First National - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to First National's third quarter analyst call. This call is being recorded on Wednesday, November 1st, 2023. At this time, all callers are in a listen-only mode, but 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 CEO)

Good morning. Welcome to our call, and thank you for participating. Robert Inglis, our Chief Financial Officer, joins me and will provide his commentary 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 Discussion and Analysis. Third quarter results exceeded our expectations. Pre-Fair Market Value Income of CAD 95.5 million was 98% higher than the same quarter last year. This outperformance was driven by several factors, including an acceleration in housing market activity prior to the resumption of Bank of Canada rate increases in June and July. This temporary re-ignition of the market created a large pipeline of new mortgage commitments and pre-approvals.

In the quarter, pre-approvals originated in earlier periods converted into funded deals as more borrowers realized on the value of those pre-approvals as prevailing rates continued to move higher. Growth was also supported by more renewal opportunities as borrowers chose not to refinance midterm into higher interest rate environments, allowing more mortgages to reach maturity. Including renewals, residential origination of CAD 8.3 billion was 26% higher year-over-year. Commercial origination, also including renewals, was CAD 3.3 billion, up 30% year-over-year on demand for CMHC-insured multifamily mortgages. With this performance, mortgages under administration reached CAD 141.9 billion, with residential and commercial mortgages under administration up 8% and 14% respectively from last year. MUA growth was assisted by slower prepayment speeds. As noted in recent quarters, these have returned to more traditional levels.

The combination of MUA growth and the effect of higher interest rates drove all revenue and profit metrics higher on a year-over-year basis. Results compared sequentially to the second quarter tell much the same story. Rob will speak to that in his comments. After a weaker first half, when total originations were down in the order of 14% year-over-year, we are pleased with third quarter performance and the resilience of our business model through this volatile period in the market. That resilience, reflected in consistent profitability, provided the basis for our Board's decision to increase our common share by CAD 0.05 to CAD 2.45 annually, effective with the payment in December. In addition, the Board approved a special dividend. The third quarter was instrumental in that decision, as strong results allowed us to build extra retained earnings.

When that capital is not needed for near-term growth, First National discipline dictates that we distribute it as dividends. We followed this approach for many years and believe it has served our shareholders and First National well. This is the benefit of having a capital-efficient business. I'll transition now to our near-term outlook. Although not evident in third quarter results, residential mortgage originations and applications began to decelerate after the Bank of Canada reentered the market with its July rate hike. In September, new application levels were well below the same month last year, and fundings in the month decelerated relative to the quarter overall. This deceleration continued through the early weeks of October. These monthly readings of new commitment activity translate into funded mortgages in the future, and the leading indicators point to a reduction in residential origination in the fourth quarter compared to Q4 last year.

What we see in the housing market generally would suggest First National is not alone. Depending on future Bank of Canada policy, Q1 may also show some weakness in origination. For commercial origination, the outlook for the fourth quarter is similar, as buyers and sellers grapple with valuations in this higher interest rate environment, resulting in relatively fewer transactions. On the positive side, policymakers have recently made two key moves to address the critical shortage of affordable rental housing in Canada, a market in which First National is a leading participant. On September 14th, the federal government announced it would eliminate the GST on the assessed value of completed rental units, which then triggered several provincial governments to convey their plans to reduce or eliminate the application of their sales taxes.

Then, on September 26th, the Department of Finance announced a CAD 20 billion increase in the annual Canada Mortgage Bond issuance limit. As you know, the majority of multifamily mortgages in Canada are CMHC insured, and the majority of those are funded through the Canada Mortgage Bond. Those additional funds create confidence for developers that there will be long-term funding available at the end of construction.

For First National, an active issuer of NHA MBS and seller into the CMB program, this means additional liquidity. Moving to the credit side, First National borrowers are generally holding up very well against the stress of higher interest rates. We did see a modest uptick in the 30-day arrears rate in the quarter, perhaps a sign that borrowers most at risk are starting to feel the effects of the most recent Bank of Canada rate increases. Nonetheless, residential arrears remain well below pre-pandemic levels.

