First National Financial Corporation reports third quarter 2018 results

Oct 30, 2018

Toronto, Ontario, October 30, 2018 – First National Financial Corporation (TSX: FN, TSX: FN.PR.A, TSX: FN.PR.B) (the “Company” or “FNFC”) today announced its financial results for the three and nine months ended September 30, 2018. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP (“FNFLP” or “First National”).

Third Quarter Summary

  • Mortgages under administration (“MUA”) up 5% to a record $105.0 billion from $100.2 billion at September 30, 2017
  • New mortgage originations up 10% to $5.4 billion from $4.9 billion a year ago
  • Revenue up 13% to $321.8 million compared to $284.3 million in Q3 2017
  • Net income $51.9 million ($0.85 per common share) compared to $58.8 million ($0.96 per common share) in Q3 2017
  • Pre-FMV EBITDA(1) $63.0 million compared to $51.8 million in Q3 2017

Dividend Increase and Special Dividend Payment

At its meeting today, the Board of Directors increased the Company's regular monthly common share dividend to an annualized rate of $1.90 from $1.85 per share, commencing with the dividend payable on December 17, 2018. The Board also announced the payment of a special common share dividend in the amount of $1.00 per common share, payable on December 17, 2018 to common shareholders of record November 30, 2018.

Management Commentary

“Performance on a year-to-date basis and in the third quarter was strong," said Stephen Smith, Chairman and Chief Executive Officer. "First National has not only adapted to new B-20 mortgage rules, but it has benefitted from the re-introduction of our alternative lending product, Excalibur, and opportunities presented in the commercial market to set another new record for MUA. Despite tighter mortgage spreads, the Company's business model efficiently converted MUA growth into solid earnings. These results, taken together with the excess capital generated over several years and our belief that near-term growth can be funded from operations, support the Board's decision to raise the dividend and authorize a special payment to common shareholders. We are pleased with these determinations and confident that First National can continue to serve our customers, partners and shareholders well in the quarters ahead."

In the third quarter, new single-family originations were $3.9 billion, up 23% year over year, while single-family renewals were $1.8 billion, up 6% year over year. New commercial originations of $1.5 billion were 14% lower than a year ago, while commercial renewals of $295 million were 6% lower than the third quarter of 2017. Total originations together with renewals amounted to $7.5 billion, up 9% from $6.9 billion in Q3 2017. 

“We're pleased with the quantity and quality of mortgage growth this year," said Moray Tawse, Executive Vice President. “In single family, third quarter origination growth was most pronounced in the Montreal and Toronto regions. In Montreal, a return to more rational pricing behaviour by competitors encouraged us to increase our activity levels and we did with a 54% overall volume increase. In commercial, production was lower but we're comparing to a very strong period a year ago. Consequently, we believe this is timing related and does not represent a change in market fundamentals. Based on year-to-date performance, both multi-unit commercial and single-family residential segments will finish 2018 with record MUA, which is a strong positive for future earnings."


 

Quarter ended

Nine months ended

 

Sept 30, 2018

Sept 30, 2017

Sept 30, 2018

Sept 30, 2017

For the Period

($ 000’s)

Revenue

321,835

284,315

869,471

808,753

Income before income taxes

71,078

80,009

183,367

222,244

Pre-FMV EBITDA (1)

62,990

51,826

169,406

173,185

At Period end
Total assets

 

35,597,827

 

31,548,130

 

35,597,827

 

31,548,130

Mortgages under administration

105,032,062

100,176,720

105,032,062

100,176,720

 (1)This non-IFRS measure adjusts income before income taxes by adding back expenses for amortization of intangible and capital assets (generally described as EBITDA) but it also eliminates the impact of changes in fair value by adding back losses on the valuation of financial instruments (except those on mortgage investments) and deducting gains on the valuation of financial instruments. See also the section “Non-GAAP Measures” in this news release for additional detail.

Q3 2018 Summary

First National’s MUA increased 5% to $105.0 billion at September 30, 2018 from $100.2 billion at September 30, 2017.  Between June 30, 2018 and September 30, 2018, MUA also grew at an annualized rate of 5% as a result of traditionally strong seasonal market activity.

