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In Conversation with Stephen Smith

  • First National Financial LP

In 1988, two young Canadian entrepreneurs (Stephen Smith and Moray Tawse) founded First National Financial Corporation. Today, Stephen and Moray still remain deeply engaged in the day-to-day business operations as committed officers, directors and shareholders of a firm that now has almost $100 billion of mortgages under management and a market capitalization of more than $1.6 billion. In this article, we asked Stephen Smith Chairman, Chief Executive Officer and co-founder of First National Financial Corporation, to share his thoughts on the industry and maintaining the entrepreneurial spirit at First National.

What’s a typical work day for Stephen Smith?
There really is no typical day, although it usually starts in the same way. I begin each morning by updating myself on macro-level developments. It’s very important to be aware and informed of what’s going on in the world and in Canada and think about how the news may affect our markets. From there, my day sometimes consists of a series of meetings, including over lunch. If I’m not in meetings, I’m checking in with my six direct reports and focusing on business challenges and how our team might deal with those challenges through our strategies.

How would you describe the team surrounding you?
Let me answer that question by telling you what it was like when Moray and I founded the business almost 30 years ago. We had, near the beginning, 11 employees and, along with the other things one would normally associate with co-managing a business start-up, I was responsible for IT. Part of my day was spent fixing printers, installing new computers and programming them. There wasn’t much time to think about strategy. Now, our business runs with a leadership team comprised of nine individuals who have tremendous knowledge and experience in specialized areas. Each of these leaders makes a substantial contribution to business development, which is why I said strategy is a team effort. It’s also why I don’t act as the IT help desk anymore.

First National has a reputation for being entrepreneurial. How do you foster that mindset now as a large business?
It’s about striking the right balance between structure and entrepreneurialism. It’s not possible or wise to run a business with 1,000 employees and almost $100 billion in mortgages under administration effectively without structure. 

Structure is important but doesn’t it come at the expense of being nimble and responsive?
The two don’t have to be mutually exclusive. We’ve demonstrated this over time, including at times when challenges, such as the 2008 financial crisis, beset us. Back then, we were not a CMBS issuer; we were just generally selling our product to third parties. Right away, we saw the market change so we responded by becoming an issuer. To a degree, this marked a pivot in the way the organization ran, from being entirely third party to creating our own very significant balance sheet. The decision put us in good stead with these recent rule changes, where we really need that balance sheet to be able to securitize loans. We couldn’t have made the pivot without a great team, a sound structure and an entrepreneurial mindset.

As CEO, there must be a lot of pressure on you to make the right decisions, to make the right changes at the right time. Isn’t that a big burden to carry?
Let me put it this way: Once you do it for a while, you get used to it. I think it’s why CEOs get a reputation for being a bit impersonal because they have to tune out the external noise and make decisions with the facts at hand and without emotion. If bombs are going off around you, you still have to make appropriate decisions. 

There has been a lot of change in the industry as of late. Did policymakers overact to the situation in Toronto and penalize other communities in the process?
Possibly, and it may be necessary to think of Toronto as an international city like London, or Paris or Tokyo, where people really don’t think about owning a single-family home. If you buy in those cities, you buy an apartment or a large condo. That sort of thinking is not the norm here and maybe that will need to change.

What about rent control measures imposed by the Province of Ontario?
I think rent controls are a mistake because they do nothing to improve housing stock supply. But we knew they were coming because of stories in the media about landlords raising rents  100 per cent. When politicians see stories like that, it’s very difficult for them to resist taking action. The problem is, those stories are anecdotal. I find it hard to believe those are anything but isolated incidents. 

Is there anything similar in history to what you are seeing now with housing price escalation?
Yes, it’s reminiscent of 1988-89. It’s been 30 years since we experienced a bubble, but that market basically burst overnight as consumer psychology changed. 

How does First National protect itself against a housing bubble bursting?
First, we insure most of our product or sell it to institutions so we don’t bear the direct risk of significant changes in the market. We’ve also mitigated risk through tighter underwriting standards, which have been in place for five or six years now. The quality of mortgages First National originates now is as good as it’s been since Moray and I started the business. Another important risk mitigation strategy in our business is that we typically don’t lend on single-family residences in the heart of Toronto and Vancouver where price escalation has been significant and individual mortgage values can be in the million-dollar range. In fact, the average value of single-family mortgages underwritten in 2016 is just under $300,000 dollars. First National mortgages are in the suburban areas surrounding the large Canadian cities and are less likely to be affected by a real estate slump.

First National has a vibrant commercial business.
Correct. Our commercial business provides diversification and another growth avenue for First National. In fact, we are the largest commercial mortgage lender in Canada, mainly as a result of our huge volume of CMHC-insured, multi-family loans. Our commercial market expertise and experience are very deep – 30 years deep. When we started First National, and for the first 12 years of operation, I oversaw commercial, and Moray lead single family residential. In approximately 2001, we determined that single family was largely a treasury, capital market type business and we switched roles. Moray picked up commercial, and I went to single family. Since then, First National has made significant strides in building the commercial business through several market cycles.

Including during the financial crisis of 2008?
In some ways, the financial crisis was a boon to us, as we were able to provide liquidity to our customers when many of the major banks withdrew from the commercial market. This is another example of why it’s necessary to have healthy, competitive alternatives to the big banks.

Commercial is now 25% of the business.
Correct -- measured by mortgages under administration. It continues to grow in importance, as we’ve been able to provide borrowers with competitive products and advice. As I see it, we have a dual role to play as both a lender and an advisor. With the team we have in place in commercial, First National can play that role better than anyone. 

If you look forward five years, will commercial be a bigger part of First National’s portfolio?
I think commercial will grow faster, but the single-family business will always be the biggest.

What else is important from a strategy perspective right now?
Good service. First National has an advantage over other institutions because all we do is provide mortgages. It’s bred in our bones. As a result of our specialization, we can be faster problem-solvers for our customers and reach faster credit decisions. In this current environment, really in any market, better custom service wins the day and that’s what we aim to do.

What about changes to the business model?
No need. What we have in place here is effective. It has been proven to be effective through multiple business cycles, and I believe it will continue to work as we move through this new phase of the cycle. 

Final thoughts?
As we look ahead, I have no doubt that First National will remain Canada’s largest non-bank originator and underwriter of mortgages during and after this period of market adjustment. Our business plan for 2017 is to manage the challenges before us in single family, focus on realizing the value of mortgage renewals in our pipeline and endeavor to grow our market leadership position in our commercial business. While we pursue these objectives, we know that with close to $100 billion of mortgages under administration, we can count on a strong foundation for ongoing income and cash flow.