Fixed rates represented 82% of new commitments issued in the quarter, compared to 48% last year. For mortgages under administration as a whole, about a quarter of mortgages are adjustable rate, where payments change with every change in the prime rate, such that borrowers remain on their original amortization schedules. Once again, the arrears rate on that adjustable rate portfolio continued to track that of the broader portfolio. To sum up, while the third quarter exceeded our expectations, we anticipate some headwinds in the fourth quarter as originations are trending toward a year-over-year decline. Despite the reduced housing activity, population growth and ongoing lack of supply in the housing market should provide support for prices. With inflation moving in the right direction, there is also renewed hope for a return to less restrictive monetary policy in 2024. Rob, over to you.

Robert Inglis (CFO)

Thanks, Jason, and good morning, everyone. MUA increased 12% on an annualized basis during the third quarter, which is the fastest rate of annualized growth we've seen in about eight years. Notwithstanding slow origination in Q4 for both business segments, we still expect MUA to finish the year at a record level, supported by renewal retention and historically low prepayment speeds. Turning now to financial results with a focus on sequential Q2 to Q3 comparisons, growth in the portfolio included Alt-A and the commercial segment, combined with higher rates, which led to a 12% increase in absolute net interest income on mortgages pledged under securitization. Net interest margin benefited from slower prepayment speeds and a relatively stable interest rate environment. Low rates of prepayment mean lower amortization of capitalized origination expenses and other securitization related fees.

Looking now to the fourth quarter, we expect securitization NIM to remain comparatively strong relative to Q3 and to last year. With higher residential origination volumes sold to institutions and stability in per unit fees, Q2 and Q3 placement fee revenues increased sequentially by 14%. Gains on deferred placement fees, which we earn in originating and selling commercial mortgages to institutional investors, increased 7% between Q2 and Q3, reflecting strong volumes of origination for this program. Investment income showed the largest sequential increase, up almost 40%, a direct result of higher interest earned on our mortgage and loan investment portfolios and the mortgages held for securitization. Reflecting growing MUA, mortgage servicing income was higher by 2% sequentially. This reflected the continued benefit of higher interest on escrow deposits and comparatively solid success in the marketplace by our third-party customers for whom we provide underwriting services.

Excluding the impact of higher interest costs incurred to fund the securitization portfolio, net revenue was CAD 272.5 million, a 6% sequential increase. The third quarter featured gains on financial instruments as bond yields increased, and the value of the company's short bond position held against single-family commitments increased. However, excluding these fair value-based revenues, net revenue was CAD 254 million, a 21% increase from Q2 2023. Turning to the other side of the ledger, broker fee expense in the quarter reflected higher single-family origination placed with institutional customers. Per unit broker fees were about 8% lower than last year, when the company offered additional incentives in a more competitive market. On a sequential basis, per unit fees were comparable to those paid in Q2. While flat to Q2, salaries and benefit costs increased 7% year-over-year in Q3.

At the same time, FTE was 7% lower year-over-year due to attrition, which did not need to be addressed. This divergence reflects higher incentive-driven variable compensation for commercial underwriting, as well as inflationary pressure on annual merit increases. Looking ahead, a weaker job market in financial services appears to be on the horizon, and with it, less competition for talent and a return to a more normal wage inflation levels. As a general policy, First National employs great talent, invests in the training of its people, and seeks to operate with a stable headcount. Jason mentioned Q3 Pre-Fair Market Value Income increased by 98% year-over-year. Our core measure of profitability was also up 6% between the two quarters.

Dividend payments in the third quarter were made at an annualized rate of CAD 2.40, with a payout ratio against net income attributable to common shareholders, about 44% or 52% if you exclude the gains and losses on financial instruments. The Pre-Fair Market Value payout ratio was 61% for the first nine months of 2023.

Jason Ellis (President and CEO)

Clearly, First National's track record of ongoing profitability provided ample support for the board's decision to increase the dividend to an annualized rate of CAD 2.45, commensurate with the December payment. This is the seventeenth such increase in distribution since our IPO 17 years ago. In closing, we do expect to see lower originations in Q4, with impact on our efficiency levels from lower operating leverage. However, a lot of the good things that contributed to outperformance in Q3 should persist, including wider securitization NIMs, higher interest on cash held in escrow, increased renewal opportunities and retention rates. And of course, the record value of our mortgages under administration will continue to drive mortgage servicing revenues in support of ongoing profitability. Now we'll be pleased to answer your questions. Operator, please open the lines. Thank you.

