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Edited Transcript of FN.TO earnings conference call or presentation 1-May-19 2:00pm GMT

Q1 2019 First National Financial Corp Earnings Call

Toronto May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of First National Financial Corp earnings conference call or presentation Wednesday, May 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Moray Tawse

First National Financial Corporation - Co-Founder, Executive VP, Secretary & Director

* Robert A. Inglis

First National Financial Corporation - CFO

* Stephen J. R. Smith

First National Financial Corporation - Co-Founder, Chairman, President & CEO

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Conference Call Participants

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* Geoffrey Kwan

RBC Capital Markets, LLC, Research Division - Analyst

* Graham Ryding

TD Securities Equity Research - Research Analyst of Financial Services

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Nikolaus Priebe

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the First National Financial Q1 2019 Analyst Conference. As a reminder, this call is being recorded on May 1, 2019, 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.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [2]

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Thank you, operator. 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 about 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.

First National remained profitable in the first quarter and increased mortgages under administration to a new record. However, tighter mortgage spreads and volatile interest rate environment and lower single-family originations produced results that were somewhat disappointing.

Starting with MUA, it grew to $107 billion, up 5% over last year and 3% in the quarter itself. This growth was realized despite a 15% drop in single-family originations.

This change was exaggerated by the fact that in last year's first quarter, we realized the benefit of higher fundings related to commitments made in late 2017, prior to the implementation of revised B-20 Guidelines. This year, there was no such pull-forward and instead what we saw was B-20 doing what it was intended to do, moderate borrowing activity.

Regionally, our offices in Vancouver and Calgary experienced the weakness in demand with originations down 35%. Certainly, the ongoing economic pressures in Alberta have added to the challenges caused by regulatory interventions and housing market.

In Ontario, single-family originations were down just 1%, but this was because Excalibur continued to produce positive results. Recall that this program did not contribute any volume in Q1 last year as it was launched in late April 2018.

In Montréal, single-family was down 5% from last year, which represents a bit of a pause for a market that has been one of the strongest in Canada for much of the year -- much of the past year.

On a national basis, single-family renewals were also lower than a year ago. First quarter originations are never a perfect indicator of market direction. And I believe that this will be true for 2019, although, what extent remains to be seen. Our view in looking at the competitive landscape is that First National is not an outlier in registering lower production in the quarter and as a consequence, we believe our market share has held firm.

Looking at our commercial segment, new originations amounted to $1.2 billion, so a good start to 2019. In fact, the same start as last year, which was a record period for the business. Meantime, Commercial renewals more than doubled to $386 million. Although First National is Canada's largest commercial mortgage lender, we are certainly not resting on our laurels. As for key profit measures, net income, EPS, and pre-fair market value EBITDA were below last year despite higher revenue.

This is largely due to tighter securitization margins and the accounting convention used for economic hedges prior to 2018.

In addition, these results were exacerbated by lower single-family volumes and a flat yield curve, which increased the cost in carrying mortgages on the balance sheet prior to securitization.

Lower earnings affects the common share payout ratio which was 102%, excluding losses on financial instruments, which we consider a timing difference in recognition to earnings. We often see a payout ratio pop-up in the first quarter before sending back.

I'll now ask Rob to provide details on our most recent performance before Moray comments on our outlook. Rob?

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Robert A. Inglis, First National Financial Corporation - CFO [3]

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Thanks, Stephen, and good morning, everyone. As a result of the higher MUA, and comparably higher interest rate environment, we experienced a 12% growth in revenue in Q1. Looking at the positives and negatives, we see that the Q1 mortgage servicing income was up 1% from last year, and this was a direct results of higher MUA. Meantime, Q1 placement fees increased 38%, which reflected the changing funding mix between the quarters. More specifically, the company placed about $1 billion of single-family volume with institutional investors in the quarter, 39% increase over last year with discount expense of securitization volumes.

Placement fees also benefited from the reintroduction of Excalibur. Mortgage investment income was up 7%, and this was due to higher interest rates paid to us on mortgages accumulated for securitization. These increases were partially offset by a 19% reduction in net interest revenue on securitized mortgages due to the impact of accounting rules the Company followed prior to the adoption of IFRS 9 related accounting for financial instruments, combined with weighted average mortgage spreads, these revenues were affected significantly.

