Business model, strategy and trends
How would you describe your business model?
First National is a non-bank originator, underwriter and servicer of single family residential and multi-unit residential and commercial mortgages. As a non-bank, we do not accept consumer deposits.
How does First National raise funds for mortgage lending?
Although we do not take consumer deposits, our funding is deep, diverse, flexible, cost effective and, over the past three decades, proven through multiple economic and business cycles. Beyond our own balance sheet, we use a variety of sources including institutional placements as well as securitization conduits such as asset-backed commercial paper, National Housing Act-Mortgage Backed Securities and Canada Mortgage Bonds (CMB).
How does First National decide what source to use for funding?
In general, originations are allocated from one funding source to another depending on different criteria, including type of mortgage and securitization limits, with an overall consideration related to maintaining diversified funding sources. Most mortgages originated are funded either by placement with institutional investors or through securitization conduits, in each case with retained servicing.
What is mortgage servicing?
The primary functions of mortgage servicing are to collect mortgage payments from borrowers and remit these payments to investors, account for the amounts due under mortgages, verify that borrowers fulfills their obligations (such as maintaining property insurance and paying realty taxes), enforcing mortgage security in the event of default and administering mortgages on behalf of investors in accordance with servicing agreements. These activities provide a stable and consistent source of revenue, ongoing relationships with borrowers, the opportunity to place or securitize renewed or refinanced mortgages and the ability to earn interest income on funds held in trust.
What is your business strategy?
Our strategy is built on four cornerstones: providing a full range of mortgage solutions for Canadian single-family and commercial customers; growing assets under administration; employing technology to enhance business processes and service to mortgage brokers and borrowers; and maintaining a conservative risk profile.
Is First National an alternative lender?
We consider ourselves a mainstream lender much like the large Canadian banks. Generally, we focus on the most creditworthy forms of residential and commercial mortgages. Approximately 60- 70% of the mortgages we underwrite are insured. Among the main differences between First National and banks is we do not use consumer deposits to fund mortgages.
How do you originate single-family residential business?
We source residential mortgages through independent mortgage brokers who are increasingly important service providers to Canadian homebuyers. These professionals shop the lending market to secure the very best mortgage offer for their clients, and choose First National because of the design and scope of our products, the thoughtful and respectful way we respond to opportunities and the timeliness of execution in funding mortgages.
How do you originate commercial mortgages?
We source multi-unit residential and commercial mortgages largely through our experienced in-house mortgage underwriters. Our 5,000+ commercial clients include large, well-established developers, REITS, other owners of multi-unit apartments, condominiums and residential care facilities as well as industrial, office and retail properties. First National’s empowered advisors provide a variety of conventional and insured mortgages to commercial clients including bridge and construction financing, and are known for their expertise and ability to execute within tight timeframes.
What is First National’s third-party underwriting and fulfillment processing business?
This business line adjudicates mortgages originated by our institutional customers through the single-family residential mortgage broker channel. We employ a customized software solution based on our proprietary MERLIN® technology to accept mortgage applications and underwrite in accordance with our customers’ guidelines. Our customers fund all the mortgages underwritten under the agreement and retain full responsibility for mortgage servicing and the borrower relationship. We created this business in 2014 to leverage the capabilities and strengths of First National in the broker channel and it is now a regular source of income.
What are the main trends affecting your business?
Population growth including immigration drives demand for housing. First National benefits from this growth because we provide mortgage financing for single family homes and multi-unit buildings (apartments and condos). In addition, many Canadians rely on mortgage brokers to identify and secure the best mortgage products available in the market. As a lender, First National is a long-time participant in the channel with a leading position. Consumers and mortgage brokers also increasingly prefer to use technology, a trend that suits First National because of our non-branch business model and proprietary information systems known as My Mortgage and MERLIN®. Over the past 30 years, securitization has also become an integral component of the Canadian financial marketplace, a trend that has allowed non-banks to access the capital markets on a cost-efficient basis to finance the same property asset classes as deposit-taking financial institutions. Interest rate movements are also key drivers of market activity. Generally a low interest rate environment increases home purchasing and the need for mortgage lending. Higher interest rates tend to reduce real estate activity and lower volumes of mortgages underwritten.
Markets and competitive advantages
What mortgage markets does First National serve?
We serve residential and commercial markets across Canada through offices in Halifax, Montreal, Toronto, Calgary and Vancouver. Commercial includes multi-unit residential (apartments and condos) as well as residential care facilities, industrial, office and retail properties.
Who are First National’s major competitors and what’s First National’s market share?
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. Our principal competitors are the chartered banks and other entities originating mortgages from mortgage brokers including insurance and trust companies and other non-bank lenders.
Do you offer only insured mortgages?