Operator (participant)

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request, and should you wish to withdraw from the question queue, please press star followed by two. If using a speakerphone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you do have any questions. Your first question will be from Nik Priebe at CIBC Capital Markets. Please go ahead.

Nik Priebe (Equity Research Analyst)

Okay, thanks for the question. I was just wondering if you could help expand on or clarify some of the changes that have been announced or are being contemplated for the CMB program. So the annual issuance limit was increased, that's constructive. But then, on the other hand, there's an unrelated review of the program ongoing, the outcome of which is unknown. Can you just help us tie all this together, and better understand what it might mean from First National's standpoint, you know, and your ability to grow origination volumes?

Jason Ellis (President and CEO)

Sure, Nik, it's Jason. So first of all, the ongoing contemplation of moving the Canada Mortgage Bond out of public markets and over to be funded directly by the Bank of Canada through the subsequent issuance of regular government bonds is completely separate and distinct from the recent announcement to increase the size of the program. So I'll break them down into two pieces. I think we're looking ahead to a fall update from the Department of Finance in November. We're hoping for some clarity in that as it relates to their decisions around the future of the Canada Mortgage Bond. So we wait on that. Separately, the increase of the annual CMB program from CAD 40 billion-CAD 60 billion is exclusive for the securitization of multifamily mortgages.

The intention, as it's been described, is to increase the 10 year CMB issuance in November from the usual CAD 4 billion to as much as CAD 8 billion, and then to increase the five-year CMB issuance from a typical CAD 5 billion to CAD 6 billion or more if they aren't able to issue the full CAD 8 billion of 10 year in November. In support of this additional CMB capacity, CMHC also provided an additional CAD 5 billion of underlying NHA MBS guarantee fees, again, exclusively for the use in the creation of multifamily pools. So, what does this mean for First National? This is one of the few times where I think changes have been made to the program that may have a disproportionately positive impact on the company.

As the largest originator of multifamily mortgages in the country, these changes will create liquidity that will directly support one of our key products.

Nik Priebe (Equity Research Analyst)

Okay. And you would typically maximize your allocation to that program, on an annual basis. Is that correct?

Jason Ellis (President and CEO)

Yes. We make maximum utility of CMHC securitization programs and the underlying guarantee fees.

Nik Priebe (Equity Research Analyst)

Okay. That's helpful. And then, just one other question for me. I was hoping you could refresh us just on the decision-making process around the special dividend. I believe in the past there's been a discussion around a minimum level of equity that you kind of target holding in the entity. Is that still the case today, or how should we think about capacity to pay a special dividend, going forward?

Jason Ellis (President and CEO)

Yeah. So it's not that there's an absolute dollar amount which represents minimum equity. It's more about a minimum amount of, call it surplus equity, that puts us in a position to either grow with opportunities or respond to contingencies that require additional cash. So it's not that we're targeting a certain amount of equity, but we're always making sure that we have sufficient amount of unrestricted liquidity available to us. So, you know, Rob and I work with the board to think about the right amount of liquidity to move into the next year with. And then if we have equity beyond that, as we typically do, we will distribute it back to the shareholders.

Nik Priebe (Equity Research Analyst)

Understood.

Jason Ellis (President and CEO)

So.

Nik Priebe (Equity Research Analyst)

Okay. I'll queue. Thank you.

Jason Ellis (President and CEO)

Thanks.

Operator (participant)

Next question will be from Etienne Ricard at BMO. Please go ahead.

Étienne Ricard (Equity Research Analyst)

Thank you and good morning. Given the strong origination numbers in Q3, would you have a sense as to how your market share is trending in the broker channel? And do you believe the environment today is less competitive as the banks face higher capital requirements?

