First National Financial Corporation Reports Second Quarter 2017 Results

TORONTO, July 25, 2017 /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, 2017. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National").

Second Quarter Summary

• Mortgages under administration ("MUA") up year over year by 3% to a record $99.5 billion from $96.6 billion at June 30, 2016
• Total mortgage originations down 14% to $4.7 billion from $5.5 billion a year ago
• Revenue up 15% to $292.2 million from $253.9 million in the 2016 second quarter
• Net income $68.8 million ($1.13 per common share) compared to net income of $41.2 million ($0.67 per common share) in the 2016 second quarter
• Pre-FMV EBITDA⁽¹⁾ up 1% to $68.3 million compared to $68.2 million in the 2016 second quarter

Management Commentary
"First National achieved solid results in the second quarter as we continued to profit from record MUA," said Stephen Smith, Chairman and Chief Executive Officer. "Despite lower originations resulting from government policy interventions, core earnings were largely unaffected as we generated consistent results from both our securitization and servicing activities. Taking a broader view, the available insured residential mortgage market has contracted and competition has increased. As a result, we anticipate that single family originations for the balance of 2017 will be lower than in 2016 and that we will incur some higher costs of origination. But at the same time, we believe that by working together with our business partners and leveraging the strength and flexibility of our business model, we will continue to find success for our customers and shareholders as Canada's largest non-bank mortgage lender."

Single-family mortgage originations of $3.3 billion in the second quarter of 2017 were 21% lower than a year ago, while commercial mortgage originations were 7% higher at $1.5 billion.

"First National held its own in the second quarter despite new mortgage insurance rules, increases in the cost of portfolio insurance and regional government interventions including Ontario's foreign buyer's tax," said Moray Tawse, Executive Vice President. "These factors resulted in an average decline of about 30% in single family origination volumes in Vancouver, Calgary and Montreal and about a 5% drop in our Ontario and Maritime markets. Despite these pressures, we still funded $3.3 billion of single family mortgages and renewed $1.3 billion, which we consider strong under the circumstances. On the commercial side, First National continued to exhibit its strength as the largest lender in the market with a volume of $1.7 billion, including new originations and renewals. Overall, we're pleased with this performance which reflects First National's expanded presence in the prime mortgage market."

		Quarter ended		Six months ended
		June 30, 2017	June 30, 2016	June 30, 2017	June 30, 2016
For the Period		($000's)
	Revenue	292,200	253,915	524,438	485,310
	Income before income taxes	93,078	55,901	142,235	106,592
	Pre-FMV EBITDA ^(1)	68,275	68,187	121,359	125,006
At Period end
	Total assets	30,832,883	31,011,683	30,832,883	31,011,683
	Mortgages under administration	99,533,430	96,591,558	99,533,430	96,591,558

^(1)

This non-IFRS measure adjusts income before income taxes by adding back expenses for amortization of intangible and capital assets (generally described as EBITDA) but it also eliminates the impact of changes in fair value by adding back losses on the valuation of financial instruments and deducting gains on the valuation of financial instruments. See also the section "Non-GAAP Measures" in this news release for additional detail.

            

Q2 2017 Summary

First National's MUA increased 3% to $99.5 billion at June 30, 2017 from $96.6 billion at June 30, 2016.  Between March 31, 2017 and June 30, 2017, MUA grew at an annualized rate of 2%, as traditionally strong seasonal market activity was reduced due to the impact of new mortgage insurance rules introduced by the Department of Finance in late 2016.

Single-family mortgage originations decreased 21% to $3.3 billion from $4.1 billion in the second quarter of 2016, reflecting approximately 30% declines in origination activity in the Company's Vancouver, Calgary and Montreal operations and a decline of approximately 5% in the Company's Ontario and Maritime markets. Single family mortgage renewals amounted to $1.3 billion in the second quarter of 2017, the same as in the prior year. Commercial segment originations increased 7% to $1.5 billion from $1.4 billion in the same period of 2016, while commercial mortgage renewals amounted to $255 million compared to $296 million a year ago. Despite higher total production in the quarter, Commercial MUA at June 30, 2017 of $22.3 billion was only slightly higher than at December 31, 2016 as a result of the maturity of about $900 million of CMBS mortgages taken on in 2007. The Company originated and renewed for securitization purposes $1.9 billion of mortgages in the second quarter of 2017 compared to $2.8 billion a year ago.

Revenue increased 15% to $292.2 million from $253.9 million in the second quarter of 2016 largely due to gains on financial instruments this quarter compared to losses on financial instruments in the same period a year ago.  Excluding these gains and losses on financial instruments in the respective quarters, revenue increased 1% year over year. This performance reflected growth in mortgage servicing (up 6% to $35.7 million from $33.6 million) and growth in mortgage investment income (up 29% to $16.2 million from $12.6 million), which offset lower interest revenue – securitized mortgages (down 5% year over year to $34.4 million from $36.3 million), lower placement fees (down 1% to $52.9 million from $53.0 million) and lower gains on deferred placement fees (down 47% to $2.4 million from $4.5 million). Securitized mortgages amounted to $26.0 billion at June 30, 2017, up 4% from $24.9 billion a year ago.

Income before income taxes was $93.1 million, up 66% from $55.9 million in the second quarter of 2016. The year-over-year increase primarily reflected $26.0 million in gains on financial instruments in 2017 compared to a loss on financial instruments of $9.9 million in the second quarter a year ago. The net change in gains and losses between 2017 and 2016 increased income before income taxes by $35.9 million.