New single-family mortgage originations increased 23% to $3.9 billion from $3.2 billion in the third quarter of 2017, reflecting steady growth in Toronto and Montreal regions. New originations in the Calgary and Vancouver regions were flat to last year. In addition, the Company benefitted from originations under its Excalibur program that was relaunched in 2018 (and did not contribute to 2017 results). Single family mortgage renewals amounted to $1.8 billion in the third quarter of 2018, up 6% from the prior year on higher renewal opportunities and good execution. New commercial segment originations decreased 14% to $1.5 billion from $1.7 billion a year ago, while commercial mortgage renewals amounted to $295 million, down 6% from $313 million a year ago. Based on performance through the first three quarters, MUA in both business segments reached record levels at September 30, 2018: Single family MUA was $78.8 billion ($77.1 billion a year ago); while Multi-Unit and Commercial MUA was $26.2 billion ($23.1 billion a year ago). The Company originated and renewed for securitization purposes $3.0 billion of mortgages in the third quarter of 2018 compared to $2.2 billion a year ago.

Third quarter 2018 revenue was $321.8 million, up 13% compared to $284.3 million a year ago. This increase was related to the rising interest rate environment, partially offset by lower revenue from gains on financial instruments. Interest revenue on securitized mortgages increased by $38.3 million as the portfolio composition moved to mortgages with higher interest rate coupons. Because of changing interest rates and the adoption of hedge accounting in 2018, gains on financial instruments were lower by $20.0 million year over year. Without this component of revenue, revenue increased by 20%. Placement fee revenues were higher in the 2018 third quarter as the comparative 2017 fees were affected by fair value accounting. Effectively, $14.4 million of revenue was recognized in the second quarter of 2017 within gains on financial instruments detracting from placement fees subsequently earned on the related mortgages in the third quarter of 2017.

The Company has several revenue sources. Placement fees were $42.0 million, up 35% from $31.2 million in Q3 2017 for reasons noted above. Mortgage servicing income increased 10% to $42.7 million in the third quarter of 2018 from $38.7 million in Q3 2017 largely due to growth in the Company's third-party underwriting business.  Mortgage investment income increased 24% to $23.1 million from $18.6 million in Q3 2017 due primarily to an increase in market interest rates. Net interest – securitized mortgages decreased 7% to $34.1 million from $36.5 million in Q3 2017 as the benefit of a larger portfolio was offset by tighter weighted-average spreads. Revenue from gains on deferred placement fees was $3.0 million, up 36% from $2.2 million a year ago on account of higher volumes of multi-unit residential mortgages originated and sold to institutional NHA-MBS issuers and consistent spreads.  Securitized mortgages amounted to $30.2 billion at September 30, 2018, up 15% from $26.2 billion a year ago. 

Income before income taxes was $71.1 million compared to $80.0 million in Q3 2017, an 11% decline due to changing capital markets conditions and the manner in which the Company accounts for gains and losses on financial instruments. In aggregate, the impact from financial instruments decreased this measure by $5.6 million compared to the 2017 quarter.

Pre-FMV EBITDA(1), which excludes the impact of gains and losses on financial instruments, increased by 22% to $63.0 million from $51.8 million in Q3 2017. This measure was higher due to lower placement fee revenues recorded in Q3 2017 when accounting conventions related to interest rate hedging were different. Normalizing for this change, Pre-FMV EBITDA(1) would have decreased by 5% in Q3 2018 from Q3 2017 due to tighter mortgage spreads and increased securitization, which delays the earning’s process.   

Chief Operating Officer

The Board is pleased to announce the appointment of Mr. Jason Ellis as Chief Operating Officer effective October 30, 2018. Since 2004, Mr. Ellis has been responsible for leading the Treasury and Capital Markets activities at First National and has successfully managed the majority of the Company’s relationships with its investor clients. In his expanded role, he will continue to report to the CEO. Stephen Smith added “As we continue to grow, it is important to ensure we maintain focus on our operational excellence and the creation of this role and promotion of Jason positions us well in the market place and with our competitors.”    