Jason Ellis (President and CEO)

So we used to have a fairly clear view of our share in the broker channel as, Finastra, which is the platform that most brokers used to use to deliver their applications, would publish market share based on the data they had. They stopped doing that, I think, in June of last year, and so we've lost that very clear line of sight in terms of our market share. Anecdotally, it would seem that year to date, we have increased our share within the mortgage broker channel based on our year-over-year change in funding, compared to what we hear some of our large broker partners describing as their own year-over-year changes. So I think that we generally feel as though, we've gained some share this year. In terms of competitiveness, it's always a fiercely competitive market, and I don't think it's any less competitive.

If we think about the banks as competitors, both directly in the broker channel and/or indirectly as competitors through the branches and their mobile mortgage specialists, I think that additional capital, additional reserves against potential, losses and the like, may force them to move rates up relative to their cost of funds. Which would then perhaps allow mortgage finance companies like First National, a little bit more latitude in terms of exploring alternative securitization funding strategies like term RMBS. So we'll see how that trend continues, but ultimately it is a competitive market and remains so.

Étienne Ricard (Equity Research Analyst)

Okay, and just to circle back on changes to the CMB. So if we, if we look at the total securitizations today, you know, it's about, I think, you're originating about CAD 13 billion on an annual basis. As a result of the changes brought forward, where do you expect this capacity to move to?

Jason Ellis (President and CEO)

Sorry, repeat the question one more time. I'm not sure I fully understood it.

Étienne Ricard (Equity Research Analyst)

Yes. So if I look at, you know, over the past twelve months, the total number of securitizations you've done, it's approximately CAD 13 billion. I'm just trying to.

Jason Ellis (President and CEO)

Of NHA MBS? Or of everything, including ABCP. Okay.

Étienne Ricard (Equity Research Analyst)

Correct. Yeah. So I'm just trying to get a sense as to how much, you know, where this will move to as a result of the increased,

Jason Ellis (President and CEO)

Right.

Étienne Ricard (Equity Research Analyst)

CMB capacity.

Jason Ellis (President and CEO)

In an idealized situation, assuming we do continue to have the scale to originate mortgages to maximize our utility into the CMHC securitization programs, I imagine that the typical allocation received on a 10-year CMB for an individual participant has tended to be around, say, CAD 200 million-CAD 300 million. To the extent that the amount of CMB capacity is increasing by what? 50%. Perhaps that translates into 50% more capacity in 5 and 10-year CMB. So, let me reset the question or reset the answer here. I think that it's possible that we could see, in terms of our access to quarterly CMB allocations, approximately 50% more than we had been seeing in previous years. So in absolute dollar terms, I don't know, maybe CAD 200 million-CAD 400 million a quarter of extra CMB funding.

I'm just. this is back of the envelope.

Étienne Ricard (Equity Research Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. Next question will be from Jaeme Gloyn at National Bank Financial. Please go ahead.

Jaeme Gloyn (Analyst)

Yeah, thanks. First question, just wanted to dig in on the origination volumes, which were, of course, really, really strong. And you know, obviously outperforming what it seems like the housing market activity would suggest, and maybe your peers, given your market share comments. But you know, I guess, are you seeing maybe looking and digging into a breakdown here, are you seeing more people refinancing with larger mortgages? Or could you offer maybe some color in terms of how much of that origination number is renewal clients versus new customers coming to First National? Just trying to dig into that outperformance relative to others.

Jason Ellis (President and CEO)

So, the new origination relative to renewed mortgages, that ratio has been relatively steady for a number of years now, and this quarter didn't change from that traditional ratio. So, our relative outperformance, such that it was, wasn't driven by new origination or renewals, specifically. In terms of the split of new origination between purchases and refis? I don't know. I don't have that in front of me, but I have no reason to believe that we originated more purchases or refis relative to each other than we normally would. The one thing we have seen, as Rob mentioned, is that our prepayment speed on the existing portfolio has decelerated significantly since the pandemic.

And the obvious reason for that is borrowers now with relatively low mortgage coupons, are not incented to break early and refinance away in what is now a much higher rate environment. So if I were to draw some sort of potential conclusion from that, maybe overall refinancing activity in the market has slowed down. But I don't, I don't know, off the top whether or not our numbers show that.