Pre-FMV EBITDA⁽¹⁾, which excludes the impact of gain and losses on financial instruments in both periods, increased 1% to $68.3 million from $68.2 million a year ago. The change reflected higher mortgage investment income and mortgage servicing income.

Dividends

The Board declared common share dividends in the second quarter of 2017 of $27.7 million or the annualized equivalent of $1.85 per common share, reflecting the previously announced increase enacted beginning in March 2017. On an after-tax Pre-FMV⁽¹⁾ basis, the dividend payout ratio for the second quarter of 2017 was 57% compared to 52% in the second quarter of 2016.

The Board also paid $0.68 million of dividends on its preferred shares in the second quarter of 2017 compared to $1.16 million in the same period a year ago. The decrease reflected the April 1, 2016 rate reset of its Class A Series 1 preference shares (fixed rate of 2.79%) and the creation of floating rate Class A Series 2 preference shares which paid 2.55% for the three months ended June 30, 2017.

Outlook

For the remainder of 2017, the Company anticipates continued lower seasonal origination in the residential segment as the full impact of new mortgage insurance rules announced in October 2016 has taken effect. Together with rising interest rates as announced by the Bank of Canada on July 12, 2017, higher costs of portfolio insurance, additional underwriting restrictions recently announced by OSFI and regional issues including foreign buyer's taxes, the Company believes single-family origination will continue to be lower by a similar proportion as experienced in the second quarter. Although the Company sees growth in single-family renewals, a rising rate environment and increased competition may impact origination in the commercial segment. In order to take advantage of the seasonally strong summer market, the Company introduced various temporary promotions that increased broker fee compensation for new single family originations. As the mortgages originated under these promotions fund, the higher costs will be capitalized against securitized mortgages or recorded as broker fees expense for mortgages placed with institutional investors.

Although the Company earned almost $26 million in gains on financial instruments in the second quarter of 2017, the offsetting economic impact will be felt in the Company's future earnings. Net securitization margins will be lower on new securitizations as the Company issues mortgage backed securities with coupons that will be higher than when the securitized mortgages were initially funded. The negative impact will be recognized over the five and ten-year terms of the securitization. To the extent that the funded mortgages are placed with institutional customers, as the Company did in the second quarter of 2017, the impact will be realized in lower per unit placement fees in current period earnings. Depending on how the Company elects to fund these mortgage assets, the negative impact associated with the large gain recorded in second quarter 2017 earnings could be spread over 5 or ten-year terms or it could be realized entirely within the 2017 fiscal year.       

In the face of these challenges the Company will continue to generate income and cash flow from its $26 billion portfolio of mortgages pledged under securitization and $73 billion servicing portfolio.

Conference Call and Webcast

July 26, 2017 10 am ET

Participant Numbers 416-640-5944 or 800-347-6311

The audio of the conference call will be webcast live and archived on First National's website at www.firstnational.ca. A question and answer session for analysts and institutional investors will be held following management's presentation.

A taped rebroadcast of the conference call will be available to listeners until 1pm ET on August 2, 2017. To access the rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter passcode 4927830 followed by the number sign. The webcast is also archived at www.firstnational.ca for three months.

Complete consolidated financial statements for the Company as well as management's discussion and analysis are available at www.sedar.com and at www.firstnational.ca.

About First National Financial Corporation

First National Financial Corporation (TSX: FN, TSX:FN.PR.A, TSX:FN.PR.B) is the parent company of First National Financial LP, a Canadian-based originator, underwriter and servicer of predominantly prime residential (single-family and multi-unit) and commercial mortgages. With almost $100 billion in mortgages under administration, First National is Canada's largest non-bank originator and underwriter of mortgages and is among the top three in market share in the mortgage broker distribution channel.  For more information, please visit www.firstnational.ca.

¹ Non-GAAP Measures
The Company uses IFRS as its accounting framework. IFRS are generally accepted accounting principles (GAAP) for Canadian publicly accountable enterprises for years beginning on or after January 1, 2011. The Company also refers to certain measures to assist in assessing financial performance. These "non-GAAP measures" such as "Pre-FMV EBITDA" and "After tax Pre-FMV Dividend Payout Ratio" should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with GAAP as an indicator of performance or as a measure of liquidity and cash flow. Non-GAAP measures do not have standard meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other issuers.

Forward-Looking Information
Certain information included in this news release may constitute forward-looking information within the meaning of securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will, "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding the future financial position, business strategy and strategic goals, product development activities, projected costs and capital expenditures, financial results, risk management strategies, hedging activities, geographic expansion, licensing plans, taxes and other plans and objectives of or involving the Company. Particularly, information regarding growth objectives, any future increase in mortgages under administration, future use of securitization vehicles, industry trends and future revenues is forward-looking information. Forward-looking information is based on certain factors and assumptions regarding, among other things, interest rate changes and responses to such changes, the demand for institutionally placed and securitized mortgages, the status of the applicable regulatory regime and the use of mortgage brokers for single family residential mortgages. This forward-looking information should not be read as providing guarantees of future performance or results, and will not necessarily be an accurate indication of whether or not, or the times by which, those results will be achieved. While management considers these assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward looking-information is subject to certain factors, including risks and uncertainties listed under ''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

Robert Inglis, Chief Financial Officer, First National Financial Corporation, Tel: [phone], Email: [email protected]; Ernie Stapleton, President, Fundamental, Tel: [phone], Email: [email protected]

Related Links

www.firstnational.ca