TORONTO, July 27, 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 and six months ended June 30,
2020. The Company derives virtually all of its earnings from
its wholly owned subsidiary, First National Financial LP ("FNFLP"
or "First National").
Q2 Summary
- Mortgages under administration ("MUA") increased 5% to a record
$114.9 billion compared to
$109.6 billion at June 30, 2019
- Revenue increased 3% to $344.6
million from $335.2 million in
Q2 2019
- Pre-FMV Income(1) increased 12% to $75.5 million from $67.6
million in Q2 2019
- Net income was $69.8 million
($0.84 per common share) compared to
net income of $44.2 million
($0.72 per common share) in Q2
2019
Management Commentary
"First National performed well
in the second quarter as our employees from coast-to-coast dealt
effectively with the COVID-19 challenge," said Stephen Smith, Chairman and Chief Executive
Officer. "By quickly adjusting to the demands of working remotely,
our team was rewarded with healthy year-over-year growth in total
production of 6%. I thank all employees for their essential
contributions to our single family and commercial businesses – your
dedication has been at the heart of our results. The Company's
diverse funding sources also proved, once again, to be invaluable
in sustaining our ability to offer competitive mortgage products
across the country. Before the end of the quarter, securitization
markets returned to normal and there is now substantial liquidity
available in the capital markets, which was not the case earlier
this year. As a result of mortgage origination growth and wider
mortgage spreads, all of First National's profitability metrics
were much higher than a year ago. After recording a small fair
market value driven loss to open 2020, the strong turnaround in the
second quarter is indicative of the strength and resiliency of our
business model."
In the second quarter of 2020, new mortgage originations
increased 2% to $6.6 billion from
$6.5 billion in the same period a
year ago, while total mortgage renewals increased 19% to
$2.5 billion compared to $2.1 billion a year ago.
"Q2 was a very productive period with results that exceeded our
expectations," said Moray Tawse, Executive Vice President. "Within
single family, the team drove mortgage originations higher by 15%
year over year which we attribute to a number of factors which
fueled growth in First National's market share of the mortgage
broker channel. We give a lot of credit for this to the popularity
of MERLIN, a technology that is particularly valuable to our
partners during this period of physical distancing. On the
commercial side, we increased CMHC insured multi-unit origination
by 32% to offset a substantial decline in demand for uninsured
product. While total commercial originations of $2.1 billion were 17% below last year, we
consider this a strong performance under very difficult
circumstances. It's only a matter of time before the conventional
market returns and we will be ready."
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|
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Quarter
ended
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Six months
ended
|
|
June
30,
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June
30,
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June
30,
|
June
30,
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|
2020
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2019
|
2020
|
2019
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For the
Period
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(000's)
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Revenue
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344,581
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335,241
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619,231
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621,552
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Income before
income taxes
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68,944
|
60,264
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65,689
|
92,342
|
Pre-FMV Income
(1)
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75,506
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67,565
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128,427
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106,834
|
At Period
end
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Total
assets
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39,040,298
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37,229,876
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39,040,298
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37,229,876
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Mortgages
under administration
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114,864,139
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109,588,468
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114,864,139
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109,588,468
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Note:
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(1)
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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.
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Second Quarter Review
Second quarter single-family
mortgage originations of $4.5 billion
were 15% or $600 million higher than
a year ago. Regionally, single-family originations grew 32% in
Ontario and 22% in British Columbia compared to a year ago but
were down by 8% and 6% in Calgary
and Montreal, respectively.
Management believes that overall growth in single-family
originations reflected growth in First National's share of the
mortgage broker channel driven by the popularity of the MERLIN
underwriting system. The Company has always considered MERLIN to be
the market leader as it enables brokers to track the status of
their customers' mortgages in real time. In this pandemic era,
MERLIN has had the unexpected benefit of providing financial
services without the need for face-to-face interactions. When
combined with renewals of $2.0
billion, total single-family production was 20% or
$1.1 billion higher compared to Q2
2019.
Second quarter 2020 commercial segment originations of
$2.1 billion were 17% or $0.5 billion lower than a year ago, reflecting
32% year-over-year growth in insured multi-unit origination offset
by lower conventional mortgage origination as investor appetite for
uninsured product declined as a result of pandemic-related risks.
Commercial segment mortgage renewals of $510
million were 23% or $154
million lower than a year ago.
The Company originated and renewed for securitization purposes
$2.3 billion of single-family
mortgages and $0.5 billion of
multi-unit residential mortgages – compared to $2.4 billion in total a year ago – and
securitized $2.3 billion of NHA-MBS
pools.
Revenue within the business is derived from the following
activities:
- Q2 2020 placement fees increased 47% to
$88.7 million from $60.4 million a year ago due to increased
mortgage spreads and the crystallization of higher mortgage rate
single-family commitments originated in the first quarter of 2020
which transformed to funded mortgages in Q2. The Company also
increased its spreads on its multi-residential products which
translated to higher placement fees.
