First National Financial Corporation Reports Third Quarter 2019 Results, Increases Dividend, Declares Special Dividend

TORONTO, Oct. 29, 2019 /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 nine months ended September 30, 2019. 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") increased 5% to $110.6 billion from $105.0 billion a year ago
• Revenue increased 13% to $362.8 million from $321.8 million a year ago
• Net income was $60.6 million ($1.00 per share) compared to $52.0 million ($0.85 per common share) a year ago
• Pre-FMV EBITDA⁽¹⁾ was $80.8 million compared to $63.0 million a year ago

Dividend Increase and Special Dividend Declaration
Today, the Company's Board of Directors also announced an increase to the regular monthly dividend and the payment of a special dividend.

Effective with the dividend payable on December 16, 2019, the common share dividend will increase to $1.95 per common share on an annualized basis from its current annualized rate of $1.90. Additionally, a special common share dividend in the amount of $0.50 per share will be paid on December 16, 2019 to shareholders of record on November 29, 2019. This special payment reflects the Board's determination that over the past year, First National has generated excess capital and can continue to fund its near-term growth opportunities from operations. This marks the third consecutive year the Company has paid a special dividend and the 5th time in the past five years that it has increased its regular dividend payment.

Management Commentary
"Third quarter growth exceeded our expectations as the strong economy and lower mortgage rates combined to provide a solid foundation for residential market activity," said Stephen Smith, Chairman and Chief Executive Officer. "As a result of higher originations, wider mortgage spreads through most of the quarter and a shift in our funding mix to institutional placements, these fundamentals translated into record profitability. We are very pleased with this progress and the support it provides for the most recent increase in dividend payments. We are determined to maintain our focus on building strong relationships in all of our markets to ensure First National's long-term performance."

For the third quarter, new mortgage originations were $5.6 billion compared to $5.4 billion a year ago, reflecting: $4.2 billion of new single-family originations (compared to $3.9 billion a year ago) and $1.4 billion of commercial originations (compared to $1.5 billion a year ago). Total mortgage renewals were $2.0 billion compared to $2.1 billion a year ago reflecting: $1.7 billion of single-family renewals ($1.8 billion a year ago) and $343 million of commercial renewals ($295 million a year ago).

"The third quarter was punctuated by solid growth in single-family mortgage originations across the country," said Moray Tawse, Executive Vice President. "Every one of our offices reported growth, which is a change from recent quarters when we experienced some market weakness in Western Canada. Originations in Ontario were once again assisted by our Excalibur program, which continues to address a well-defined need in the mortgage market. Our commercial business also delivered a solid quarter; remaining on pace for a year of record production. The net result was sizeable growth in MUA, which is a key driver of First National's earnings."

	Quarter ended		Nine months ended
	September 30,	September 30,	September 30,	September 30,
	2019	2018	2019	2018
For the Period	($ 000's)
Revenue	362,833	321,835	984,385	869,471
Income before income taxes	82,778	71,078	175,120	183,367
Pre-FMV EBITDA ^(1)	80,772	62,990	189,519	169,406
At Period end
Total assets	37,249,143	35,597,827	37,249,143	35,597,827
Mortgages under administration	110,601,875	105,032,062	110,601,875	105,032,062

Note:

⁽¹⁾This non-IFRS measure adjusts income before income taxes by adding back expenses for depreciation of capital
assets, but it also eliminates the impact of changes in fair value by adding back losses on the valuation of financial
instruments (except those on mortgage investments) used in and deducting gains on the valuation of financial
instruments

Q3 2019 Summary

Between June 30, 2019 and September 30, 2019, MUA increased at an annualized rate of 4%. For the third quarter of 2019, single-family mortgage originations were 8% or $0.3 billion higher than a year ago. The Company attributes this growth to a strong economy, a lower interest-rate environment and First National's performance in the mortgage broker market. Regionally, all of the Company's branches experienced growth, led by Ontario and the Maritimes where originations were 10% above last year. Third quarter 2019 commercial segment originations of $1.4 billion were 6% or $0.1 billion lower than a year ago due to the timing of mortgage closings. Third quarter 2019 single family mortgage renewals of $1.7 billion were 6% or $0.1 billion lower than a year ago, while commercial mortgage renewals of $343 million were up 16% from $295 million a year ago.