To take these 2 factors in turn, you'll recall that prior to adopting hedge accounting in 2018, we recorded gains and losses on [financial instruments] in current earnings and earned tighter or wider securitization spreads in future periods. Both 2017 and '16, the company recorded very large gains as interest rates began to climb. The offset to these gains was lower expenses, securitization debt. Now if the securitization transactions is meant to be and performs, a lower net securitization margin is recorded. In a nutshell, we recorded large gains in 2016 and '17, which we told investors to ignore by calculating pre-fair market value EBITDA. But now we are experiencing the offsetting losses, which do not affect pre-fair market value of EBITDA. The company estimates that the impact of this accounting treatment, increases net interest on securitized mortgages in the first quarter by about $4 million year-over-year.

2018 also represented the tightest period for mortgage spreads in the past 12 years. Although spreads widened in the first quarter of 2009, for the most part, these mortgages will not be securitized until the second quarter.

In particular, spreads on floating-rate securitizations were unusually tight as 30-day SEDAR, which forms the base rate for the company's securitization interest expense, peaked by January 1.

The company's interest revenue on floating-rate mortgages is based on First National's prime lending rate was not changed since late October 2018. Accordingly, the spread between these 2 entities was about 20 basis points narrower to the start of the year than it has been in the past decade. This had a negative impact on securitization net interest margin, even though the spreads returned to normal levels at the beginning of March.

And moving on to gains on deferred placement fees, they were also lower by 31% due to lower volumes of multi-unit residential mortgages originated and sold to our institutional customers in spite of similar spreads and consistent per unit gains.

Although we adopted new hedging provisions, permitted under IFRS 9 last year, our revenue still includes gains and losses on financial instruments. Looking at this item, economic concerns that bond price is rapidly higher within the quarter, while we experienced losses of almost $61 million on our total short Canada bond and soft book, about $54 million of that amount relates to instrument, where we could apply hedge accounting. This left losses on account of short bonds of about $7 million, which directly impacted our earnings. These losses largely reflect the decrease in the value of short bonds used to mitigate interest-rate risks related to our single-family mortgage commitments. By comparison, in Q1 last year, interest rate environment was much less turbulent and as such, a loss of just $800,000 was recorded in that quarter.

Lastly, pre-fair market value EBITDA in Q1 was down 20% or $10.2 million compared to Q1 a year ago as a result of tighter securitization margins and the accounting provision used for economic hedges prior to 2018 at $0.38 per share. EPS on this basis was also lower by 21% or 30%. As Stephen said, it's still a disappointing quarter and one that reflected unusual market volatility.

Now here is Moray with our closing comments.

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Moray Tawse, First National Financial Corporation - Co-Founder, Executive VP, Secretary & Director [4]

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Thanks, Rob. Good morning, everyone. If you remember when I spoke during our first quarter call last year, I remember saying that quarter 1 did not turn out as we expected. That's because we were very surprised by the strength of last year's residential originations pretty well across the country.

At that time, we were not expecting growth because B-20 have just been implemented. In hindsight, what we experienced was a large surge of market activity from 2017 prior to the implementation of the B-20. Since the beginning of the year, we have faced the full force of B-20, which has reduced housing affordability and likely reduced the size of the market overall. As you heard, a rapid downward movement in interest rates also had an impact on our financial reserves for the quarter.

So what happens next? Moving into the second quarter, we actually feel pretty positive. Single-family mortgage commitments in March were ahead of 2018 levels by almost 10%. Meantime, mortgages with wider spreads, which were originated during the first quarter will be securitized in the second quarter. And the Prime BA spreads, which affects returns on floating-rate mortgage securitizations returned to normal levels.

Activity in the commercial segment, which was strong in the first quarter appears to be gaining momentum as interest rates have stabilized.

As Stephen said, the first quarter is never a great indicator of future market direction. And so instead of solely relying on actual performance from quarter 1 to develop our outlook, we also took an [accounting] to somewhat positive development. That said, I would caution you that despite these stable indicators, tighter securitization margins and the effects of pre-2018 fair value accounting conventions will impact our income for most of 2019.