- Q2 2020 mortgage servicing income increased 5% to
$41.0 million from $39.0 million a year ago due to growth in revenue
earned on the Company's underwriting and fulfillment processing
services business.
- Q2 2020 net interest revenue earned on securitized
mortgages decreased 39% to $21.0
million from $34.6 million a
year ago largely due the financial consequences of the pandemic
including temporary compression in securitization spreads and the
cost of indemnities payable to NHA MBS debtholders when mortgages
prepaid prior to their scheduled maturity dates.
- Q2 2020 mortgage investment income decreased 22% to
$17.0 million from $21.8 million in 2019 primarily due to the lower
interest rate environment as a consequence of the pandemic.
- Q2 2020 gains on deferred placement fee
revenue increased 124% to $6.5
million from $2.9 million as a
result of higher origination spreads which translate to higher
placement fees on these mortgages.
As a result of the above-noted growth, second quarter revenue
increased 3% to $344.6 million from
$335.2 million in the second quarter
of 2019. The increase reflected the change in fair market values
gains and losses related to interest-rate movements in the
quarters. Excluding these amounts, revenue grew 2% to $352.1 million from $343.7
million in Q2 2019. This growth was largely the function of
higher mortgage origination combined with wider mortgage spreads
which fueled an increase in placement fee revenue.
Pre-FMV Income(1) was $75.5
million, up 12% from $67.6
million in Q2 2019 largely due to wider mortgage spreads
which had a favorable effect on placement fees. The higher
origination volumes meant the benefits of these spreads had an even
greater effect on placement fees.
Outstanding Securities
At June
30, 2020, and July 27, 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; and 200,000 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. During the second 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 second quarter of 2020 of $29.2
million ($28.5 million in Q2
2019) reflecting a dividend increase in December 2019 that brought the annualized rate to
$1.95 per share from $1.90 per share.
For the quarter ended June 30,
2020, the common share payout ratio was 58% compared to 66%
in the 2019 second quarter. 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 53% in Q2 2020 compared to 58% in Q2
2019.
Mortgage Payment Deferrals
When First National
reported for the first quarter, management described the nature of
deferred mortgage payments and the need for cash resources to fund
these assets. As of May 11th, the
Company had 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.As at
July 27th, this number has fallen
significantly and now stands at 10,473 borrowers or approximately
4.2% of the relevant MUA. The Company has found that about a
quarter of borrowers granted an initial deferral are requesting an
extension and that many borrowers rescinded their deferral
arrangement before the initial three-month period ended.
Outlook
The 2020 second quarter results exceeded management's
expectations. Single-family origination increased by 15% from the
comparative volume in 2019 and commercial segment origination
decreased by just 17% despite the pandemic related slowdown in
demand for uninsured commercial product. With COVID-19
uncertainties still prevalent, it is difficult to look too far
ahead. However, management's outlook has turned relatively positive
with trends established in the second quarter of 2020 looking to
continue strongly into the third quarter. This includes:
substantially higher seasonal residential origination, commercial
segment success in originating lower volumes but at higher spreads,
and employment productivity from the Company's work from home
strategy. During the second quarter, the value of First National's
business model became evident. By designing systems that do not
rely on face to face interactions, the Company's business practices
resonated with mortgage brokers and borrowers during the pandemic
period. In the second quarter, some of the Company's commercial
competitors temporarily slowed their businesses and First National
increased its market share while experiencing wider spreads.
Although more and more the Company's competitors are returning to
the market, wider spreads are persisting. The residential segment
is experiencing substantial growth in originations in part due to
the disruption that COVID-19 has meant for the chartered banks
branch and mobile sales force origination channels. On the funding
side, there continues be strong demand from institutional investors
as a result of the substantial amount of liquidity in the financial
system. Securitization markets have normalized after a period of
disruption at the beginning of the crisis. There is now substantial
liquidity available in the capital markets further enhanced by the
government's actions in providing facilities to purchase NHA-MBS,
CMB, and ABCP. Much like its experience in 2009 coming out of
the credit crisis, the Company is now 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.
While it is not early in the crisis, there is still significant
uncertainty about its duration and 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. 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 long-term
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.
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 $80 billion
servicing portfolio and focus on the value inherent in its
significant single-family renewal book.
Conference Call and Webcast
July 28, 2020 10:00
am ET
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(647) 427-7450 or
(888) 231-8191
www.firstnational.ca
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A taped rebroadcast of the conference call will be available
until August 4, 2020 at midnight ET. To access the rebroadcast, please
dial (416) 849-0833 or (855) 859-2056 and enter passcode 4579675
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 almost $115
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