Dividends 

The Board declared common share dividends in the third quarter of 2018 of $27.7 million or the annualized equivalent of $1.85 per common share. The dividend payout ratio as a percentage of net income attributable to common shareholders was 54% in Q3 2018. If gains on financial instruments are excluded, the dividend payout ratio for the third quarter was 63%. The Board also declared $0.7 million of dividends on its preferred shares in the third quarter of 2018, unchanged from the comparable period in 2017. 

Outlook 

Going into the fourth quarter of 2018, the Company is optimistic that the trend established in the first three quarters will continue. The 13% year-to-date increase experienced in new single-family origination represents a return to more normalized markets after the disruption in 2017 resulting from the change to mortgage insurance rules announced in October 2016. Despite the impact of these new qualifying mortgage rules under B-20 and higher interest rates, the Company is confident that its strong relationships with mortgage brokers and diverse funding sources will continue to set First National apart from its competition. It also expects a tight interest spread environment similar to what has existed for most of 2018. 

The Company will continue to generate income and cash flow from its $30 billion portfolio of mortgages pledged under securitization and $72 billion servicing portfolio, and focus on the value inherent in its significant single-family renewal book. 

Conference Call and Webcast

October 31, 2018 10 am ET

Participant Numbers
647-794-1827 or 800-347-6311

 

The audio of the conference call will be webcast live and archived on First National’s website at www.firstnational.ca. A question and answer session for analysts and institutional investors will be held following management’s presentation.

A taped rebroadcast of the conference call will be available to listeners until 1 pm ET on November 7, 2018. To access the rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter passcode 8529188 followed by the number sign. The webcast is also archived at  www.firstnational.ca for three months.

Complete consolidated financial statements for the Company as well as management’s discussion and analysis are available at www.sedar.com and at www.firstnational.ca.

About First National Financial Corporation

First National Financial Corporation (TSX: FN, TSX:FN.PR.A, TSX:FN.PR.B) is the parent company of First National Financial LP, a Canadian-based originator, underwriter and servicer of predominantly prime residential (single-family and multi-unit) and commercial mortgages. With $105 billion in mortgages under administration, First National is Canada’s largest non-bank originator and underwriter of mortgages and is among the top three in market share in the mortgage broker distribution channel.  For more information, please visit www.firstnational.ca.

1 Non-GAAP Measures

The Company uses IFRS as its accounting framework. IFRS are generally accepted accounting principles (GAAP) for Canadian publicly accountable enterprises for years beginning on or after January 1, 2011. The Company also refers to certain measures to assist in assessing financial performance. These “non-GAAP measures” such as “Pre-FMV EBITDA” should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of performance or as a measure of liquidity and cash flow. Non-GAAP measures do not have standard meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers.

Forward-Looking Information

Certain information included in this news release may constitute forward-looking information within the meaning of securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will, "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's outlook and anticipated events or results and may include statements or information regarding the future financial position, business strategy and strategic goals, product development activities, projected costs and capital expenditures, financial results, risk management strategies, hedging activities, geographic expansion, licensing plans, taxes and other plans and objectives of or involving the Company. Particularly, information regarding growth objectives, any future increase in mortgages under administration, future use of securitization vehicles, industry trends and future revenues is forward-looking information. Forward-looking information is based on certain factors and assumptions regarding, among other things, interest rate changes and responses to such changes, the demand for institutionally placed and securitized mortgages, the status of the applicable regulatory regime and the use of mortgage brokers for single family residential mortgages. This forward-looking information should not be read as providing guarantees of future performance or results and will not necessarily be an accurate indication of whether or not, or the times by which, those results will be achieved. While management considers these assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward looking-information is subject to certain factors, including risks and uncertainties listed under ‘‘Risk and Uncertainties Affecting the Business’’ in the MD&A, that could cause actual results to differ materially from what management currently expects. These factors include reliance on sources of funding, concentration of institutional investors, reliance on relationships with independent mortgage brokers and changes in the interest rate environment. This forward-looking information is as of the date of this release and is subject to change after such date. However, management and First National disclaim any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.

For Further Information:

Robert Inglis
Chief Financial Officer
First National Financial Corporation
Tel:  416-593-1100
Email: rob.inglis@firstnational.ca

Ernie Stapleton
President
Fundamental
Tel:  905-648-9354  
Email: ernie@fundamental.ca