Stepping back, we continue to forge strong relations with mortgage brokers and have had great success in diversifying our funding sources. And these factors will be instrumental in sustaining First National's market leadership going forward. I think it's important to remember we have a solid foundation from which to generate income and cash flow from our $31 billion portfolio of mortgages pledged under securitization and the $74 billion servicing portfolio we continue to focus on the value inherent in our significant single-family renewal book.

That concludes our prepared remarks. Now we'll be pleased to take your questions. Operator, please open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Nik Priebe with BMO Capital Markets.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [2]

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Just wanted to start with a question on the net interest margin of the securitization portfolio. Sounds from your commentary like at least one element of the margin pressure experienced in the quarter could have been attributed to the floating-rate components of the portfolio and the associated prime BA spreads, the compression there. Just have a 2-part question. One, what percentage of the securitized mortgage principal would be floating-rate assets? And secondly, if you'd be able to quantify at least, roughly what the impact on NIM of that dynamic would have been on a quarter-over-quarter basis?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [3]

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I think the impact on NIM was $1 million. And is it 6?

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Robert A. Inglis, First National Financial Corporation - CFO [4]

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Yes. I think it's around 20% of our total book perhaps. It's floating rates. I mean it's kind of a changing number all the time, but it's around 20%.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [5]

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Okay, that's helpful. And then just moving on then, just a high-level question, perhaps. I was wondering if you could give us a little bit of insights into the market dynamics that you're seeing in the single-family space in Western Canada. One, just how you would attribute some of that weakness? And how you might characterize competitive conditions in Western Canada for single-family residential mortgages whether you're seeing evidence of a greater pricing pressure as lenders try to retain market share there?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [6]

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I wouldn't -- we would say that when we see competitive pressures, we tend to see markets that tend to be national, all of the lenders tend to be national lenders. So if you tend to see pricing competitive pressures, it tends to be across the country. I think in our comments while the volumes were quite a bit lower and commitments were lower, commitments were up 10% in March. And I just ran the numbers this morning for the end of April and total commitments for the first 4 months in the single-family residential are up about 3% or 4% over a similar period last year.

So while -- I think those were pretty tough for commitments for the first January, February. I think it's a reflection of B-20, and that we're actually feeling fairly confident and positive for both the rest of the year. Some of the underlying macro conditions, I think, in general, are fairly good in the sense unemployment is still strong. We -- when you have that restriction, that really comes in ['18], but it starts to be '20, in the sense that it tends to come back as you tend to normalize, again, and people start to adjust. So we are feeling comfortable, we feel our competitive -- our interest rates are competitive this year. So I think we're fairly -- feeling fairly good about the rest of the year.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [7]

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Okay. And just to clarify that 3% to 4%, that would have been on the -- that would have been Canada-wide as opposed to just Western Canada that you were alluding to earlier?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [8]

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Yes, correct. Yes, that's Canada-wide.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [9]

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Okay. Maybe one last one for me before I requeue. You also talked about the contribution of the Excalibur product as well that helped stabilize volumes in Eastern Canada when compared to, say, a year-ago period. Just wondering if you could give us a bit of an update on what volumes on the [alt 8] product would have contributed towards total single-family originations in the quarter?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [10]

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I don't have that -- I'd have to take that off-line because I don't want to have -- I have a guess, but I think I don't to -- I don't remember looking at it specifically, but it's -- but if I had to guess, 2?

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Robert A. Inglis, First National Financial Corporation - CFO [11]

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That's [165] and...

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [12]

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Yes. It wasn't a big amount, 200 maybe?

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Robert A. Inglis, First National Financial Corporation - CFO [13]

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Yes, just under, maybe.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [14]

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Yes, under?

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Robert A. Inglis, First National Financial Corporation - CFO [15]

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Yes. 150-ish.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [16]

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150-ish.

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Nikolaus Priebe, BMO Capital Markets Equity Research - Analyst [17]

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For the first quarter? 150 for first quarter commitments for Excalibur?

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Robert A. Inglis, First National Financial Corporation - CFO [18]

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Yes, for funding.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [19]

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Well for funding it's -- okay, so fundings for the first quarter would be 150. I don't know what commitments would be. I mean, I can extrapolate that back and say it might be 300, but if you wish, we can get that number for you offline.

