TORONTO, May 12, 2020 /CNW/ - 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 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 Income
(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.
SOURCE First National Financial Corporation