TORONTO, Oct. 26, 2021 /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
nine months ended September 30, 2021
and declared a special common share dividend. The Company derives
virtually all of its earnings from its wholly owned subsidiary,
First National Financial LP ("FNFLP" or "First National").
Q3 Summary
- Mortgages under administration ("MUA") increased 4% to a record
$122.3 billion compared to
$117.1 billion at September 30, 2020
- Revenue decreased 5% to $353.7
million from $373.8 million in
Q3 2020 largely due to mortgage spread compression year over
year
- Pre-FMV Income(1) was $64.9
million compared to $99.6
million in Q3 2020 due to the mortgage spread environment, a
shift in commercial product mix and funding strategy
- Net income was $47.6 million
($0.78 per common share) compared to
$72.5 million ($1.20 per common share) in Q3 2020
Special Dividend Declaration
A special common share
dividend in the amount of $1.25 per
share will be paid on December 15,
2021 to First National shareholders of record on
November 30, 2021. This distribution
reflects the Board of Directors' determination that over the past
year, First National has generated excess capital and can
efficiently fund near-term growth from operations.
Management Commentary
"First National's performance in
the third quarter was in line with, and in some cases, ahead of our
expectations," said Stephen Smith,
Chairman and Chief Executive Officer. "MUA, the source of most of
our earnings, benefitted from a healthy 10% increase in new
originations. Originally, we had expected Q3 originations to be
flat to last year. Profitability measures were also solid but as
expected came in below 2020. By comparison, the third quarter of
2020 was exceptional as higher levels of home purchases and
abnormally wide mortgage spreads created an ideal environment for
the Company. A year later, spreads are as narrow as they were
before the 2008 financial crisis. On a year-to-date basis, strong
growth in both revenue and earnings has allowed the Company to
generate capital beyond what we need. Accordingly, to remain
capital efficient for our shareholders, I'm pleased to say our
Board has authorized a $1.25 per
share special dividend – the 5th First National has
declared in the past five years."
In the third quarter of 2021, new mortgage originations
increased 10% to $8.4 billion from
$7.6 billion a year ago, while total
mortgage renewals were $2.3 billion,
the same as last year.
"First National continues to enjoy the benefits of a robust real
estate market, a strong share of the mortgage broker channel, and
most of all our productive, service-oriented culture supported by
MERLIN technology," said Moray Tawse, Executive Vice President. "As
a result, our single-family team delivered origination growth of 4%
year over year, a strong showing especially in a market where
activity is slower compared to the frenetic pace earlier this year.
After a slow start to 2021, our commercial team drove a 33%
year-over-year increase in new originations with conventional
mortgage growth augmenting insured mortgage volumes. Renewal rates
were positive for both segments on available opportunities although
we believe the 48% increase in commercial renewals reflects First
National's ability to find solutions for our real estate borrowers
and maintain long-term relationships with them. Overall, we are
very pleased with these results and look to finish 2021 in a
positive fashion."
|
|
|
|
Quarter
ended
|
Nine months
Ended
|
|
September
30, 2021
|
September
30, 2020
|
September
30, 2021
|
September
30, 2020
|
For the
Period
|
($000s)
|
Revenue
|
353,704
|
373,760
|
1,055,313
|
992,991
|
Income before
income taxes
|
65,134
|
98,767
|
206,710
|
164,456
|
Pre-FMV Income
(1)
|
64,867
|
99,644
|
200,231
|
228,071
|
At Period
End
|
|
Total
assets
|
40,763,169
|
38,314,904
|
40,763,169
|
38,314,904
|
Mortgages
under administration
|
122,311,392
|
117,116,971
|
122,311,392
|
117,116,971
|
|
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 (except
those on mortgage investments)
|
Third Quarter Review
Third quarter single-family
mortgage originations of $6.1 billion
were 4% or $212 million higher than a
year ago. Single family mortgage renewals of $1.7 billion were $217
million lower than a year ago, reflecting available renewal
opportunities. Third quarter commercial segment originations of
$2.3 billion were 33% or $567 million higher than a year ago as demand for
conventional lending picked up to augment insured mortgage volumes.
Commercial segment mortgage renewals of $604
million were 48% or $198
million higher than a year ago.
In the third quarter, the Company originated and renewed for
securitization purposes approximately $1.8
billion of single-family mortgages and $0.8 billion of multi-unit residential
mortgages.
Total third quarter revenue decreased 5% to $353.7 million from $373.8
million in the third quarter of 2020. This reflected the
factors noted below:
- Q3 2021 placement fees decreased 14% to
$85.0 million from $98.4 million a year ago despite a 12% increase
in origination volumes sold to institutional investors as mortgage
spreads compressed and volumes sold on a funded basis attracted
lower per-unit placement fees. In the commercial segment, spreads
were between 15% and 50% lower than the abnormally high levels a
year ago. The impact was most pronounced in the commercial segment
of the business where borrower-driven shifts in origination mix
(from insured to uninsured and from 10-year to five-year terms)
added to the challenge presented by tighter spreads. Placement fees
are directly linked to the term of mortgages such that 5-year terms
provide approximately 50% lower revenue on a per-unit basis. In
addition, the Company elected to securitize a larger percentage of
its 10- year term insured commercial mortgage origination resulting
in less product to place with institutional investors.
