First National Financial Corporation reports second quarter 2019 results

Jul 30, 2019

Toronto, Ontario, July 30, 2019 – 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 six months ended June 30, 2019. The Company derives virtually all of its earnings from its wholly owned subsidiary, First National Financial LP (“FNFLP” or “First National”).

Second Quarter Summary

  • Mortgages Under Administration ("MUA") increased 6% to $109.6 billion from $103.6 billion a year ago 
  • Revenue increased 15% to $335.2 million from $290.9 million a year ago
  • Net income was $44.2 million ($0.72 per share) compared to $46.3 million ($0.76 per common share) a year ago
  • Pre-FMV EBITDA(1) was $68.5 million compared to $56.0 million a year ago

Management Commentary

“First National delivered strong performance in the second quarter, assisted by a positive economic environment, a recent reduction in interest rates that contributed to consumer demand and normal market seasonality," said Stephen Smith, Chairman and Chief Executive Officer. "While we had anticipated growth, mortgage originations surpassed our expectations in both single family and commercial segments. We believe this reflected good execution by our team and First National's market share positions. These higher volumes had a favourable impact on all financial metrics including net and operating earnings. After a slow start to the year, we're very pleased with these results."

For the second quarter, new mortgage originations were $6.4 billion compared to $5.1 billion a year ago, reflecting: $3.9 billion of new single-family originations (compared to $3.4 billion a year ago) and $2.5 billion of commercial originations (compared to $1.7 billion a year ago). Total mortgage renewals were $2.1 billion compared to $2.2 billion a year ago reflecting: $1.5 billion of single-family renewals ($1.9 billion a year ago) and $664 million of commercial renewals ($299 million a year ago).

“First National's mortgage book grew at an annualized rate of 10% in the second quarter, a very strong result given the size of our MUA," said Moray Tawse, Executive Vice President. "This growth was relatively broad-based such that total single family MUA and commercial MUA each reached all-time record levels. In single family, Ontario and the Maritimes origination led with growth of about 25%. After Q1, when total single-family originations were $400 million lower than in 2018, we were very pleased at this significant turnaround. Our national underwriting teams generated $500 million in origination growth year over year by providing excellent service to mortgage brokers and borrowers alike.  In commercial, we set a quarterly record for originations – 50% above last year – as the business capitalized on its market leadership and unique capabilities to develop innovative conventional and insured financing solutions for property owners and developers from coast to coast." 

 

Quarter ended

Six months ended

 

June 30, 2019

June 30, 2018

June 30, 2019

June 30, 2018

For the Period

($000's)

  Revenue

335,241

290,935

621,552

547,636

  Income before income taxes

60,264

63,017

92,342

112,289

  Pre-FMV EBITDA (1)

68,552

56,048

108,747

106,416

At Period end

  Total assets

37,229,876

35,794,066

37,229,876

35,794,066

  Mortgages under administration

109,588,468

103,574,915

109,588,468

103,574,915

Note:

(1) This non-IFRS measure adjusts income before income taxes by adding back expenses for depreciation of capital assets, 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) used in and deducting gains on the valuation of financial instruments.

Q2 2019 Summary

Between March 31, 2019 and June 30, 2019, MUA increased at an annualized rate of 10%. For the second quarter of 2019, single-family mortgage originations were 13% or $0.5 billion higher than a year ago. The Company attributes this growth to the strength of its business model together with a lower interest-rate environment and First National's share of the mortgage broker market. Regionally, the Company experienced the fastest mortgage origination growth (approximately 25%) in Ontario and the Maritimes. Growth in Ontario partly reflected the positive impact of the Excalibur program. Regionally, the only outlier was single-family origination volume in B.C., which was down 2% year over year. Second quarter 2019 single family mortgage renewals of $1.5 billion were 23% or $0.4 billion lower than a year ago, reflecting a smaller renewal pool and lower retention rates in a very competitive environment.  Second quarter 2019 commercial segment originations of $2.6 billion were 50% or $0.9 billion higher than a year ago reflecting strong demand and the Company's leading market position. Commercial mortgage renewals of $664 million were up significantly from $299 million a year ago on the same fundamentals. 

The Company originated and renewed for securitization purposes $1.9 billion of single-family mortgages and $0.5 billion of multi-unit residential mortgages.  

Second quarter 2019 revenue was $335.2 million compared to $290.9 million in the second quarter of 2018, a 15% increase. Looking at the contributors to revenue:

  • Q2 2019 placement fees were $60.4 million, up 95% from Q2 2018 as a result of a changing funding mix between the quarters and wider spreads
  • Q2 2019 mortgage servicing income was $39.0 million, up 5% from Q2 2018 due to higher MUA
  • Q2 2019 net interest revenue earned on securitized mortgages was $34.6 million, down 3% from Q2 2018 due to the impact of accounting for financial instruments prior to the adoption of IFRS 9 and tighter weighted-average mortgage spreads 
  • Q2 2019 mortgage investment income was $21.8 million, down 2% from Q2 2018 due primarily to lower commercial segment mortgage and loan investments held in the period
  • Q2 2019 gains on deferred placement fees were $2.9 million, up 21% from Q2 2018 due to higher volumes of mortgages originated and sold to institutional investors 

Q2 2019 Pre-FMV EBITDA(1) was $68.5 million, 22% higher than in Q2 2018 largely due to increased placement fee revenue. Q2 2019 net income was $44.2 million ($0.72 per share) compared to $46.3 million ($0.76 per common share) in Q2 2018.

Dividends

The Company declared common share dividends in the second quarter of 2019 of $28.5 million compared to $27.7 million in the second quarter of 2018, reflecting a dividend increase in December 2018 that brought the annualized rate to $1.90 per share (paid monthly) from $1.85 per share. The common share payout ratio in the second quarter was 66% compared to 61% a year ago. If gains and losses on financial instruments in the comparative quarters are excluded, the dividend payout ratio for Q2 2019 would have been 58% compared to 70% in Q2 2018. 

The Company also paid $0.8 million of dividends on its preferred shares in the second quarter of 2019 compared to $0.7 million in 2018 second quarter.

Shares Outstanding

At June 30, 2019 and July 30, 2019, 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 and 175,000 April 2020 senior unsecured notes outstanding.

Outlook

The seasonally strong second quarter exceeded management’s expectations as single-family origination increased by 13% from the comparative quarter in 2018 and commercial segment origination increased by 50%. Management remains optimistic for the remainder of the year. Single-family mortgage commitments continue to outpace those at the same time in 2018, although not by the same degree as evidenced at the end of the first quarter of 2019. Similarly, the commercial segment continues to meet its growth initiatives and increase its presence across the country. While it is unlikely the growth rate of 50% recorded in the second quarter will be repeated, the Company continues to forecast double digit rates of growth. Despite these favorable indications, the Company will continue to be faced with tight securitization margins as mortgage rates have tightened toward quarter end and the effect of pre 2018 fair value accounting conventions will continue to have a negative impact on its income for most of 2019.  

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 $31 billion portfolio of mortgages pledged under securitization and $76 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

July 31, 2019 11:30 am ET

Participant Numbers
(647) 427-7450 or (888) 231-8191

 

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 until August 7, 2019 at midnight ET. To access the rebroadcast, please dial (416) 849-0833 or (855) 859-2056 and enter passcode 1289335 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 $109 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” 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
Tel:  905-648-9354  
Email: ernie@fundamental.ca