News articles

Toronto, Ontario, March 2, 2021 – First National Financial Corporation (TSX: FN, TSX: FN.PR.A, TSX: FN.PR.B) today announced its financial results for the three and twelve months ended December 31, 2020. The Company derives virtually all of its earnings from its wholly owned subsidiary, First National Financial LP (“FNFLP” or “First National”), Canada’s largest non-bank mortgage originator and underwriter. 

2020 Annual Summary

•  Mortgages under administration (“MUA”) increased 7% to a record $118.7 billion compared to $111.4 billion at December 31, 2019
• Revenue increased 4% to $1.38 billion from $1.33 billion in 201
• Net income grew 7% to $190.2 million ($3.12 per share) from $177.2 million ($2.90 per common share) in 2019
• Pre-FMV Income⁽¹⁾ increased 31% to $323.0 million from $247.1 million in 2019

Fourth Quarter Summary

• Revenue increased 13% to $387.3 million from $342.1 million a year ago
• Net income grew 41% to $69.1 million ($1.13 per share) from $49.0 million ($0.80 per common share) a year ago
• Pre-FMV Income⁽¹⁾ increased 57% to $94.9 million from $60.4 million a year ago

Management Commentary

“First National’s record-setting performance in 2020 reflected the value of our long-standing business model and the extraordinary efforts of our employees who worked from home to serve our residential and commercial borrowers,” said Stephen Smith, Chairman and Chief Executive Officer. “We designed our business model and developed our MERLIN underwriting technology so that we do not require face-to-face interactions to be an effective lender. The advantages from these innovations have become even more significant during the pandemic when physical distancing is required. The year’s results also show that our non-bank funding sources are as reliable as that of any financial institution. Our objective is to maintain this momentum to continue to deliver results for all stakeholders.”

In 2020, the Company’s after-tax Pre-Fair Market Value return on shareholders’ equity was 50%. Since its listing on the TSX 14 years ago, it has paid over $1.4 billion in total dividends and distributions, or $25.80 per share. Combined with share price appreciation, total return to IPO investors stood at 573% at December 31, 2020.

“Despite the widespread economic and social disruption caused by the pandemic, our business and our markets performed exceptionally well,” said Moray Tawse, Executive Vice President. “Both single family and commercial operations set new records for originations. In single-family, originations reached just over $19 billion, a 42% year-over-year increase with double-digit growth recorded by every First National operation across the country. In commercial, originations were 23% ahead of last year at just over $9 billion. In both cases, we believe First National gained market share as our solutions resonated with our customers and partners and in the case of commercial, because we continued to lend when competitors pulled back. Consistency of lending is a hallmark of our business.”

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 figures presented for 2019 have been restated to conform to 2020’s presentation. 

Annual Review

Record results in 2020 generally reflected growth in mortgage originations and renewals which drove higher MUA, the source of most of the Company’s earnings, as well as wider mortgage spreads. In the fourth quarter, the same drivers for success were present.

First National’s MUA increased 7% to a record $118.7 billion from $111.4 billion at December 31, 2019 on higher new mortgage originations and renewal retention. MUA increased at an annualized rate of 5% during the fourth quarter. At year-end 2020, single-family MUA was $83.6 billion, up 4% from $80.7 billion at December 31, 2019, while commercial MUA was $35.1 billion, up 14% from $30.7 billion a year ago.

New single-family mortgage originations increased 42% to $19.2 billion in 2020 from $13.5 billion a year ago. Management believes the increase was due to several factors including the Company’s strong mortgage broker and investor relationships and its MERLIN technology and operating systems which support efficient origination and underwriting – without the need for physical contact. These advantages appear to have led to market share growth for the Company in the mortgage broker channel. Of equal importance, home purchasing activity across the country was strong due to lower mortgage rates. Single-family mortgage renewals for 2020 were 22% higher at $6.7 billion compared to $5.5 billion in 2019.

New commercial segment originations increased 23% to $9.1 billion from $7.4 billion in 2019, with growth driven by origination of insured mortgages. The Company attributes segment growth to the continued development of its expertise in real estate across the country, and its ability to provide customers with a range of insured and conventional financial products. Commercial mortgage renewals remained steady at approximately $2.0 billion in both years.

Of the Company’s $36.9 billion of new originations and renewals in 2020, $25.0 billion was placed with institutional investors, for which it earns placement fees.

Origination for direct securitization into NHA-MBS, CMB and ABCP programs remained a large part of the Company’s strategy in 2020 with volume of $11.0 billion including $8.2 billion of single-family mortgages and $2.8 billion of multi-unit residential mortgages.