- Q3 2021 mortgage servicing income increased 12% to
$51.4 million from $46.0 million a year ago as higher MUA generated
growth in administration revenue and the company generated higher
revenue from underwriting and fulfillment processing services.
- Q3 2021 net interest revenue earned on securitized
mortgages increased 15% to $40.1
million from $34.9 million a
year ago on 4% growth in the Company's portfolio pledged under
securitization as well as: wider-spread prime mortgages securitized
in the past 12 months; an increase in the Excalibur mortgage
program which had lower credit loss ratios than originally
anticipated; and a decrease in indemnity costs payable to MBS
debtholders on single-family mortgage prepayments compared to a
year ago.
- Q3 2021 mortgage investment income increased 5% to
$16.2 million from $15.5 million a year ago as mortgage rates rose
moderately in the quarter which resulted in higher amounts of
interest earned while mortgages were accumulated for securitization
on First National's balance sheet.
- Q3 2021 gains on deferred placement fee
revenue decreased 73% to $3.5
million from $12.9 million a
year ago as the volume of multi-unit residential mortgages
originated and sold to institutional investors declined by 42% from
the comparative 2020 quarter and spreads were narrower.
Pre-FMV Income(1) decreased 35% to $64.9 million from $99.6
million in 2020 largely due to a return to a pre-pandemic
spread environment and the shift in the commercial segment's
product mix and funding strategy to allocate more origination
volume to securitization as opposed to institutional placement.
Generally, the increase in commercial origination volume was in
uninsured business which is less profitable than insured
origination.
Outstanding Securities
At September 30, 2021, and October 26, 2021, the Corporation had 59,967,429
common shares; 2,984,835 Class A preference shares, Series 1;
1,015,165 Class A preference shares, Series 2; 200,000 November 2024 senior unsecured notes; and 200,000
November 2025 senior unsecured notes
outstanding.
Dividends
The Board declared common share dividends in
the third quarter of 2021 of $35.2
million ($29.2 million in Q3
2020) reflecting an increase in the regular monthly dividend paid
in December 2020 and another
increase, effective with the payment on June
15, 2021, that brought the current annualized common share
dividend rate to $2.35 per share.
The third quarter common share payout ratio was 75% compared to
41% in the 2020 third 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 not materially
different in the third quarter of 2021.
Outlook
With the results of the first three quarters
of 2021, management remains positive about the remainder of 2021
and into 2022. In the short term, the expectation for the fourth
quarter includes lower year over year new origination due to
slowing markets set against the 2020 fourth quarter which was
exceptional. Management estimates that residential origination may
be as much as 25% lower than the almost $6
billion recorded in the comparative 2020 quarter but still
some 20% above the fourth quarter of 2019 before the pandemic led
to unusual market activity. Management recognizes that home
purchasing in the past 15 months accelerated and that a slowdown
was inevitable. However, it is confident that First National will
remain competitive and a leader in the marketplace. The commercial
segment funded a record volume of $2.6
billion of new mortgages in the fourth quarter of 2020 which
included about $1.4 billion in
December 2020 alone as property
owners sought to close transactions before year end. Management
anticipates commercial origination to remain strong in the fourth
quarter of 2021 based on the current pipeline.
During the pandemic, the value of First National's business
model has been demonstrated. By designing systems that do not rely
on face-to-face interactions, the Company's business practices have
resonated with mortgage brokers and borrowers alike during this
period. In 2021, the Company has adhered to this model and will
continue to benefit from record MUA.
The economic effects of COVID-19 are expected to slowly
diminish, although the duration and impact of the pandemic is
unknown at this time, as is the long-term efficacy of the
government and central bank interventions. It is still 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 the length of this transition, First National is set up
to execute its business plan. In 2021 and into 2022, the Company
expects to enjoy the value of its goodwill with mortgage broker
partners earned over the last 30+ years and reinforced during the
pandemic. On the funding side, there continues to be strong demand
for the Company's mortgages from institutional investors due to
substantial liquidity in the financial system. Securitization
markets are robust and continue to provide consistent and reliable
funding for the Company.
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 $87 billion
servicing portfolio and focus on the value inherent in its
significant single-family renewal book.
Conference Call and Webcast
October 27, 2021
10:00 am ET
|
(416) 764-8609 or
(888) 390-0605
www.firstnational.ca
|
A taped rebroadcast of the conference call will be available
until November 3, 2021 at
midnight ET. To access the
rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter
passcode 141337 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 $122
billion in mortgages under administration, First National is
one of Canada's largest non-bank
originators and underwriters 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