First National Financial Corporation Reports First Quarter 2017 Results

TORONTO, April 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 first quarter ended March 31, 2017. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National").

First Quarter Summary

  • Mortgages under administration ("MUA") up 5% to $99.1 billion from $94.3 billion at March 31, 2016
  • Total new mortgage originations unchanged at $2.9 billion
  • Revenue up 1% to $232.2 million from $231.4 million in the 2016 first quarter
  • Net income $36.1 million ($0.58 per common share) compared to $37.3 million ($0.59 per common share) in the 2016 first quarter
  • Pre-FMV EBITDA(1) down 7% to $53.1 million from $56.8 million in the 2016 first quarter

Management Commentary

"The resilience of First National's business model and the advantage of its broad Canadian presence were evident in the first quarter of 2017," said Stephen Smith, Chairman and CEO. "Despite lower residential housing market activity in Western Canada, and intensified competition fueled by changes to mortgage rules, the Company came very close to equaling last year's first quarter performance as it captured new opportunities in residential and commercial markets and realized the economic advantages of scale. The results were satisfying given the changing market environment."

"While the first quarter is never a bellwether for residential lenders due to seasonality, it does hint at what may follow this year as tighter mortgage insurance rules, the tax regime in British Columbia and economic weakness in Alberta play out," said Moray Tawse, Executive Vice President. "We experienced a taste of all three in the first quarter and performed well. Total single family production including renewals increased 8% to $4.3 billion despite a 12% drop in single family originations in our Calgary and Vancouver operations and a 6% decline in Quebec. Offsetting these declines was a 9% increase in originations out of our Toronto office. Our commercial business got off to a great start with higher new originations and renewals which led to total commercial production growth of 22%. Once again, this demonstrates the advantage that accrues from having strong residential and commercial lending businesses."




Quarter ended


March 31,
2017

March 31,
2016

For the Period

($ 000's)

Revenue

232,238

231,395

Income  before income taxes

49,157

50,691

Pre-FMV EBITDA (1)

53,084

56,819

At Period end



Total assets

29,901,289

28,194,301

Mortgages under administration

99,061,532

94,275,930

(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.

 

Q1 2017 Summary

First National's MUA increased 5% to $99.1 billion at March 31, 2017 from $94.3 billion at March 31, 2016.  Comparing December 31, 2016 and March 31, 2017, MUA was lower by 1% reflecting typical housing and mortgage market seasonality, the impact of tighter mortgage rules on certain segments of the single family residential market and about $500 million of scheduled CMBS maturities.  

New single-family mortgage originations were $1.9 billion, down slightly from $2.0 billion in the first quarter of 2016, largely due to a 12% decline in volumes originated by First National's Calgary and Vancouver operations. These operations were affected by the ongoing slowdown in Alberta's oil industry and its effect on housing activity and by a tax on foreign ownership in British Columbia. All Canadian markets were generally affected by tighter mortgage rules introduced in early October, 2016, although First National's new single family originations in Ontario and the Maritimes climbed 9%, offsetting declines in the West and in Quebec. Single family mortgage renewals amounted to $1.1 billion, up from $929 million a year ago on more renewal opportunities.

Commercial segment originations increased 7% to $945 million from $886 million in the same period of 2016, while commercial mortgage renewals amounted to $332 million, up 50% from $162 million a year ago.  The Company originated and renewed for securitization purposes $1.7 billion of mortgages in the first quarter in order to take advantage of the Company's capital resources.

Revenue increased 1% to $232.2 million from $231.4 million in the first quarter of 2016 primarily due to a 2% increase in interest on securitized mortgages ($37.2 million compared to $36.6 million a year ago), a 6% increase in mortgage servicing income ($30.2 million compared to $28.5 million) and a 3% increase in gains on deferred placement fees ($3.7 million compared to $3.6 million). These increases were partially offset by a 24% decrease in placement fees ($26.6 million compared to $36.6 million a year ago) as a result of the Company's decision to allocate more of its originations to its securitization business. The securitized mortgage portfolio amounted to $26 billion compared to $25 billion at March 31, 2016.

Income before income taxes was $49.2 million, down from $50.7 million in the first quarter of 2016 largely due to lower placement fees earned because of lower volumes allocated to institutional funding partners. Also, the Company recorded a $2.7 million loss on financial instruments in the first quarter of 2017 compared to a loss of $3.7 million on financial instruments in the first quarter a year ago. While these losses reduced net income in both quarters, the gross spread on the related portfolio of securitized mortgages will be proportionately wider going forward.

The Company's Pre-FMV EBITDA(1) decreased 7% to $53.1 million from $56.8 million in the first quarter a year ago due to lower placement fees.

Dividends

The Board declared common share dividends in the first two months of 2017 based on an annualized rate of $1.70 per share. At its meeting in February, the Board increased the common share dividend by 9% to an annualized rate of $1.85 per share, commensurate with the dividend for the period March 1 to March 31, 2017 (paid April 17th, 2017). On an after-tax Pre-FMV basis, the dividend payout ratio was 71% compared to 61% in the first quarter of 2016.

The Company also paid $0.68 million of dividends on its preferred shares in the first quarter of 2017 compared to $1.16 million 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. The floating rate preferred shares paid 2.58%, for the three months ended March 31, 2017. For the period January 1, 2017 to March 31, 2017, the Series 1 dividend was $0.174375 per share while the Series 2 Share dividend was $0.158979.

Outlook

For the remainder of 2017, the Company anticipates lower seasonal origination in the residential segment as the full impact of new mortgage insurance rules announced in October 2016 and the higher cost of portfolio insurance are realized. The rules, which increase the qualifying rate for 5 year term fixed rate borrowers and reduce the scope of portfolio insurance, combined with regional slowing housing markets will likely reduce First National's origination volumes. Although the Company sees growth in the commercial segment and in single-family renewals, it expects that new single-family origination could be significantly reduced from the volumes recorded in 2016. Competitive pressures from other mortgage lenders originating insured mortgages may also negatively impact origination volumes and the cost of broker fees as lenders compete for market share in a shrinking market. Recent Ontario Government announcements of a foreign buyer's tax and rent controls may also affect origination but at this early stage, management is unable to assess the impact on First National.

In the face of these challenges in the residential market for new mortgage originations, the Company will endeavor to grow its commercial segment business, focus on the significant value of single family renewal opportunities and continue to generate income and cash flow from its $26 billion portfolio of mortgages pledged under securitization and $73 billion servicing portfolio.

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.

Conference Call and Webcast

April 26, 2017 10 am ET   

Participant Numbers

416-642-5209 or

866-564-7439

 

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 May 3, 2017. To access the rebroadcast, please dial 1 647-436-0148 or 888-203-1112 and enter passcode 9267734 followed by the number sign. The webcast is also archived at www.firstnational.ca for three months.

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

For further information: Robert Inglis, Chief Financial Officer, First National Financial Corporation, Tel: 416-593-1100, Email: rob.inglis@firstnational.ca; Ernie Stapleton, President, Fundamental, Tel: 905-648-9354, Email: ernie@fundamental.ca

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