Jaeme Gloyn (Analyst)

Okay. Following on that last comment around prepayment speeds, and I think it was Rob mentioning that wider NIMs or I guess NIMs at these levels would persist. Is it, does it really just come down to the prepayment speeds at this point that would sustain these securitization NIMs at around 59, 60 basis points? And I guess I just want to understand the commentary in the MD&A suggests that we've approached more traditional levels, but are we running below more traditional levels, or is it kind of right at normal?

Jason Ellis (President and CEO)

No, I, I guess to be fair, traditional understates it. I did take a peek, the other day at our fixed-rate NHA MBS portfolio. CMHC has a, a great set of statistics on NHA MBS prepayment speeds, both industry-wide and by issuer. Looking at our own outstanding pools, I think our annualized liquidation rate in the quarter on our fixed-rate MBS was below 6%. During the pandemic, we saw that in the mid- to high 10%, and I think the long-term average, I would characterize in the 10%-12%, maybe eight to twelve, depending. But, so I would say we're actually running slower than even the long-term at this moment. The small offset to that, for what it's worth, is on the adjustable-rate MBS portfolio.

Those liquidation rates are actually a little bit above long-term, and that's a function of borrowers that aren't actually prepaying and leaving, but are rather exercising their privilege to convert from an adjustable rate to a fixed rate. And over the course of the year, we saw a little bit more of that than you would typically. And when a mortgage converts, it's forced to liquidate from the MBS pool. But fortunately, it doesn't leave First National.

Jaeme Gloyn (Analyst)

Right.

Jason Ellis (President and CEO)

So one of the things that's been driving NIM is, one, compared to the really, really fast prepayment speeds during the pandemic, where Rob was forced to accelerate the amortization of capitalized costs faster than scheduled, we're seeing a little bit of the opposite of that now. So it's really had a significant impact.

Robert Inglis (CFO)

Yeah, and I'll add, too, it's interesting, before, when this prepaid in the pandemic, you know, the cash from those prepayments goes into trust for 30 days, wherever it is, between receipt and the day we pay off the bondholders on the MBS side. If I was earning sort of, you know, less than 2% on the overnight rate two years ago, now it's earning, you know, 5% because CDOR rates are so high. So when those, you know, prepayments happening before, it was like a loser. You're getting 2% on your cash, your asset, and you're paying, you know, 3% on the MBS side. Now, it's the opposite. You're paying 3% on the MBS, and you're getting 5% as that cash sits in trust. A lower amount of cash, but you're carrying it positively.

Jaeme Gloyn (Analyst)

Right. And so, just, you know, getting back to the first part of the question of like, the wider NIMs and sustainability. Is it really around prepayment speeds that we should be tracking for how that should progress? And at these like, let's say at 6%, if that holds, like there shouldn't be that much more expansion in NIM from here. Is that a fair comment or are there other factors?

Jason Ellis (President and CEO)

That's probably a reasonable outlook. Yeah, it's hard to imagine getting much more of a lift from that phenomenon from this point on. So but like Rob said, the higher interest rates help. Sorry?

Jaeme Gloyn (Analyst)

Are there other factors beyond prepayment that would drive the NIM much higher than we are today?

Jason Ellis (President and CEO)

I mean, there's a lot.

Jaeme Gloyn (Analyst)

Consider.

Jason Ellis (President and CEO)

There's a lot of variables that go in, to influencing NIM. But I would say that, you know, the most important one that we should talk about, of course, is the spread on the new mortgage originated against the underlying cost of funds of either the ABCP or the NHA MBS into which it's being funded. But because we are dealing with such a mature portfolio of CAD 39 billion of mortgages under admin, even a period of relatively tight or relatively wide spreads at origination, will only just nudge NIM slightly. It's really as we move through cycles, as periods-- extended periods of tight spreads run off the book and or, the opposite, you know, wider spreads run off. So it, it should be a generally gradual movement.

It's tough to see things really move it as swiftly as it's moved other than this really whipsaw in prepayment speeds that we've experienced from the lows of the pandemic in terms of rates to today.