About 60-70% of the mortgages we underwrite are insured. In the residential mortgage market, we also provide “Excalibur” branded mortgage products that are originated using broader underwriting criteria than those applied in originating prime mortgages and generally have higher interest rates than prime mortgages. In the commercial mortgage market, our largest financings are CMHC-insured but we also offer our Core Conventional program which offers competitive interest rates.
What are First National’s competitive advantages?
We consider our major advantages to be: our extensive and established relationships with mortgage brokers who serve as our source of single family residential mortgages; the skills, commitment and entrepreneurial nature of our workforce; our servicing expertise; our proprietary software that enhances our operations during the mortgage origination process and then later during servicing and administration; our diverse and established sources of funding; our scale which creates efficiency; and the experience and expertise of our Board and senior leadership group.
What’s special about First National’s culture?
We are broadly recognized in the industry for hiring the best people and helping them to grow professionally through job-specific training, job shadowing, ongoing coaching, mentoring and our online Learning Network. Our workplaces are collaborative and empowering. Every voice is heard and respected. Our comprehensive salary and benefits package includes our wellness and educational reimbursem*nt programs, as well as extended health, dental and insurance coverage. But when it comes right down to it, what makes our culture special – and Great Places to Work® certified – is that we share a higher purpose and are passionate about helping each other deliver it. That purpose is to help Canadians achieve home and property ownership. As we often say, a great culture is in our nature.
Performance
What financial metrics should be used to measure First National’s performance?
Investment analysts focus on a number of measures in assessing corporate performance including: Mortgages Under Administration (MUA); mortgage originations; Pre-FMV Income, which is a non-IFRS term; net income, net income attributable to common shareholders and dividend payout ratio.
What is MUA and why is it important?
MUA includes our mortgage servicing portfolio and our securitized mortgage portfolio. The mortgage servicing portfolio provides a significant source of stable and recurring income. The mortgage securitization portfolio provides ongoing net interest margin. If we retain mortgages upon renewal, servicing revenue or securitization margin continues over the new term. By growing MUA, we create opportunities to grow revenue, lower our per unit servicing costs and secure mortgage renewals in the future.
What happens to performance if originations drop?
First National’s revenues and earnings are driven by a combination of the value of its mortgage origination, the number of mortgages pledged under securitization, and its mortgages under administration. While originations and renewals are important for growing and maintaining MUA, the source of most of our earnings is servicing and net securitization margin which will continue to generate earnings even with a drop in originations.
Why does First National report Pre-FMV Income?
First National’s net income is influenced by conditions in the capital markets. More specifically, there is a potential for large gains and losses on financial instruments arising from our interest rate hedging program. These gains and losses are usually not an indication of performance but the outcome of the accounting required to record them in the income statement. Accordingly, the movement of net income between quarters can be related to factors external to our core business. As a supplemental to net income before tax, we also report Pre-FMV Income. 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.
Does First National’s Board set a dividend payout ratio target?
Our Board does not prescribe a specific payout ratio but does seek to return a large share of profits to shareholders – measured as a percentage of common shareholder income – while ensuring that the company has adequate funds available to support ongoing growth and performance.
Do you segment the sources of First National’s revenue?
We have five sources of revenue: net interest – securitized mortgages, mortgage servicing income, placement fees, gains on deferred placement fees and mortgage investment income. We segment our revenue accordingly in our financial reports where we also describe the current drivers of each.We also provide information on the residential business and the commercial business separately as these have been determined to be distinct segments.
Does First National reinvest in operations?
Beyond undertaking securitization transactions that may require significant amounts of First National’s own capital – provided in the form of cash collateral, credit enhancements, and the upfront funding of broker fees and other origination costs – our business invests in technology, leasehold improvements, and office equipment. In the long term, we expect capital expenditures on fixed assets will be approximately $10 million annually.
Risk and regulation
How does First National manage risk?
First National employs various techniques. To manage mortgage risk, we invest in the most creditworthy mortgages, approximately 60-70% of which are insured. As a structural advantage of our business model, about 96% of our MUA is funded through sources that result in no residual credit risk to First National. That said, our underwriting process is detailed, thorough and compliant with the highest standards in the country. At the front end, our underwriters are responsible for reviewing every loan application to ensure it meets acceptable risk. This involves reviewing all submitted documents and independently verifying the data and claims made in those documents. Our quality assurance operations and our internal auditors add two more layers to our defences. Our risk management process allows us to attract and retain relationships with sophisticated institutional mortgage investors.
Are your practices reviewed by third parties?
We sell mortgages to third-party institutional investors who audit us on a regular basis, while third-party mortgage insurers review our loans against their standards. We are examined and receive periodic reports from CMHC and Canada’s two other mortgage default insurers (Canada Guaranty Mortgage Insurance and Sagen MI Canada) that show how our delinquency and early default rates compare to the industry. First National consistently matches or outperforms industry comparables.
Is First National exposed to credit and interest rate risk?
In addition to the origination of high quality, low risk mortgages, we are committed to the minimization of credit and interest rate risk. Approximately 96% at the end of 2021 of First National’s mortgages under administration are funded through sources that result in no residual credit risk to First National. First National also engages in an extensive interest rate management program for all mortgages we originate with the objective of eliminating the economic impact of any changes in interest rates to which we may be exposed.
Is First National regulated like a bank?
Canada’s chartered banks are regulated by OSFI and as a non-bank, we are not. However, as a mortgage lender, we are subject to significant oversight because many of our policies and procedures are guided by our regulated investor partners which include banks, trust companies, credit unions, insurance companies, and pension funds. We are also subject to Anti-Money Laundering regulations administered by FINTRAC. As a publicly listed company, we follow laws and guidelines set down by Canadian securities regulators. We are legally registered in every province and territory where we do business. This includes registration with the Financial Services Regulatory Authority of Ontario, the Autoritédes des marchésfinanciers, BC Financial Services Authority, and the Real Estate Council of Alberta. In addition to these regulatory bodies, the Company is subject to oversight by CMHC and Canada’s other mortgage default insurers for all aspects of our insured mortgage programs including routine examinations of our underwriting systems.
Is First National covered by credit rating agencies?
As a mortgage servicer for large financial institutionsand securitization transactions, First National is rated byDBRSMorningstar,Standard &Poor’s,andFitch.In all cases, First National consistently achieves above-average ratings. For many of these same institutions, weprovide areport on our internal controls(CSAE3416Report). Thisexternally audited report provides comfort to mortgage investors that our control environment is functioningproperly.DBRSMorningstaralso rates First National as an issuer of investment-grade securities including publicly traded debtand preference shares. The rating was initiated in February 2010 andhasbeenconfirmed each year asBBB (mid).
ESG and general
How does First National contribute to environmental sustainability?
As a non-bank, non-branch financial services company with proprietary digital technologies used to serve customers, First National has a small environmental footprint across five offices. However, we aim to do our part to conserve resources within our operations by: operating as much as possible with a paperless office environment, and in 2022, moving to a new, purpose-built, energy efficient headquarters in Toronto designed to exceed LEED platinum and Well Building Institution Guidelines. We have also created Digital by Design, a hybrid model that enables our team to work from home and in office, which reduces travel-related carbon emissions.
Does First National finance the creation of affordable housing?
First National is a leading participant in MLI Select, a CMHC program which provides borrower incentives to create and preserve affordable, energy efficient and accessible apartment units across Canada.
What equity analysts cover First National?
- BMO Capital Markets
- CIBC Capital Markets
- National Bank Financial
- RBC Capital Markets
- Scotiabank GBM
- TD Securities
Who are First National’s senior officers?
Biographies of our senior management team are available under the Leadership section of our website.
When was First National founded?
First National was incorporated in 1988 by our co-founders Stephen Smith and Moray Tawse. Over the decades, we have become one of Canada’s largest non-bank mortgage originators and since our listing on the TSX in 2006, have invested $150+ billion in housing loans, including to first-time buyers to help them realize their dreams of home ownership.
Financial reporting
When is First National’s fiscal year end?
December 31.
When does First National report earnings?
Quarterly financial results are typically announced in April, July, October and February. We issue dividend announcements on or about the 15th of each month.
How can I obtain a copy of the Annual Report or other financial documents?
You can download an electronic copy of these documents by visiting the financial reports section of this website. For a printed copy of the Annual Report, please contact First National investor relations.
Who are the Company’s independent auditors?
Ernst & Young LLP, Toronto, Ontario.
What is the CUSIP number for First National common shares?
33564P.
Who is First National’s transfer agent, and what services do they provide?
Our transfer agent maintains records of investors and account balances and transactions, cancels andissues share certificates, delivers investor mailings and assist with items such as lost or stolencertificates. First National’s transfer agent is Computershare Investor Services, 1.800.564.6253.
What should I do if I have questions regarding missing dividends, lost share certificates, estates, address changes to the share register, duplicate shareholder mailings or to stop (or resume) receiving Annual and Quarterly Reports?
Please contact Computershare Investor Services, 1.800.564.6253.
Are First National dividends paid considered "eligible dividends" for Canadian tax purposes?
Yes, unless otherwise noted. Please consult your tax advisors for specific advice.
Does First National have a Dividend Reinvestment Plan (DRIP)?
No, currently we do not have a DRIP as we do not require additional capital.