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First National Financial Corporation reports 2020 first quarter results

May 12, 2020

First National Financial Corporation Reports 2020 First Quarter Results

 

Toronto, Ontario, May 12, 2020 – First National Financial Corporation (TSX: FN, TSX: FN.PR.A, TSX: FN.PR.B) today announced its financial results for the three months ended March 31, 2020. The Company derives virtually all of its earnings from its wholly owned subsidiary, First National Financial LP (“FNFLP” or “First National”).

Q1 Summary

  • Mortgages under administration (“MUA”) increased 6% to a record $113.5 billion compared to $107.0 billion at March 31, 2019
  • Revenue decreased 4% to $274.6 million from $286.3 million in 2019
  • Pre-FMV Income(1) increased 35% to $52.9 million from $39.3 million in 2019
  • Net loss was $2.3 million (loss of $0.05 per common share) compared to net income of $23.5 million ($0.38 per common share) in 2019

Management Commentary

“First National achieved substantial origination growth in both our single-family and commercial mortgage operations in the first quarter,” said Stephen Smith, Chairman and Chief Executive Officer. “In light of the severe disruption COVID-19 has caused to all Canadians and businesses, I am proud of the productivity achieved and service delivered by First National employees across the country as they quickly transitioned to work from home for our customers and partners. From an operating perspective, the benefits of origination growth registered in both MUA and higher Pre-FMV Income, but not in IFRS-measured earnings as a result of fair market value losses related to the sudden decline in interest rates. Despite incurring our first loss as a public company, we remain confident that First National’s business model will prove to be highly resilient during this unprecedented period.”

In the first quarter of 2020, new mortgage originations increased 77% to $5.4 billion from $3.0 billion in the same period a year ago. Total mortgage renewals were $1.6 billion compared to $1.3 billion in 2019, a 22% increase.

“Seasonality typically leads to lower first quarter originations – but not this year,” said Moray Tawse, Executive Vice President. “Operationally, first quarter results exceeded our expectations as single-family origination increased year over year by 53% to $2.8 billion while commercial origination increased 113% to $2.6 billion. We attribute this growth to a strong economy in January and February, prior to COVID-19,  and our growing market share. All regions achieved growth led by British Columbia where volumes were up 75% compared to last year. Our Excalibur program also experienced strong growth. While we expect originations to slow, First National was able to underwrite a record volume of new commitments for customers in March, which will be reflected in second quarter volumes.”

 

Quarter ended

 

March 31, 2020

March 31, 2019

For the Period

($000's)

  Revenue

274,650

286,311

  Income (loss) before income taxes

(3,255)

32,078

  Pre-FMV EBITDA (1)

52,921

39,269

At Period end

  Total assets

39,203,792

36,193,793

  Mortgages under administration

113,493,605

107,034,925

Note:
 (1)  This non-IFRS measure adjusts income before income taxes by eliminating 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. The 2019 comparative figure has been revised to conform to the 2020 presentation. 

First Quarter Review

Between December 31, 2019 and March 31, 2020 (the first quarter), MUA increased at an annualized rate of 8%. 

For the first quarter of 2020, single-family mortgage originations of $2.8 billion were 53% or $1.0 billion higher than a year ago. Management believes a strong economy in January and February of 2020 (prior to COVID-19), low mortgage rates and the Company’s position in the mortgage broker channel all contributed to growth. Origination growth was achieved by all First National operations: Toronto office volumes were up 53%, Vancouver 75%, Calgary 33% and Montreal 44%. The Company’s Excalibur program experienced a higher origination growth rate than the overall single-family segment. When combined with renewals of $1.1 billion, total single-family production was $3.9 billion, up 42% or $1.2 billion compared to Q1 2019. 

First quarter 2020 commercial segment originations of $2.6 billion were 113% or $1.4 billion higher than a year ago, while commercial mortgage renewals of $488 million were 26% or $102 million higher than a year ago. Management believes the same economic factors that drove single-family originations also resulted in higher commercial originations. Additionally, First National continued to benefit from its commercial mortgage market expertise and position as the country’s largest multi-family property lender.