Jaeme Gloyn (Analyst)

Great, great. That's, that's very helpful. One last one, and I'll queue. You know, part of the-- what was driving the, the securitization, upside is the success in the Excalibur program. And one of the comments around Excalibur is that, from the MD&A is that there's almost no loan losses. And, you know, that's, that's pretty easy to understand why there's almost no loan losses there at this point. What I'm curious is if you have any data on delinquencies in that portfolio and how those borrowers, that are on typically shorter-term mortgages are performing, or from a delinquency standpoint or an arrears standpoint, given the higher mortgage payments they'd be facing today versus a year or two years ago.

Jason Ellis (President and CEO)

Yeah. So as you suggest, it's easy to understand the fact that there's little to no losses, and that there's a great deal of equity in the underlying mortgages. And other than the very small blip we saw from the peak of the market in, say, March or April of 2022, most of the borrowers enjoyed an increase in that equity, you know, while they held their mortgage. They do tend to have shorter terms, and you're right, more of them will have experienced renewal into new and higher rates than on the prime book in relative terms. Fortunately, just as the adjustable rate borrowers have adapted well relative to the new rates, so have our Alt-A borrowers. We've noticed that our retention rate has been good and that the borrowers are managing their new payments well.

That said, there is a slight separation between the 30-day arrears rate in the Alt-A book and the comparable rate in the prime book, as one would expect, given the nature of some of the borrowers. That said, it is well below what we've provisioned against and, you know, much lower than anything we would have cautiously predicted. So, so far, the Alt-A portfolio is holding up extremely well, and we're not seeing any canary in the coal mine warnings on it.

Jaeme Gloyn (Analyst)

Great. Thank you very much. I'll queue.

Operator (participant)

Thank you. Once again, as a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. Your next question will be from Graham Ryding at TD. Please go ahead.

Graham Ryding (Equity Research Analyst)

Hi, good morning. Maybe just on a similar theme, I think you made some comments at the beginning of the call, which I didn't quite catch, around, sort of arrears trends deteriorating slightly. Is there anything you can quantify it on, on what you're seeing, maybe both in your residential and, commercial books?

Jason Ellis (President and CEO)

Yeah, I mean, deteriorating is a strong word. Nothing to speak of really in commercial. You know, the 30-day arrears rate. So if you really wanna make it as, you know, tough as you can make it, the 30-day arrears rate on the residential book at the end of the second quarter was 12 basis points. At the end of the third quarter, it was 14 basis points. So that's about as explicit as I can be on that. It's, you know, it's higher. Deterioration maybe was the wrong word.

Graham Ryding (Equity Research Analyst)

Right. Okay. And.

Jason Ellis (President and CEO)

The 90-day rate is.

Graham Ryding (Equity Research Analyst)

What's the 90-day?

Jason Ellis (President and CEO)

Yeah, the 90-day rate is like unchanged, and it's less than 6 basis points.

Graham Ryding (Equity Research Analyst)

So lower than what we're seeing in the mortgage market overall in Canada, in your portfolio?

Jason Ellis (President and CEO)

We've traditionally enjoyed an arrears rate that, as far as we could tell, compared favorably to that you could see from, say, the banks. I don't know where the banks are at right now.

Graham Ryding (Equity Research Analyst)

The CBA data?

Jason Ellis (President and CEO)

The CBA data, yeah.

Graham Ryding (Equity Research Analyst)

Yeah. Okay. Okay, that's helpful. Last quarter, there was an offset within your interest expense. So I guess the question is probably for Rob, but you were getting some carry benefit that was sort of offsetting your overall net interest expense. Was that a factor in the quarter? And if so, was there anything that you would flag?

Robert Inglis (CFO)

Yeah, that's still the case. I mean, Canadas for five years now, it's a 4% yield kind of thing, I think. I don't know, it changes every day. But, on the short end, when we're borrowing the bonds to fulfill the repo agreement, that exceed our rates, you know, it's in the 5%. So we're basically picking up a 1% margin on the short Canada. And those are the short Canadas, right, that are against single-family commitments, the ones that are against multi-family commitments and funded mortgages go through OCI. So only the bit that. Well, actually, the bit that funds mortgages just kinda converts the mortgages to float, which matches our funding from the bank syndicate.

