First National Financial Corporation Reports 2020 Second Quarter Results

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First National Financial Corporation Reports 2020 Second Quarter Results

Canada NewsWire

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."

Quarter ended

Six months ended

June 30,

June 30,

June 30,

June 30,





For the Period







  Income before income taxes





  Pre-FMV Income (1)





At Period end

  Total assets





  Mortgages under administration







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.

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.

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.


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   

(647) 427-7450 or (888) 231-8191

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 for three months.

Complete consolidated financial statements for the Company as well as management's discussion and analysis are available at and at

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

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

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