concludes today's call. [Operator Closing Remarks].
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