Jason Ellis (President and CEO)

Yeah, but it's fair to say structurally, just the shape of the curve from overnight repo to five-year government bond yields. Obviously, during the pandemic, that was positively sloped and resulted in negative carry on our book of CAD 2 billion plus of short bonds. That carry is reversed now, so that is just structurally a nice tailwind that we've enjoyed.

Graham Ryding (Equity Research Analyst)

Okay. So is that the math that we should roughly do? CAD 2 billion of sort of hedging short bonds and whatever that carry is. Is that how we should think about it on a quarterly basis?

Robert Inglis (CFO)

It could change. It could change. I mean, almost in, on the balance sheet, we describe sort of the total amount of short bonds, and it could be, you know, as high as CAD 3 billion in some seasons. So if you want to think about that, though, in totality, you need to remember that if we're short CAD 2 billion or CAD 3 billion bonds, as the case may be, some of those shorts are against mortgage commitments, where the only math is the overnight repo versus the yield we're short. Some of those hedges are against funded mortgages. So you also have to think about the cost to carry those mortgages on our balance sheet while we wait for securitization, compared to the coupon on those mortgages we earn prior to securitization. So you've got mortgage carry, and then you've got hedge carry.

Graham Ryding (Equity Research Analyst)

Okay. Does that all fall under your interest expense line?

Robert Inglis (CFO)

Yes.

Graham Ryding (Equity Research Analyst)

I guess where, where I'm trying to get at with this is just, next year, if we start to see the yield curve flatten out, and you don't have this carry benefit, is it going to be material to your interest expense?

Jason Ellis (President and CEO)

Yeah, that it'll add up, just as it's been materially constructive this year.

Graham Ryding (Equity Research Analyst)

Mm-hmm. Okay. On the third party, you signed up a third bank for third-party fulfillment, and I can't remember when that started. So I guess my first question is: Was that in your servicing income in the quarter? And if so, like, is that partnership or that client arrangement sort of fully ramped up?

Jason Ellis (President and CEO)

Yeah. So, we're pleased that Bank of Montreal selected First National to provide its underwriting services for its re-entry to the broker channel. BMO has announced that BMO BrokerEdge is scheduled to launch in the beginning of 2024. So no, there is no revenue yet from that. However, all the heavy lifting in support of that launch and providing the services is behind us now. So at this stage, we look forward to starting that business with them, and we've begun hiring in support of it.

Graham Ryding (Equity Research Analyst)

Okay. Excellent. That's it for me. Thank you.

Operator (participant)

Thank you. Next question will be from Geoff Kwan at RBC. Please go ahead.

Geoff Kwan (Managing Director)

Hi, good morning. Just wanted to follow-up on Graham's last question. Just now you've got two of the big banks, you've got a smaller bank that are outsourcing their broker underwriting to you. Is. Are you able to say, like, is the fee rate that you're charging them, are they identical or are they like how different or not are they? And then also, too, is now that you would have two of the big banks and a smaller bank, like, those volumes should be quite significant when you get to kind of a run rate. Is that something you'd be able to report in terms of the originations you're doing through the third-party outsourcing at some point down the road?

Jason Ellis (President and CEO)

I think, at this stage, it doesn't meet, I think, tactical materiality thresholds that would compel us to disclose it separately, and I think for the time being, it will continue to be part of our overall servicing revenue line. So there aren't plans to strip it out and report it separately, partly, for the benefit of our counterparty's own proprietary information. With respect to the terms of the contracts, I'll put that under the category of proprietary as well and not comment. But I will say that the services we're providing for both are virtually identical, and in a competitive market, you can imagine that the terms would be quite competitive as well.

Geoff Kwan (Managing Director)

Okay, thank you.

Operator (participant)

Thank you. At this time, I would like to turn the call back over to Mr. Ellis for closing comments.

Jason Ellis (President and CEO)

Okay. Thank you, operator. We look forward to reporting our Q4 results on March 5th. Thank you for participating, and have a great day.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we ask that you please disconnect your lines.