TORONTO, Feb. 25, 2019 /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 and 12 months ended December 31,
2018. The Company derives virtually all of its earnings from
its wholly-owned subsidiary, First National Financial LP ("FNFLP"
or "First National").
2018 Summary
- Mortgages under administration ("MUA") increased 5% to a record
$106.2 billion compared to
$101.6 billion at December 31, 2017
- Revenue increased 10% to $1.2
billion from $1.1 billion in
2017
- Net income $166.4 million
($2.73 per share) compared to
$209.7 million ($3.42 per common share) in 2017
- Pre-FMV EBITDA(1) down 4% to $225.2 million from $234.3
million in 2017
Fourth Quarter Summary
- MUA increased at an annualized rate of 5% during the
quarter
- Revenue increased 15% to $312.0
million from $270.0 million a
year ago
- Net income $32.2 million
($0.53 per share) compared to
$45.9 million ($0.75 per common share) a year ago
- Pre-FMV EBITDA(1) down 9% to $55.8 million from $61.1
million a year ago
Management Commentary
"First National marked its
30th consecutive year of profitable operations in 2018
with strong growth in MUA reflecting a diligent focus on service
and expanded market coverage," said Stephen
Smith, Chairman and Chief Executive Officer. "Despite
tighter mortgage spreads and our decision to increase
securitization activity, which delays the earnings process, EPS
performance was solid and we were pleased to reward fellow
shareholders with an increase in the common share dividend in
December along with the payment of a special dividend. Since MUA is
the source of most of the Company's earnings, the stage is set for
continued progress."
In 2018, new mortgage originations increased 9% to $18.5 billion from $16.9
billion in 2017 reflecting: 10% growth in new single-family
originations and 8% growth in commercial originations. Total
mortgage renewals increased 17% to $7.4
billion from $6.3 billion
reflecting: 17% growth in single-family mortgage renewals and 19%
growth in commercial mortgage renewals.
"The single-family team responded exceptionally well to the new
realities of the marketplace by winning over new customers and
renewing more mortgage business than ever," said Moray Tawse,
Executive Vice President. "We are particularly pleased with the
contribution made by our alternative lending product, Excalibur,
which allowed us to address a significant group of credit-worthy
borrowers, including the self-employed, many who fall just outside
traditional lending guidelines. The commercial team also did an
outstanding job of addressing demand across Canada and across multiple asset classes by
combining responsive service and market knowledge to find solutions
for borrowers, and then matching those solutions with funding from
government-sponsored programs and institutional investors."
|
Quarter
ended
|
12 months
ended
|
|
Dec.
31,
2018
|
Dec.
31,
2017
|
Dec. 31,
2018
|
Dec. 31,
2017
|
For the
Period
|
($000's)
|
Revenue
|
312,039
|
270,015
|
1,181,510
|
1,078,768
|
Income before income
taxes
|
44,050
|
63,158
|
227,417
|
285,402
|
Pre-FMV EBITDA
(1)
|
55,780
|
61,093
|
225,186
|
234,278
|
At Period
end
|
|
Total
assets
|
36,037,127
|
32,776,278
|
36,037,127
|
32,776,278
|
Mortgages under
administration
|
106,151,363
|
101,589,153
|
106,151,363
|
101,589,153
|
(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 and deducting gains on the valuation of financial
instruments. See also the section "Non-GAAP Measures" in this
news release for additional detail.
|
Q4 2018 Summary
Between October 1, 2018 and
December 31, 2018 (the fourth
quarter), MUA increased at an annualized rate of 5%. For the fourth
quarter of 2018, single-family mortgage originations of
$2.8 billion were unchanged from the
fourth quarter of 2017. Fourth quarter 2018 single family mortgage
renewals of $1.3 billion, were 18% or
$198 million higher than a year ago,
reflecting more renewal opportunities and good execution.
Fourth quarter 2018 commercial segment originations increased 12%
to $1.8 billion from $1.6 billion in the same period of 2017, while
commercial mortgage renewals more than doubled to $592 million compared to $257 million a year ago.
The Company originated and renewed for securitization purposes
$1.4 billion of mortgages in the
fourth quarter of 2018 compared to $2.4
billion a year ago.
Fourth quarter 2018 revenue was $312.0
million compared to $270.0
million in the fourth quarter of 2017, a 15% increase
reflecting the higher interest rate environment. Looking at the
contributors to revenue:
- Q4 2018 net interest revenue earned on securitized mortgages
$36.2 million, down 7% from Q4
2017
- Q4 2018 placement fees $49.2
million, up 45% from Q4 2017
- Q4 2018 mortgage servicing $35.5
million, down 2% from Q4 2017
- Q4 2018 mortgage investment income $23.1
million, up 17% from Q4 2017
Securitized mortgages amounted to $30.6
billion compared to $27.6
billion at December 31, 2017,
an 11% increase.
Q4 2018 Pre-FMV EBITDA(1) was $55.8 million, down 9% from $61.1 million in Q4 2017, largely due to the
increasing interest rate environment together with tighter mortgage
funding spreads. In combination, these factors negatively affected
securitization margins, increased the cost of funding mortgages in
the period prior to securitization and, in some cases, reduced per
unit placement fee revenue. Q4 2018 net income was $32.2 million ($0.53 per share) compared to $45.9 million ($0.75 per common share) in Q4 2017.
Annual 2018 Review
First National's MUA increased 5% to a record $106.2 billion, from $101.6 billion at December
31, 2017 on higher new mortgage originations and renewals.
At year-end 2018, single-family MUA was $79.2 billion, up 2% from $77.4 billion at December
31, 2017, while commercial MUA was $27.0 billion, up 12% from $24.2 billion a year ago.
For the 12 months ended December 31,
2018, new single-family mortgage originations increased 10%
to $12.2 billion from $11.1 billion a year ago, despite regulatory
changes that likely reduced the size of the Prime residential
market. The Company attributes this growth to the relaunch of its
Excalibur program, which serves the alternative market and strong
growth in the Toronto and
Montreal regions. Single family
renewals for 2018 increased 17% to $6.1
billion from $5.2 billion in
2017 on more opportunities and solid retention rates.
The commercial segment had a strong year with new mortgage
origination up 8% as volumes increased to $6.2 billion in 2018 from $5.8 billion in 2017. The Company attributes this
growth to the continued development of its expertise in real estate
across the country, which increased the value proposition of its
financial products to borrowers and investors alike. Commercial
mortgage renewals increased 18% to $1.3
billion from $1.1 billion in
2017.
The Company originated and renewed for securitization purposes
$10.1 billion of mortgages in 2018
compared to $8.2 billion in 2017.
2018 annual revenue increased 10% to $1.2
billion from $1.1 billion in
2017, reflecting rising interest rates, partially offset by lower
revenue from gains on financial instruments. Looking at the
contributors to revenue:
- 2018 interest revenue earned on securitized mortgages increased
20% to $790.2 million from
$658.8 million in 2017 due to higher
mortgage rates in the portfolio
- 2018 placement fees decreased 2% to $141.9 million from $144.6
million in 2017 as a result of several factors including a
change in product mix with the re-introduction of the Excalibur
program, which has lower per unit placement fees than Prime
mortgages, higher securitization levels and tighter mortgage
spreads
- 2018 mortgage servicing income increased 4% to $146.2 million from $140.8
million in 2017 largely due to the Company's third-party
underwriting business as well as the benefits of higher MUA
- 2018 mortgage investment income increased 23% to $84.3 million from $68.3
million in 2017 primarily due to an increase in market
interest rates
- 2018 gains on financial instruments amounted to $3.2 million, down from $56.3 million in 2017, which was due to the
slowdown in interest rate growth in 2018 and the result of the
adoption of hedge accounting in 2018 which reduced the impact of
changing interest rates on gains and losses on financial
instruments recorded in earnings
For 2018, Pre-FMV EBITDA(1) was $225.2 million, down 4% from $234.3 million in 2017, largely due to tighter
mortgage spreads which affect both securitization margins,
placement fee revenue and increase the costs of warehousing
mortgages prior to securitization. Although the Company set a new
record for overall origination in 2018, including renewal volume,
most of the additional origination was securitized.
Securitization, while perhaps economically superior, delays the
recognition of earnings when compared to a placement
transaction.
2018 net income was $166.4 million
($2.73 per share) compared to
$209.7 million ($3.42 per common share) in 2017.
Dividends
The Board declared common share dividends in the fourth quarter
of 2018 of $88.2 million. This
included a special common share dividend of $1.00 per share ($60.0
million in total), paid on December
17, 2018.
For all of 2018, the Company declared common share dividends of
$171.4 million or $2.86 per common share, reflecting both the
special dividend and a dividend increase in December that brought
the annualized rate to $1.90 per
share from $1.85 per share.
Excluding the special dividend, the payout ratio was 68% in 2018
and 53% in 2017. Excluding gains on financial instruments (which
management does not consider as revenue available for dividend
payment) in 2018 and 2017, the dividend payout ratio for 2018 would
have been 70% compared to 67% in 2017.
Shares Outstanding
At December 31, 2018 and
February 25, 2019, the Company 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
Going into 2019, the Company is cautiously optimistic. Economic
concerns arose in November 2018 and
continued through to year end. Equity markets sold off and credit
spreads widened. While perhaps too early to determine if these
events are a harbinger for a recession, in the short term, the
consequences may be lessened at First National. Because the Company
uses government-sponsored funding programs such as NHA MBS and CMB,
it expects these sources of funding to remain liquid and to
outperform other debt instruments during a spread widening cycle.
In addition, while the yields on underlying government bond
benchmarks have fallen, mortgage lenders have been disciplined in
the face of an uncertain economy and mortgage coupons have not
fallen to the same extent. The consequence is a wider spread
between the interest rates on Prime mortgages and the costs of
CMHC-sponsored funding sources, despite increased credit spreads.
Generally, if persistent, these circumstances will provide the
Company with greater securitization margins in 2019. It is unclear,
however, how long this environment will last and whether
competitive pressures will reduce these margins back to the levels
experienced in 2018.
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 $30 billion portfolio of mortgages pledged under
securitization and $73 billion
servicing portfolio and focus on the value inherent in its
significant single-family renewal book.
Conference Call and Webcast
February 26, 2019 10
am ET
|
Participant
Numbers
(647) 490-5367 or
(800) 667-5617
|
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 March 5, 2019 at 1:00 pm ET. To access the rebroadcast, please
dial (647) 436-0148 or (888) 203-1112 and enter passcode 9871928
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 $106
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.
SOURCE First National Financial Corporation