First National Financial Corporation Reports 2019 Fourth Quarter and Annual Results

TORONTO, Feb. 24, 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 twelve months ended December 31, 2019. The Company derives virtually all of its earnings from its wholly owned subsidiary, First National Financial LP ("FNFLP" or "First National").

2019 Annual Summary

• Mortgages under administration ("MUA") increased 5% to a record $111.4 billion compared to $106.2 billion at December 31, 2018
• Revenue increased 12% to $1.3 billion from $1.2 billion in 2018
• Net income grew to $177.2 million ($2.90 per share) compared to $166.4 million ($2.73 per common share) in 2018
• Pre-FMV EBITDA⁽¹⁾ increased 12% to $251.3 million from $225.2 million in 2018

Fourth Quarter Summary

• MUA increased at an annualized rate of 3% during the quarter
• Revenue increased 10% to $342.1 million from $312.0 million a year ago
• Net income grew to $49.0 million ($0.80 per share) compared to $32.2 million ($0.53 per common share) a year ago
• Pre-FMV EBITDA⁽¹⁾ up 11% to $61.8 million from $55.8 million a year ago

Management Commentary
"First National's growth reflected the effectiveness of our business model, record single family and commercial originations and dedicated efforts by our team across Canada to deliver a good customer experience," said Stephen Smith, Chairman and Chief Executive Officer. "Profitability measures were likewise very positive with record earnings achieved as a result of a 13% increase in overall new originations, wider mortgage spreads and a shift in our funding mix favouring institutional placement over securitization. These results provided good support for our Board's previously announced decision in the fourth quarter to increase the Company's regular monthly dividend. Our focus for 2020 is to build on this performance by working together to give our more than 300,000 customers and our many valued business partners the very best service."

In 2019, the Company's after-tax Pre-Fair Market Value return on shareholders' equity was 40%. Since its listing on the TSX 13 years ago, it has paid $1.4 billion in total dividends and distributions, or $23.32 per share. Combined with share price appreciation, total return to IPO investors stood at 514% at December 31, 2019.

For all of 2019, new mortgage originations increased 13% to $20.9 billion from $18.5 billion in 2018 reflecting: new single-family originations of $13.5 billion (2018 - $12.2 billion) and record new commercial originations of $7.4 billion (2018- $6.2 billion). Total mortgage renewals were $7.5 billion compared to $7.4 billion in 2018 reflecting: single-family mortgage renewals of $5.5 billion (2018- $6.1 billion) and commercial mortgage renewals of $2.0 billion (2018 - $1.3 billion).

"We're very pleased with the results of 2019 which included record origination in both segments of our business," said Moray Tawse, Executive Vice President. "It's safe to say that the 11% increase achieved in single-family origination year over year and the 19% growth in commercial origination exceeded our expectations. Unquestionably, lower mortgage rates made it comparatively easier for borrowers and stable economic conditions played their part, but we also benefitted from First National's strong market share position on the residential side, the expansion of our Excalibur program and our status as Canada's largest commercial mortgage lender in capturing more business. All told, this was a very positive year, with growth in every one of our regional offices. We look forward to continued progress in 2020."

	Quarter ended		Year ended
	December 31,  2019	December 31,  2018	December 31,  2019	December 31,  2018
For the Period	($ 000's)
Revenue	342,138	312,039	1,326,523	1,181,510
Income before income taxes	66,593	44,050	241,713	227,417
Pre-FMV EBITDA ^(1)	61,766	55,780	251,285	225,186
At Period end
Total assets	37,685,593	36,038,527	37,685,593	36,038,527
Mortgages under administration	111,378,891	106,151,363	111,378,891	106,151,363

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

Annual Review

First National's MUA increased 5% to a record $111.4 billion, from $106.2 billion at December 31, 2018 on higher new mortgage originations and renewals. At year-end 2019, single-family MUA was $80.7 billion, up 2% from $79.2 billion at December 31, 2018, while commercial MUA was $30.7 billion, up 14% from $27.0 billion a year ago.

For the 12 months ended December 31, 2019, new single-family mortgage originations increased 11% to $13.5 billion from $12.2 billion a year ago, due to a strong economy coupled with low mortgage rates and the Company's strong position in the mortgage broker distribution channel. All of the Company's regional offices experienced growth, led by Ontario and the Maritimes where comparative volumes were 17% higher than in 2018. The Company's Excalibur program was a strong contributor to originations with a growth rate similar to that experienced by the rest of the Company's single family segment. Single family renewals for 2019 were 10% lower at $5.5 billion compared to $6.1 billion in 2018 on fewer opportunities.

The commercial segment had its strongest year in its history with new mortgage origination up 19% as volumes increased to $7.4 billion from $6.2 billion in 2018. 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 54% to $2.0 billion from $1.3 billion in 2018.

The Company took advantage of demand for its mortgages and increased mortgages placed with institutional investors to $18.6 billion in 2019 from $14.9 billion in 2018. By placing mortgages, the Company accelerates the recognition of earnings. Despite this growth, the Company still originated and renewed for securitization purposes $8.9 billion of mortgages in 2019. This figure compares to $10.1 billion in 2018.