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Operator [20]

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Our next question comes from Geoff Kwan with RBC Capital Markets.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Just another question on the Excalibur side because you've got it in Ontario, you're talking about maybe bringing it to out Western Canada. What's the kind of the mindset and the thought process around when you look at doing that? Is it getting the institutional investor demand lined up? Is it making sure you've got the rollout the way that you want to do it? Or what market conditions are or other factors?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [22]

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So prior to last year when we launched it, we felt best to do it at the scale that was appropriate if we had to have the appropriate funding vehicles for that. And we were able to secure that last year, and we're continuing to do that. So I think the feeling for expanding into Western Canada would be to ensure that we have the appropriate liquidity to kick it up to the next scale. And I think there's a range of ways that you can fund that. Certainly, institutional funding would be the core, securitization, although I'm not entirely too sure that, that would work, but I think primarily it would be institutional funding. And certainly, with the tightening up of B-20 and the way that, that product is underwritten, it's showing very attractive [rate] of returns, given the risk profile for just underlying.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [23]

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And so, Stephen, just -- Sorry, go ahead.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [24]

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And the liquidity issue will be expanded beyond Ontario.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Okay. So the way you're responding, it sounds like institutional is the most likely. But it sounds like that, that's still kind of what's called in progress. In other words, assuming you do expand to Western Canada, it doesn't look like it's going to be something in the next couple of quarters, at least?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [26]

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Oh, I wouldn't say no. I wouldn't -- it's one of those things that when you're -- we would be talking to a number of institutions that it's an issue for them, determining how much they want to put in. And it's one of those things that we get in 2 week period (inaudible) it would be [3 quarters].

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Moray Tawse, First National Financial Corporation - Co-Founder, Executive VP, Secretary & Director [27]

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I think the key, Geoff, is that we believe we're going to be rolling it out across the country. All at once.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [28]

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I wouldn't want to give you a precise date.

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [29]

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Sure. No, no, totally understood. Just my other question, it's 2-part question. On the mortgage and loan investments on the balance sheet, it was up, I think, about $100 million quarter-over-quarter. Just wondering if there is any color on what types of loans you were putting on in the quarter?

And then on the nonperforming, the fair value went down from 25% to 20%, just wondering if it was just -- I guess, if there was anything specific that drove the quarter-over-quarter reduction in the fair value?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [30]

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Well, I guess, the increase is good prior to when we have large investments on length of products you get from point A to point B. That those deals came in, they're usually kind of like 3 or 4 monthers. The nonperforming stuff, one of that is a completed project that's paying off as we sell units in it. So it has paid off. I mean we got money back to our net book value. But the secondary project is a kind of a rezoning of an industrial area that is taking time and there's carry there. The carry is what were sort of costing us the rate in every quarter as we pay the first mortgage off, et cetera, well, the carry on that, we have to expense that. So those 2 arts make up...

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [31]

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Oaky. And then in terms of that quarter is, was it -- like what types of properties? Were they multifamily? Were they commercial on the quarter-on-quarter increase?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [32]

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On the regular book?

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Geoffrey Kwan, RBC Capital Markets, LLC, Research Division - Analyst [33]

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Yes. Well, kind of, in a sense what types of -- Yes, was the $100 million, like kind of what types of properties? Where is that? Was it Ontario or...

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Robert A. Inglis, First National Financial Corporation - CFO [34]

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There -- oh, on the -- sorry, you're talking about the $100 million mezz? It was all very, very short-term institutional grade credits that's probably only going to be on the books for 60 days or so. Yes, we have -- we do use our balance sheet to help very strong borrowers close until we get the CMHC certificates. So these were only loans, they're just bridging between the closing of the purchase and the CMHC certificates.

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Operator [35]

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Our next question comes from Graham Ryding with TD Securities.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [36]

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Maybe I could focus on the net interest income from your securitization portfolio. Just in regards to the sort of economic offset that you're experiencing now related to those hedging gains in previous years, why would the impact in Q1 '19 be $4 million more of a drag than Q1 '18? I'm just wondering why that wouldn't be a steady impact as opposed to fluctuations year-over-year?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [37]

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Yes. So Graham, it's an amalgam of sort of 5 or 6 or even 10 years before, so in 2014 or '15, we had large losses, they were amortizing. Those losses have been fully amortized now to some extent and the gains are taking over. That make sense?