The Company took advantage of demand for its mortgages and increased mortgages placed with institutional investors to $5.9 billion in 2019 from $4.3 billion in 2018. By placing mortgages, the Company accelerates the recognition of earnings. Despite this growth the Company still originated and renewed $1.6 billion of mortgages for its own securitization programs.

Third quarter 2019 revenue was $362.8 million compared to $321.8 million in the third quarter of 2018, a 13% increase reflecting:

• 66% year-over-year growth in placement fees, which stood at $69.8 million, reflecting a change in funding mix between the quarters (principally higher placement volume with institutional investors)
• 3% year-over-year growth in mortgage servicing income, which stood at $43.9 million, due to higher MUA
• 5% year-over-year growth in net interest revenue earned on securitized mortgages, which stood at $35.9 million, due to the impact of wider securitization spreads coupled with a shift in the securitized portfolio to NHA-MBS funded mortgages from ABCP-funded assets
• 20% year-over-year growth in gains on deferred placement fees, which stood at $3.6 million, due to both higher volumes of mortgages originated and wider spreads

Third quarter revenue growth was partially offset by a 3% year-over-year decrease in mortgage investment income, which stood at $22.5 million, due primarily to lower commercial segment mortgage and loan investments held in the period.

Q3 2019 Pre-FMV EBITDA⁽¹⁾ was $80.8 million, 28% higher than in Q3 2018. Growth reflected increased origination and the Company's decision to shift its funding from securitization to institutional placement.  By increasing funding through institutional placement by approximately $1.3 billion, First National accelerated the recognition of earnings into the current period. (The value of securitization is recognized in earnings over the term of the mortgages – typically five years.) The Company also benefited from wider mortgage spreads which have prevailed for most of 2019.

Q3 2019 net income was $60.6 million ($1.00 per share) compared to $52.0 million ($0.85 per common share) in Q3 2018.

Dividends
The Company declared common share dividends in the third quarter of 2019 of $28.5 million compared to $27.7 million in the third quarter of 2018, reflecting a dividend increase in December 2018 that brought the annualized rate to $1.90 per share (paid monthly) from $1.85 per share. The common share payout ratio in the third quarter was 48% compared to 54% a year ago. If gains and losses on financial instruments in the comparative quarters are excluded, the dividend payout ratio for Q3 2019 would have been 49% compared to 63% in Q3 2018.

The Company also paid $0.8 million of dividends on its preferred shares in the third quarter of 2019 compared to $0.7 million in the 2018 third quarter.

Shares Outstanding
At September 30, 2019 and October 29, 2019, the Corporation had 59,967,429 common shares, 2,887,147 Class A preference shares, Series 1, 1,112,853 Class A preference shares, Series 2, and 175,000 April 2020 senior unsecured notes outstanding.

Outlook
Management remains optimistic about the remainder of the year. Single-family mortgage commitments have continued to outpace commitments at the same time in 2018.  The commercial segment anticipates a strong fourth quarter based on its current pipeline and forecasts growth year over year in fourth quarter originations. Despite these favorable indications, the Company will continue to be faced with uncertain securitization margins as mortgage spreads have been volatile in the past 12 months and tightened toward quarter end. The effect of pre 2018 fair value accounting conventions will continue to have a negative impact on income for the remainder of 2019. 

The Company is confident that its strong relationships with mortgage brokers and diverse funding sources will continue to set First National apart from its competition. The Company will continue to generate income and cash flow from its $32 billion portfolio of mortgages pledged under securitization and $77 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

October 30, 2019 10:00 am ET

[phone] or [phone] www.firstnational.ca

A taped rebroadcast of the conference call will be available until November 6, 2019 at midnight ET. To access the rebroadcast, please dial [phone] or [phone] and enter passcode 3481438 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 over $110 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