First National Financial Corporation Reports Third Quarter 2014 Results

TORONTO, Oct. 28, 2014 /CNW/ - First National Financial Corporation (TSX: FN, TSX: FN.PR.A) (the "Company" or "FNFC") today announced its financial results for the third quarter ended September 30, 2014. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National").

Third Quarter Summary

• Mortgages under administration ("MUA") $83.2 billion at September 30, 2014 up 12% from $74.0 billion a year earlier
• New mortgage originations $5.0 billion, up 21% from $4.1 billion in the third quarter of 2013
• Revenue $230.6 million, 15% higher than $200.5 million a year ago
• Net income $35.3 million ($0.56 cents per common share) compared to $39.4 million ($0.63 per common share) a year ago
• Income before income taxes $47.6 million compared to $53.0 million
• Pre-FMV EBITDA¹ $50.1 million compared to $56.1 million

"In the third quarter, First National once again demonstrated the advantage of its growth through service approach and the value of its broad partnerships as it captured a significant share of broker-originated mortgage business in Canada," said Stephen Smith, Chairman, President and CEO. "As expected, the market itself was seasonally strong and afforded the opportunity to grow MUA at an annualized rate of 16%. Profitability also remained solid even though the competition for mortgages increased and net interest margins tightened.  In total, this was a positive quarter that reflects well on the execution of our core strategies."

"New mortgage originations were strong in the third quarter, up 21% or $800 million in single family and 20% or $151 million in commercial over last year on account of real estate demand stimulated by the low-interest rate environment and an increase in First National's share in the mortgage broker market," said Moray Tawse, Executive Vice President. "We are particularly pleased to note the pace of growth in our commercial business. When combined with mortgage renewals, total production in commercial surpassed $1.2 billion in the quarter, 27% higher than last year. With record MUA at quarter end, including a $21 billion portfolio of securitized mortgages, we have a healthy foundation for future performance."

	Quarter ended		Nine months ended
	September 30,  2014	September 30,  2013	September 30, 2014	September 30, 2013
For the Period	($ 000's)
Revenue	230,552	200,522	604,853	575,580
Income before income taxes	47,621	53,009	117,099	176,190
Pre-FMV EBITDA ^(1)	50,121	56,124	139,901	144,181
At Period end
Total assets	25,077,361	19,930,780	25,077,361	19,930,780
Mortgages under administration	83,190,530	74,042,024	83,190,530	74,042,024

⁽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.

Q3 2014 Results

First National's MUA grew to $83.2 billion at September 30, 2014 from $74.0 billion at September 30, 2013, a 12% increase.  Between June 30, 2014 and September 30, 2014, MUA grew approximately 4% from $79.9 billion, an annualized increase of 16%.

Total single-family mortgage originations grew 21% to $4.1 billion from $3.4 billion in the third 2013 quarter. Commercial segment originations increased 20% to $911 million from $760 million in the same period of 2013. Overall origination was up approximately 21% year over year. The Company originated and renewed for securitization purposes $2.4 billion of mortgages in the third quarter.

Third quarter revenue increased 15% to $230.6 million from $200.5 million a year ago due to growth in interest revenue from a larger pool of securitized mortgages. Securitized mortgages amounted to $21.1 billion at September 30, 2014, up 28% from $16.5 billion a year ago.

Income before income taxes in the quarter decreased 10% to $47.6 million from $53.0 million in the third quarter of 2013 despite higher revenue. The change reflected a tightening in net interest margin between interest revenue and expenses on securitization as well as lower per unit placement fees. Net interest revenue increased 4% year over year in the third quarter.

Without the impact of gains and losses on financial instruments, which can be volatile, the Company's Pre-FMV EBITDA decreased by 11% to $50.1 million from $56.1 million a year ago. This change reflected lower net interest margin, lower per unit placement fees and Company's decision to securitize more of its originations. This strategy will create future income from net interest margin, at the expense of current net placement and mortgage servicing fees. 

Dividend Ratio

The Board declared common share dividends in the third quarter of 2014 based on the current rate of $1.50 per share. For the quarter ended September 30, 2014, the ratio of dividends paid to earnings available to common shareholders was 65%, which is within the range contemplated by the Company in its dividend policy.  In the third quarter a year ago, the payout ratio of 54% reflected  higher earnings resulting from wider net interest on securitization and a lower common share dividend. The results of both quarters were affected by changes in the value of financial instruments used for hedging purposes; however such losses were not significant in either quarter.

Outlook

Management is pleased with the results of the third quarter of 2014 particularly the very strong origination volumes realized as the Company took advantage of strong seasonality. Looking ahead, the Company anticipates continuing strength through the fourth quarter with seasonally strong origination as First National solidifies its leadership in the mortgage broker distribution channel. During the fourth quarter of 2014, the Company will begin to incur some training, recruiting and other start-up costs in conjunction with the mortgage underwriting and fulfillment processing services agreement it announced on July 16, 2014. Although operations from this agreement will not commence until the January 2015 launch, management is excited about the long-term potential of this business opportunity which leverages the Company's expertise in underwriting mortgages and its industry-leading MERLIN technology. 

The Company anticipates the low interest rate environment will continue to keep mortgage affordability at favourable levels. By realizing on the significant renewal opportunities available in upcoming quarters and managing its partnerships with institutional customers, the Company will continue to focus on sustainable profitability. Despite conservative new origination targets, management expects to continue to capitalize on mortgage renewals and to generate cash flow from its $21 billion portfolio of mortgages pledged under securitization in order to maximize the Company's financial performance. 

Conference Call and Webcast

October 29, 2014 10 a.m. ET

Participant Numbers 416-849-1847 866-530-1554

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 1 p.m. on November 5, 2014. To access the rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter passcode 6090692 followed 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) 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 over $83 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", "Adjusted Cash Flow," and "Adjusted Cash Flow per Share" 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]