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [38]

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That makes sense. So the -- I think in total, it's roughly around $6.3 million drag this quarter. And is the impact this year going to be much larger than the impact in 2018 in terms of like a drag on your net interest income? And if so, do you have -- are you in a position to estimate or quantify what that drag would be?

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Robert A. Inglis, First National Financial Corporation - CFO [39]

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It's going to be bigger this year. As I've said, the good impact from 2013, '14 is sort of going away. But I think looking at last year, I think Q1 was the lowest impact in 2018. So that would be more competitive between Q2 and Q2, although it will be bigger this year.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [40]

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$11 million was the impact last year, is that correct?

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Robert A. Inglis, First National Financial Corporation - CFO [41]

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Yes, that sounds familiar.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [42]

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Full year.

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Robert A. Inglis, First National Financial Corporation - CFO [43]

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For the whole year.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [44]

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Okay. But you don't really know exactly what's it's going to be this year in relation to last year?

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Robert A. Inglis, First National Financial Corporation - CFO [45]

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It will, maybe I think...

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [46]

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$20 million.

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Robert A. Inglis, First National Financial Corporation - CFO [47]

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$20 million or something sounds familiar to me? For the whole year, $21 million?

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [48]

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That's fairly material on the whole...

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Robert A. Inglis, First National Financial Corporation - CFO [49]

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But I mean it's almost like we recorded the gains before and now it's just -- and unfortunately for us, it doesn't go through that fair market value line in our income. It goes to core earnings. So it's almost like you adjust the adjusted number to get to the real number.

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Graham Ryding, TD Securities Equity Research - Research Analyst of Financial Services [50]

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Well, that was the next part of my question. I was just -- have you considered if you're adjusting these hedging gains or losses when you realize them up front and you're pulling them out of pre-fair market value EBITDA, have you considered adjusting them on the other end when they flow through your net interest income when they're this material?

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Robert A. Inglis, First National Financial Corporation - CFO [51]

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Yes, we're kind of talking about that a little bit. The difficulty is securities law, I think, or if you looking at that, saying, well, you're kind of going a little step too far there. Before it was here is the number on my income statements. We're adding [it back [to that number to get] -- now it's kind of, well, I'm guessing at the number because we don't really know what that number is. Just say we believe it's around $4 million because some of those 10-year gains are going out in 10 years. Some of them have petered out. It's more of a guessing game than like a real number. So that's -- but we'll think about that as a possibility to change the definition.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [52]

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You raised a good point, Graham, and we've certainly discussed that at the Board level is that -- How do you represent the proper performance of the company in a way that's material? But what we don't want to get too far away from GAAP. I mean, pre-fair market value number is not a GAAP number. And we, in many ways, manage that. And when we've had the gains and losses, I think, in previous years, it's probably been a fair representation. This is an example where it's not a fair representation, but you're probably getting into another non-GAAP number that we're going to represent. And as Rob said it, although we have a ballpark sense of where -- what that is, we don't have a precise accounting number.

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Operator [53]

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(Operator Instructions) Our next question comes from Jaeme Gloyn with National Bank Financial.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [54]

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My first question is around capitalization levels. And if I'm looking at the NHA-MBS outstanding today and the current book equity I have leveraged pretty close to that 50x level. I'm just wondering, is that going to suggest how we should see a lot more placement there this year? Or are there other strategies that you have thought about that might keep that from approaching or breaching that 50x level?

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [55]

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So I don't think we're going to see a change in our strategy with respect to our breakdown between securitization and placements. And I'm a little bit unclear about your comment about the 50x level in terms of reaching anything. We're certainly well within inside any of our requirements, regulatory requirements with respect to our securitization program. The last time I looked at it, we had excess -- certainly considerable excess capital in terms of the regulatory requirements required we need for securitization.

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Robert A. Inglis, First National Financial Corporation - CFO [56]

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I would think too, that, the public company has less capital than the issuing company at the MBS. They don't look at that company. So there is a different -- there's more capital in the issuing company than there is there.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [57]

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Okay, that's a fair point and maybe we will just dive into it offline a little bit deeper. The next question is just around the mortgage servicing up only about sort of 1%. Mortgages under administration of up 5% year-over-year, I'm just wondering if you can explain or give us a little more color as to moving parts and pricing around the book that would create that difference?