2020 revenue increased 4% to $1.38 billion from $1.33 billion in 2019. Revenue performance included a:

• 62% or $128.2 million year-over-year increase in placement fee revenue which stood at $333.7 million reflecting increased residential mortgage volume and per unit placement fees
• 179% or $20.8 million increase in gains on deferred placement fees which stood at $32.4 million reflecting growth in multi-unit residential mortgages originated and sold to institutions
• 12% or $18.3 million year-over-year increase in mortgage servicing income which stood at $175.0 million primarily because of growth in the Company’s third-party underwriting business  
• 7% or $9.2 million year-over-year decrease in net interest revenue earned on securitized mortgages which stood at $129.4 million due to pressure on securitization margins in the first two quarters of 2020 when the Bank of Canada cut overnight interest rates as well as the impact of lower interest rates on the cost of indemnities payable to MBS debtholders when mortgages prepaid prior to the scheduled maturity date  
• 18% or $15.6 million year-over-year decrease in mortgage investment income which stood at $69.0 million due primarily to a reduction in the Bank of Canada’s overnight rate that led to a reduction in the Company’s offered mortgage rates and lower amounts of interest earned while mortgages were accumulated for securitization and sale on the balance sheet

The 4% year-over-year increase in total revenue was affected by changes in the fair market value of financial instruments related to interest rate movements in both years.  Excluding these changes, revenue increased 8% year over year to $1.45 billion from $1.34 billion in 2019.

Income before income taxes increased 7% to $258.7 million in 2020 from $241.7 million in 2019. The increase was affected by changing capital market conditions. Excluding the gains and losses related to financial instruments, the Company’s earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income1”) for 2020 increased by 31% to $323.0 million from $247.1 million in 2019. The increase was largely the result of higher origination and wider mortgage spreads which had a favorable impact on placement fee revenue.

Net income for 2020 increased 7% year over year to $190.2 million from $177.2 million in 2019, while net income per share increased 8% to $3.12 from $2.90 in 2019.

Dividends 

The Company’s Board of Directors increased the regular monthly dividend to an annualized rate of $2.10 per common share from $1.95 per common share annualized effective with the dividend payable on December 15, 2020; and declared a special common share dividend in the amount of $0.50 per share, payable on December 15, 2020 to shareholders of record on November 30, 2020. This special dividend reflected the Board’s determination that the Company has generated excess capital in the past year and that the capital needed for near-term growth can be generated from current operations.

Total dividends per common share paid in 2020 amounted to $2.47, up 3% from $2.41 in 2019. The common share payout ratio in 2020 was 79% compared to 83% in 2019.

If the special dividends and gains and losses on financial instruments in the two years are excluded from these calculations, the dividend payout ratio for 2020 would have been 50% compared to 64% in 2019.

The Company also paid $2.8 million of dividends on its preferred shares in 2020 compared to $3.1 million in 2019.

Outstanding Securities

At December 31, 2020, and March 2, 2021, the Corporation had 59,967,429 common shares; 2,887,147 Class A preference shares, Series 1; 1,112,853 Class A preference shares; 200,000 November 2024 senior unsecured notes; and 200,000 November 2025 senior unsecured notes outstanding.

Mortgage Deferrals

When management reported for the second quarter, the nature of deferred mortgage payments and the need for cash resources to fund these assets was described. At May 11, 2020, the Company had approved mortgage payment deferrals for approximately 13.9% of the Company’s single-family MUA eligible for such an approval. On September 30, 2020, the Company ended its deferral program, such that by the end of 2020, there were virtually no mortgages on deferral.

Outlook

With COVID-19 related uncertainties still widespread, it is difficult to look too far ahead. However, with the results of the last three quarters of 2020 and a window on the first quarter of 2021, management is very positive about the 2021 fiscal year.

The expectation for the next year includes: residential origination comparable to 2020, commercial segment success in growing origination, and continued employee productivity from the Company’s work from home strategy.

With the expected distribution of vaccines across the nation, the economic effects of COVID-19 will hopefully diminish. However, the return to normalcy is certainly some months away. Management believes First National will continue to have an advantage over traditional bank origination channels which have been faced with disruption during the pandemic.  First National expects that goodwill with its broker partners and customers created during the past nine months will persist through 2021. 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.

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 $34 billion portfolio of mortgages pledged under securitization and $83 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

A taped rebroadcast of the conference call will be available until March 10, 2021 at midnight ET. To access the rebroadcast, please dial (416) 849-0833 or (855) 859-2056 and enter passcode 5155447 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 $118 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 ‘‘Risks 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.

For further information: