First National Financial Corp
TSX:FN
US |
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
|
US |
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Mastercard Inc
NYSE:MA
|
Technology
|
|
US |
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
|
US |
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
|
US |
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
|
US |
Visa Inc
NYSE:V
|
Technology
|
|
CN |
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
|
US |
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
|
US |
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
|
US |
Coca-Cola Co
NYSE:KO
|
Beverages
|
|
US |
Walmart Inc
NYSE:WMT
|
Retail
|
|
US |
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
35.1183
44.87
|
Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
Johnson & Johnson
NYSE:JNJ
|
US | |
Berkshire Hathaway Inc
NYSE:BRK.A
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Mastercard Inc
NYSE:MA
|
US | |
UnitedHealth Group Inc
NYSE:UNH
|
US | |
Exxon Mobil Corp
NYSE:XOM
|
US | |
Pfizer Inc
NYSE:PFE
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
Nike Inc
NYSE:NKE
|
US | |
Visa Inc
NYSE:V
|
US | |
Alibaba Group Holding Ltd
NYSE:BABA
|
CN | |
3M Co
NYSE:MMM
|
US | |
JPMorgan Chase & Co
NYSE:JPM
|
US | |
Coca-Cola Co
NYSE:KO
|
US | |
Walmart Inc
NYSE:WMT
|
US | |
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Good day, and welcome to the First National Financial Q3 2018 Analyst Conference. As a reminder, this call is being recorded on October 31, 2018, for replay purposes.At this time, I would like to turn the conference over to Stephen Smith, Chairman and Chief Executive Officer. Please go ahead, Mr. Smith.
Good morning, everyone. Welcome to our call, and thank you for participating. I'm joined by Rob Inglis, our Chief Financial Officer; and Moray Tawse, Executive Vice President.I will remind you that our remarks and answers may contain forward-looking information, both future events or the company's future performance. This information is subject to risks and uncertainties and should be considered in conjunction with the risk factors detailed in our MD&A.We are pleased to report our third quarter results last night along with the news that our board has authorized both the common share dividend increase. This is the 11th since our TSX listing, and the payment of a special dividend in December.As a result of these authorizations, our annual dividend rate moves up to $1.90 per common share, while common shareholders of record at the end of November will receive an additional $1 per share as a special. This is the second time the board has authorized a special dividend payment. The last time being a year ago, we believe this later -- latest declaration is well supported by and predicated on our business model.We've always managed to -- at First National, to maximize the use of its capital. This has been clearly demonstrated over the past 3 years as the after-tax prefair market value return on shareholders' equity has averaged 43%. If we can't use capital efficiently, we believe returning it to our shareholders is the appropriate action. Based on our assessment of the capital needed for near-term growth, we're confident we can produce the funds from operations.Turning to quarterly performance. We established another high watermark for MUA at $105 billion. Despite this very large number, MUA is 5% higher than a year ago and 5% above the previous record set in June of this year.This growth reflects the good market conditions and greater execution by our single-family and commercial teams. Single-family originations increased 23% or about $700 million compared to last year with higher activity levels recorded in Toronto and Montréal. We talked about Montréal on our last call and it was the regional growth leader with production up 54%. We attribute this to improved market fundamentals and more rational price behavior by our competitors, which had the effect of making First National's offering more attractive.Calgary and Vancouver volumes were flat with last year. We also got another assist from Excalibur, which we launched earlier this year. We're very pleased with market receptivity to this alternative product, and we remain confident that it can be a meaningful contributor in future periods.As a reminder, we originated over $700 million annually with this program before it was discontinued back in 2008. We originated Excalibur for placement with our institutional funding partners and earning a onetime placement fee in servicing the income over the mortgage terms.Beyond new originations, retention was also strong as the team executed well on our large renewal book. Single-family renewals were up 6% year-over-year to about $1.8 billion of volume. In commercial, new originations renewals were lower than a year ago by 14% and 6%, respectively.We don't believe that there's been any fundamental change in the market demand for our conventional insured commercial products as our pipeline remains healthy. But I would notice that we are comparing commercial originations to a very, very strong period a year ago. Our commercial team continues to find success with its more-than-the-lender approach, with good borrow uptake of First National's market research and financial modeling capabilities.Turning to the other news of the day. I'm very pleased to announce that we've appointed Jason Ellis in the newly created position of Chief Operating Officer. Jason has been with First National for the past 14 years, most recently as Senior Vice President and Managing Director of Capital Markets. The creation of this new role and Jason's appointment to it positions First National well for the future.Rob will now walk us through the financial metrics for the quarter before Moray presents our outlook. Rob?
All right, good morning, everyone. Beginning with the Q3 revenue with $321 million, that's about 13% higher than last year. As our MD&A describes in depth, there are several changes in revenues to the rising interest rate environments, the adoption of hedge accounting in 2018 and the large placement transactions that happened in 2017. If revenue was normalized for these changes, revenue increased by 16%. This results from higher average mortgage coupons in its securitization portfolio, which is in turn the result of increasing rates in the market. Within total revenues, placement fee revenues were also affected by changing interest rates. But at statements, it appears, placement fees have grown by about 35% or if, however, fees are normalized by adding about $14.4 million to 2017 figure, placement fees actually decreased by 8% in the quarter. This is a result of lower unit prices coming from the tight spread environment. Reduction was partially offset by revenues from our relaunch of Excalibur product. Now looking at the various components of revenue, mortgage servicing income increased 10% year-over-year, and was the result of the growth in the company's third-party underwriting business as well as the benefits of a higher MUA. Mortgage investment income increased 24% due primarily to an increase in market interest rates and notably, we earned higher interest rates on mortgages warehouse prior to securitization. Net interest for securitized mortgages decreased by 7% as the benefit of a larger portfolio of securitized mortgages was offset by modestly tighter weighted average spread. By larger, I mean, the securitized mortgages portfolio that grew 15% year-over-year to $30.2 billion. And by tighter spreads, I'm referring to the fact that mortgage spreads are -- to the interest we're in it -- sorry, the risk-free government of Canada have decreased by about 66 basis points since 2016.The impact of accounting for financial instruments has also affected this revenue as large gains recognized in 2016 and '17 are effectively amortized against these margins. Revenue from gains on deferred placement fees was up 36% on account of higher volumes of multi-unit residential mortgages originated and sold to institutional NHA-MBS issuers, coupled with consistent spreads.Moving to earnings performance. Tighter mortgage spreads and the trend towards increased securitization resulted in a year-over-year decline in net earnings of $0.11 a share or about 11%. However, earnings available to common shareholders in Q2 comfortably exceed common share dividend payments with a Q3 payout ratio of 54%.Prefair market value EBITDA for the quarter increased by 22%. However, this growth will be -- reflects the mismatch of $14.4 million of placement fees in the second and third quarter of 2017 because of past accounting conventions related to interest rate hedging. If this amount is added back to Q2 2017, Q3 2018 prefair market value EBITDA would have decreased by 5% on comparative basis due to tighter mortgage spreads, but more so because of the outcome of shifting mortgages to securitization programs. As you know, when securitizing mortgages instead of placing them with institutional investors, this delays our earnings process. Despite this, core earnings were solid, and MUA provides a good support for fourth quarter and 2019 performance.And now here's Moray with our outlook.
Thanks, Rob, and good morning, everyone. From the results we discussed today, I think it's evident that First National has adjusted well for the various changes made to mortgage insurance rules and underwriting standards over the past 2 years. I think this demonstrates our ability to efficiently incorporate new protocol without missing a beat in responding to the needs of our borrowers and mortgage broker partners. We've also been fortunate to be servicing a residential market that has been quite resilient in most regions of Canada as a result of steady economic, employment and population growth. From what we've seen so far this year, I would suggest that the market conditions have largely normalized. Looking to the immediate future, we are optimistic that the trend established in the last few quarters will continue. This includes our expectation that the tight interest spread environment will also continue, similar to what existed in the second and third quarters.Thinking beyond those short-term considerations, we consider -- we continue to operate First National with the same vision and strategies that we've always had. Our intention is to remain the leading nonbank mortgage lender in Canada by providing a full range of products, now including the Excalibur on the alternative lending side, deploying technology that we can leverage to enhance service and cost efficiencies and also maintain a conservative risk profile.We believe these are the right strategies for the growth of our company. Overall, our positioning is strong, and we expect to continue to benefit from income and cash flow generated from our now $30 billion portfolio of mortgages, pledged under securitization and $72 billion servicing portfolio while we focus on the value inherent in our significant single-family renewal book.That concludes our prepared remarks. Now we'll pleased to take your questions. Operator, please open the lines for the questions.
[Operator Instructions] And we'll first go to Nik Priebe with BMO Capital Markets.
I was wondering if you could provide just a little bit of color maybe surrounding the special dividend announcement. Just interested to get some insight on the nature of the discussion around that decision?
Well, I think we've been pretty efficient users of capital, here I think our ROE for the last 5 years forever is like in excess of 40%. So we can get a fair -- we intend to fund our growth internally. We did capital projections for the next 5 years relating to what we'll need for our NHA-MBS issuance and for any other initiatives. And I think we definitely felt that we had excess capital for our needs. I think just, generally, philosophically -- just philosophically in general, I think there tends to be a little bit of an issue that management, I think, naturally tends to like the husband, any excess that capital have and look for investments. I think we're -- the shareholders here and the board here tends to be a bit more believer of that. If we can't get good ROEs, we should return those to the shareholders and the shareholders can deploy those resources. We certainly think we'll be generating enough capital next year and in the future to fund anything we need. And we have a lot of excess borrowing capacity in terms of undertaking initiatives, too. I think, structurally, we tend to be a little bit underlevered though little overcapitalized. So that was the thinking.
Okay. And so, I guess, staying in the same vein, could you expand a bit just on your views regarding the regular dividend as well? Like, I'm just wondering whether there is a targeted range of the payout ratio over the long term that you kind of be comfortable with there. Or that investors should be thinking about whether that's on earnings or EBITDA?
Yes, I think we've been thinking in the 60% to 70% range. I think we're up at the upper limit of that now. Obviously, then there's a little bit of a contradiction you may ask because we did a special last year, and we did a special this year. Just given how the market could potentially penalize you in the event that you ever had a dividend cut, I think we want to leave a fair amount of cushion there. So I think that's how we're thinking.
Okay. That makes sense. One last one from me before I requeue. Looks like the mix of the funding sources kind of shifted back slightly towards institutional placement as opposed to securitization relative to the prior quarter. Could you give us just a bit of a read on what you're seeing in terms of I guess institutional demand for the prime single-family assets as well as your new Excalibur program. Was there anything notable with respect to uptick there?
I think the most common question we get from analysts is trying to give -- ask, what's your slip between institutional sales and securitization? And in many ways, it's the most difficult one to answer because it very much depends quarter-to-quarter on market conditions. One of the reasons you would see a big jump in our institutional sales is that all of our Excalibur business has been going into institutions. So that would pump that number up. That's not a product that's securitized. So we're just seeing good institutional bids in that area, and I think that would be the main reason why that number pumped up this quarter.
We'll go next to Marko Kais with TD Securities.
Just a question on the Excalibur. I was wondering, what is driving your market share gains in the alternative space? Anything -- like, is there anything in your underwriting or service levels that could be significantly different than that of the federally regulated ventures? And I'm referring to factors such as buying stress-test income verification and/or turnaround times?
Yes. Well, we think in the space in general that our Excalibur program is probably in the range of alternative lending, probably on the conservative side. However, the First National is the largest nonbank lender -- largest mortgage lender in Canada. We have a huge footprint with mortgage brokers. We have been reluctant to introduce that product in the past because we could have, but we just didn't think we could do it a scale. I mean, we had -- we would have institutional investors coming to us, smaller ones and say, we would like to do it for $100 million or $200 million, and we didn't feel that was enough scale for the type of way we would want to do something at First National. So I think we're getting it for all the reasons we get good -- we do business here. We have a big footprint in the mortgage broker channel. We have very, very good sale -- service levels and so that when we launch a product, it tends to have an impact and we can deliver substantial volumes. And we do think single-family, we're in the $12 billion to $13 billion range. So if we want to do $1 billion that's not a big percentage of our overall business.
We'll go next to Victor Dri with National Bank Financial.
Just filling in here for Jaeme. The first question is on the mortgage servicing income. So it appears, kind of, the third-party servicing agreement generate a lot more revenue for first knot in Q3 than prior periods. So just, one, is that a correct assessment? And two, what is the sustainability of that revenue stream?
I think that's why it has generated more revenue than it has in the previous months. And we think that income stream is fairly sustainable. I mean, it would be quite cyclical based on mortgage volumes. But on an annual basis, it's -- we would see that continuing to be able to maintain itself.
Okay. Perfect. Second one here on the originations. Just on the contribution of the Excalibur program to the single-family number, was that around $300 million? And are you getting any economics on that product that you kind of originally expected? And then are you able to elaborate on the type of institutional investors purchasing those mortgages?
Right. So I don't think we've commented -- we did provide guidance somewhere that number comes in, but we haven't given actual numbers. The economics are coming in as we expected. So 1- or 2-year product, I think we spoke to it a little bit in the MD&A. So it's a slightly different compensation to the brokers and then slightly different fee model. And then it's a little bit different because they renew after 1 or 2 years, you don't have the same renewal rates. Because often, it can be a transition product if people are moving -- potentially moving on to a qualifying product. The economics are turning out as we expect and they've been helpful.
Right. Okay. That's helpful. Last one from me is on the mark-to-market losses of $1 million in Q3. It's a several quarters now of losses, and it appears to be interest accrual. So just wondering at what point do you take a write-down on the principal of that loan?
No, the $1 million is all principal. Every quarter that we've taken -- it was quite a loss in 2017 because of its nature of IFRS 9. So every time you that, that's just principal being set aside as a current loss.
Okay, that's helpful. Just if I could sneak one in on the same vein there, last paragraph on Page 7 of the financials, Note 6, it states that 3 mortgages are nonperforming and they're recorded at $31.5 million. So that's about a $4 million decrease from last quarter. So just wondering if you could walk me through what drove that change and why that decrease in fair value hasn't run through the P&L?
Well, I think a portion of this project is actually repaying. It's sort of selling off on those units and as those -- the units are sold, we get proceeds, which takes it down. But it's not -- taking it down at the fair market value we have forward. So there's no uptake in value, just -- we're just receiving receipts that we expect to receive now.
[Operator Instructions] And Mr. Smith there are no other questions, so back to you for closing comments.
Thank you very much, operator. That concludes today's event. We look forward to reporting our fourth quarter results in late February. In the meantime, thanks, everyone, for taking part in the call.
This does conclude today's conference. We thank you for your participation.