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Robert A. Inglis, First National Financial Corporation - CFO [58]

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Once that it goes in there, actually, is the fees we get from borrowers or things like NSF, discharge and et cetera. I think just generally those are lower because we have very little arrears, that's a good thing, so lower NSF fees, but also lowered discharge fees in the new environment under B-20. It's harder to move. So we're seeing less payouts, so less fees there. That's part of the component.

I think a lot of our growth, too, is with the commercial segment where there is a lower pricing, there always has been. So that mix is different. The single-family book is much the same as it was last year. The growth is very -- is lower. So that's usually a higher per unit servicing fee. So those 2 things have contributed to kind of a flatter revenue.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [59]

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Okay. So higher commercial mix and just lower lapse rates, I guess, on the single-family is driving that. Okay. Perfect.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [60]

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Yes. You have an interesting balance, Jaeme, in the sense that if you want to grow your book and if you have -- and you want a good credit environment. So if you have a good credit environment and the book is -- but more discharges, you don't get quite as many administration fees. But the flip side is a good credit environment and growing book lower than it had been.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [61]

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Okay, makes sense to me. I was going to shift to commercial sales, staff commissions and I just want to get a sense as to, I guess, how that's driven. Let's say, originations in commercial mortgages are kind of flat or where they performed this year, would we expect a similar commercial sales staff commission rate or component in the salaries and benefits next Q1? Or are the thresholds buffed up? Maybe a little color around how we should think about that.

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Robert A. Inglis, First National Financial Corporation - CFO [62]

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Well, it should be consistent year-over-year. I think, typically, at the end of the year we have very strong Q4 and some of the commissions expense sort of leaked into Q1 a little bit, unfortunately, for us. But yes, it's essentially just the same as it has ever been.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [63]

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Okay. So it's more around the strong Q4 than it is around the full-year 2018 performance?

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Robert A. Inglis, First National Financial Corporation - CFO [64]

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Yes.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [65]

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Okay, great. And the last one for me, I think we talked about this in the past, I just want to get a quick refresh. Looking at the debt-to-equity leverage that you report in the MD&A around 0.55, that's up from 0.36, I believe, if I've got the numbers right. Just a quick refresh on where you're comfortable, what sort of maximum level you think about as it relates to that leverage component?

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Moray Tawse, First National Financial Corporation - Co-Founder, Executive VP, Secretary & Director [66]

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Well, I'll give you a reply about where we're comfortable. We just think that probably less than 1:1 is probably fine, to be honest. That's the true leverage ratio that we publish. The leverage we get in mortgages in the warehouse is like an inventory -- I mean the real capital is against --

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [67]

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If I had a general view, I think the company is really relatively underleveraged, Jaeme, because if you -- the mortgages -- we have a warehouse line. I think it's a facility of about $1.2 billion. We would carry, say, $1 billion of mortgages at any one time. We tend to look at the debt of big mortgages we carry as cash because they're all for sale, they're liquid. [They go for] 30 days, and we sort of look at the net debt. So when we see -- when we look at our net debt, it's relative to our equity, hence we don't say what -- it tends to be well under 1:1. And if anything, we feel that actually, despite the headline and the pairing, we have quite a bit of leverage, most of those mortgages are all securitized and are pass-through. And we look at the real debt we have as being [net debt that are] cash and for that reason, it tends to be very, very low. But we don't have a policy. I don't think we're not even up at a level where we have to think where we will get our policy. Maybe we got up to 2, 3, 4, 5:1, you might think of that. But certainly not the levels we're talking about now.

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Operator [68]

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Mr. Smith, there are no questions, so back to you for closing remarks.

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Stephen J. R. Smith, First National Financial Corporation - Co-Founder, Chairman, President & CEO [69]

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Thanks, operator. That concludes today's event. We look forward to hosting our annual meeting on May 8 at the TSX gallery in Toronto beginning at 9 a.m. I know I can count on all the analysts being there. Thanks for taking part in our call, and have a good day.

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Operator [70]

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Thank you, ladies and gentlemen, this concludes today's teleconference. You may now disconnect.