The Company originated and renewed for securitization purposes $1.9 billion of single-family mortgages and $1.0 billion of multi-unit residential mortgages – compared to $1.7 billion in total a year ago – and securitized $2.0 billion of NHA-MBS pools.

Revenue within the business is derived from the following activities:

  • Q1 2020 placement fees increased 70% to $46.2 million from $27.3 million in 2019 due to higher origination. The Company placed $3.5 billion of new single-family and commercial segment volume with institutional investors (compared to $2.1 billion in Q1 2019). The Company also increased per unit commercial mortgage placement fees  
  • Q1 2020 mortgage servicing income increased 18% to $36.6 million from $31.1 million in 2019 due to the benefits of higher MUA, and revenue earned on the Company’s underwriting and fulfillment processing services business
  • Q1 2020 net interest revenue earned on securitized mortgages increased 14% to $35.3 million from $31.0 million in 2019 largely due to adding a new source of net interest margin in the form of the Excalibur securitization program which began in Q2 2019 and growth in the commercial segment securitization portfolio
  • Q1 2020 mortgage investment income increased 3% to $20.8 million from $20.2 million in 2019 primarily due to higher origination which results in more mortgages held prior to securitization
  • Q1 2020 gains on deferred placement fee revenue increased 75% to $4.2 million from $2.4 million as a result of a 61% increase in this category of multi-unit residential mortgages originated and sold to institutional investors

Despite the growth noted above, first quarter revenue of $274.6 million was 4% or $11.7 million below Q1 2019, as a result of an increase in fair market value losses related to a sudden decline in interest rates. The Bank of Canada reduced its overnight lending rate by 1.50% in the first quarter of 2020 and lower yields had a significant impact on the Company’s short bond positions used to mitigate interest rate risk on single-family commitments. The Company experienced losses of $123.7 million on its total short bond book during the quarter; $57.3 million pertained to mortgages to which the Company was able to apply hedge accounting. This left losses on account of financial instruments in earnings of $66.4 million. Excluding such losses, revenue grew 13% year over year.

Pre-FMV Income(1) was $52.9 million, up 35% from $39.3 million in Q1 2019 largely due to increased origination which created placement fee revenue. The first quarter of 2020 also benefitted from growth in the Company’s third-party underwriting business. MUA growth drove higher mortgage servicing revenue and increased net margin from securitized mortgages.

Outstanding Securities

At March 31, 2020, and May 12, 2020, the Corporation had 59,967,429 common shares; 2,887,147 Class A preference shares, Series 1; 1,112,853 Class A preference shares, Series 2; 175,000 April 2020 senior unsecured notes: and 200,000 Series 2 November 2024 senior unsecured notes outstanding. As previously indicated, the Company issued 200,000 3.582% Series 2 November 24, 2024 senior unsecured notes in November 2019 pursuant to a private placement.  In April 2020, subsequent to the first quarter, FNFLP drew on its bank credit facility to repay the existing 4.01% $175 million Series 1 note when it matured. 

Dividends

The Board declared common share dividends in the first quarter of 2020 of $29.2 million ($28.5 million in Q1 2019) reflecting a dividend increase in December that brought the annualized rate to $1.95 per share from $1.90 per share. 

Excluding gains and losses on financial instruments (which management does not consider appropriate as a determinant of its dividend policy), the after tax Pre-FMV Dividend Payout Ratio(1) was 76% in Q1 2020 compared to 102% in Q1 2019. As the Company sustained a loss in the first quarter of 2020, the total common share dividend payout ratio could not be calculated.

Deferred Payments

For borrowers who can demonstrate financial need as a result of COVID-19 disruptions, the Company has determined to grant mortgage payment deferrals. Qualifying borrowers receive three months of payment deferral. In cases of extended hardship, the Company will consider a second three month deferral after the initial deferral period ends. During this deferral period, a significant portion of such mortgages will cease to amortize and interest otherwise payable will be capitalized to the principal of the mortgage. The three mortgage default insurers have approved these steps, permitting the deferrals to occur without any impact on subsequent claims under the mortgage insurance policies. In turn, First National will be required to make “timely payments” on the NHA-MBS securities. This means that despite not receiving payments from borrowers on the mortgages that support the NHA-MBS, the Company will still be required to pay the interest and amortizing principal on the debt.  In effect, the Company will de-leverage its balance sheet by paying off the debt while the related mortgages do not as amortize as quickly. The Company has almost $27 billion of NHA-MBS issued as at March 31, 2020. The monthly payment required to service the NHA-MBS is approximately $130 million, of which $104 million is for single family residential borrowers. Management believes that ultimately somewhere between 10% and 20% of single-family borrowers may request deferrals. At this time, there are no significant deferral requests from the multi-family segment of borrowers. The Company has significant credit lines and prime mortgage assets that continue to be liquid in turbulent economic times. Such facilities will provide the cash needed to fund this investment in ‘timely payments.’ For non-securitized MUA, the Company’s institutional investors will be required to fund any deferred payments which First National grants to borrowers in that investor’s portfolio.

Outlook 

Operationally 2020 first quarter results exceeded management’s expectations, as single-family origination increased by 53% from the comparative volume in 2019 and commercial segment origination increased by 113%. However, with the COVID-19 crisis which began toward the end of the first quarter, management’s outlook turned more negative for the remainder of the year. In the short term, origination volume will be strong as mortgage commitments issued in the 2020 first quarter transform into funded mortgages in the second quarter. As the Company moves into the latter part of the second quarter, management foresees single-family origination volumes declining, as home buying has slowed in April and May 2020. If this does not change shortly, the Company’s third quarter volumes will be lower than otherwise expected. The commercial segment anticipates a change in product mix as the year unfolds. As investor appetite for mortgages on commercial property has diminished, the Company has focused on its CMHC multi-family insured business where both customer and investor demand is still strong. With some of the Company’s competitors temporarily slowing their businesses, First National believes it can increase its market share.  Although securitization spreads are wider compared to pre-crisis levels, there is substantial liquidity available in the capital markets further enhanced by the government’s actions in providing facilities to purchase NHA-MBS, CMB, and ABCP. In addition, the Company’s institutional investors have continued to purchase mortgages in this period and accordingly, First National does not foresee any issues in funding its originations for the remainder of 2020.  Further, as in 2009 coming out of the credit crisis, the Company is benefiting from the wider mortgage coupons relative to funding costs on new originations. If the wider spreads persist, the Company will continue to benefit from such a period. 

It is still early in the crisis and there is still significant uncertainty about the extent of repercussions. The outbreak of COVID-19, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and physical distancing, have caused material disruption to businesses globally resulting in an economic recession. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company and its operating subsidiaries in future periods.

Despite these uncertainties, the current crisis is a further validation of the Company’s business model. The Company has direct credit exposure to only $2.7 billion (2.4%) of mortgages under administration.  This means, other than these mortgages, any additional credit exposure as a result of mortgage payment deferrals is insured by a mortgage default insurer or is on the balance sheet of an institutional investor.

As of May 11th, the Company has approved mortgage payment deferrals for approximately 33,800 borrowers in its portfolio of single-family residential mortgagors. This represents 13.9% of the Company’s single-family mortgages under administration eligible for such an approval. The requests for deferrals was significant in March and April, but the pace of new deferral requests has slowed materially at the date of this analysis.

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. The Company will continue to generate income and cash flow from its $33 billion portfolio of mortgages pledged under securitization and $78 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

May 13, 2020 10:00 am ET   

(647) 427-7450 or (888) 231-8191
www.firstnational.ca


A taped rebroadcast of the conference call will be available until May 20, 2020 at midnight ET. To access the rebroadcast, please dial (416) 849-0833 or (855) 859-2056 and enter passcode 8275818 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 over $113 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 Income” and “After tax Pre-FMV Dividend Payout Ratio” 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 future 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 Creative Inc.
Tel:  905-648-9354  
Email: ernie@fundamental.ca