2019 annual revenue increased 12% to $1.3 billion from $1.2 billion in 2018, reflecting growth in mortgage originations in the year and the funding mix change that favoured more placement with institutional investors than mortgage securitization. Looking at the contributors to revenue:

• 2019 placement fees increased 44% to $205.5 million from $142.1 million in 2018 due to a number of factors including the 25% increase in placement volume and the benefit of the interest rate environment on both newly originated and renewed single family mortgages
• 2019 mortgage servicing income increased 7% to $156.7 million from $146.2 million in 2018 largely due to the benefits of higher MUA and the funding shift to institutional placements from securitization which moves revenues from net securitization margin to servicing income
• 2019 net interest revenue earned on securitized mortgages decreased by 4% to $138.6 million from $144.1 million in 2018 largely due to accounting for financial instruments, which the Company estimates had about an $8.3 million year-over-year impact (excluding this impact, this revenue increased by 2%)
• 2019 mortgage investment income decreased 4% to $84.7 million from $88.3 million in 2018 primarily due to lower mortgage interest rates

For 2019, Pre-FMV EBITDA⁽¹⁾ was $251.3 million, up 12% from $225.3 million in 2018 due to increased origination and the Company's decision to shift its funding from securitization to institutional placement. By placing mortgages with institutions, most of the economics of the transaction are recognized in the current period. Using securitization funding, the value inherent in the mortgages is realized over the term of the mortgages – typically five years. By increasing funding through institutional placement by approximately $1.3 billion as opposed to securitization, First National accelerated the recognition of earnings into the current period. The Company has also benefited from comparatively wider mortgage spreads which prevailed for most of 2019.

In aggregate, the impact from financial instruments decreased pre-tax income by $12.5 million comparing 2019 to 2018. In 2019, economic concerns had a significant impact on the bond market as bond prices rose in the first eight months of the year until receding toward year end. Overall, the Company experienced losses of $36.5 million on its total short bond book during 2019; however about $28.2 million of these losses pertained to mortgages to which the Company was able to apply hedge accounting. This left losses related to unhedged interest rate mitigation programs of $8.3 million within gains and losses on account of financial instruments in earnings. These losses largely reflect the decrease in the value of short bonds used to mitigate interest rate risk related to the Company's single-family mortgage commitments. The Company does not attempt to document a hedge relationship on such commitments.

Outstanding Securities

At December 31, 2019 and February 24, 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 175,000 April 2020 senior unsecured notes and 200,000 November 24, 2024 senior unsecured notes outstanding. The Company issued the November 24, 2024 senior unsecured notes in November 2019 pursuant to a private placement. The notes bear interest at 3.582% payable in equal semi-annual payments commencing May 25, 2020. The net proceeds were used to repay a portion of the Company's outstanding indebtedness on its bank credit facility.  On April 9, 2020, the LP plans to draw on the bank credit facility to repay the maturing 4.01% $175,000,000 unsecured notes.

Dividends

The Board declared common share dividends in the fourth quarter of 2019 of $59.0 million. This included a special common share dividend of $0.50 per share ($30.0 million aggregate) paid on December 16, 2019. 

For all of 2019, the Company declared common share dividends of $144.4 million or $2.41 per common share, reflecting both the special dividend and a dividend increase in December that brought the annualized rate to $1.95 per share from $1.90 per share.

Excluding the special dividend, the payout ratio was 66% in 2019 and 68% in 2018. Excluding gains and losses on financial instruments (which management does not consider as revenue available for dividend payment) in 2019 and 2018, the dividend payout ratio for 2019 would have been 64% compared to 70% in 2018.

The Company also paid $3.1 million of dividends on its preferred shares in 2019 compared to $2.9 million in 2018.

Outlook

Management remains optimistic about 2020 as single-family mortgage commitments have continued to outpace commitments at the same time in 2019.  The commercial segment also anticipates a strong start to 2020 as borrower appetite continues to be strong following the record fourth quarter of 2019. Despite these favorable indications, the Company will continue to be faced with uncertain securitization margins as mortgage spreads tightened toward the end of 2019 and have not widened in early 2020. The effect of pre-2018 fair value accounting conventions will continue to have a negative impact on income in 2020, albeit for a slightly lower amount than in 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 $32 billion portfolio of mortgages pledged under securitization and $77 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

February 25, 2020 10:30 am ET

[phone] or [phone] www.firstnational.ca

A taped rebroadcast of the conference call will be available until March 3, 2020 at midnight ET. To access the rebroadcast, please dial [phone] or [phone] and enter passcode 6858798 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 $111 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

Robert Inglis, Chief Financial Officer, First National Financial Corporation, Tel: [phone], Email: [email protected]; Ernie Stapleton, President, Fundamental, Tel: [phone], Email: [email protected]

Related Links

www.firstnational.ca