First National Reports Fourth Quarter and Year-End 2011 Results

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Solid growth in mortgages under administration and revenue

TORONTO, Feb. 28, 2012 /CNW/ - First National Financial Corporation (TSX: FN) (the "Company" or "FNFC") today announced its financial results for the fourth quarter and year ended December 31, 2011. The Company derived all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National"). Despite a weaker than expected economy, the Company continued to increase its portfolio of mortgages under administration and boosted its origination in 2011 to near record volume.

First National Financial's 2011 Summary:

  • Mortgages under administration up 12% year-over-year to $59.6 billion

  • Mortgage originations increased by 12% to $11.8 billion from $10.5 billion

  • Revenue increased by 18% year-over-year from $394.3 million to $464.0 million

  • Income before income taxes decreased 19% to $96.8 million from $120.0 million

  • EBITDA* decreased 19% to $106.6 million from $131.2 million

  • Dividends declared to shareholders in 2011 increased 16% compared to tax equivalent distributions declared by the Company's predecessor, First National Income Fund ("the Fund") in 2010

"The Canadian real estate market remained strong in 2011 despite turmoil in the global economy.  First National was able to originate near record levels of new mortgages and grow its capital base by securitizing more than $4 billion of mortgages," said Stephen Smith, Chairman and President. "Revenue for the year increased 18%, reflecting the higher interest revenue on securitized mortgages.  Mortgages under administration increased 12% in the year. Mortgage originations not only drive placement and securitization revenues, but longer term values such as servicing fees, mortgage administration fees, renewal opportunities and growth in customer base for marketing initiatives.  As a result, we are well positioned to achieve future growth and continued success going forward."

"Management is pleased with its volume of originations for 2011," said Moray Tawse, Vice President, Mortgage Investments. "In 2012, we see origination volumes remaining at levels comparable or slightly lower than 2011 origination as market activity slows down.  With wider mortgage spreads on the Company's core products and the opportunity to pursue more direct securitization, we expect to increase cash flow and profitability in 2012."

                           
        Quarter ended     Year ended
        December 31,
2011
    December 31,
2010(2)
    December 31,
2011
    December 31,
2010(2)
For the Period         ($000s)
Revenue       118,121     116,011     464,020     394,259
Income before income taxes       24,287     33,029     96,783     119,957
EBITDA (1)       26,347     35,938     106,607     131,221
At Period end        
Total assets       11,927,270     8,403,993     11,927,270     8,403,993
Mortgages under administration       59,598,596     53,293,132     59,598,596     53,293,132

Note:
(1)     This non-IFRS measure adjusts income before income taxes by adding back expenses for amortization of intangible and capital assets.
(2)     December 2010 figures have been restated for the Conversion and transition to IFRS.

2011 Annual and Fourth Quarter Results
First National's mortgages under administration totalled $59.6 billion at December 31, 2011, up from $53.3 billion at December 31, 2010, an increase of 12.0% on an annualized basis; growth from September 30, 2011, when mortgages under administration were $58.0 billion was 2.8%, an annualized increase of 11.0%.

Total single-family originations increased by 9% in 2011 compared to last year. The multi-unit residential and commercial segment experienced an even higher rate of growth as volumes increased by 23% to $2.7 billion from $2.2 billion in 2010. The Company continued to leverage on its CMB seller status, securitizing over $1.1 billion of its mortgage origination directly in the Canada Mortgage Bonds program in the year.

Revenue for the year ended December 31, 2011 increased by 18% year-over-year to $464.0 million from $394.3 million. The increase reflects the increased interest revenue on securitized mortgages, particularly floating rate mortgages indexed to the prime rate, which increased by 16% from an average of 2.58% in 2010 to 3.00% in 2011.  Higher mortgage servicing revenue, placement fees and mortgage investment income offset the large negative change in gains and losses on financial instruments.

Due to volatile debt markets in the year which negatively affected the Company's interest rate hedges, income before income taxes in 2011 decreased by 19% from $120.0 million in 2010 to $96.8 million in 2011 and EBITDA for the year was $106.6 million, a decrease of 19% from $131.2 million in 2010. The Company's hedging program, while appropriate, accounted for $31.0 million of the net losses on financial instruments of $18.5 million. The losses pertain to instruments used for interest rate hedging purposes on mortgages pending securitization. From an economic perspective, the effect on the Company is neutral as the upfront losses incurred on interest rate hedges result in greater interest rate margins for the term of the related mortgages. Without the effect of all gains and losses on financial instruments, the Company's EBITDA increased by 1% in 2011 compared with 2010. This increase is the product of steady and growing income from the Company's securitized mortgage and servicing portfolios.

For the fourth quarter, revenue increased to $118.1 million from $116.0 million in 2010. Net income declined to $24.3 million from $33.0 million in the fourth quarter of 2010. EBITDA for the quarter decreased to $26.3 million from $35.9 million year over year. The decline was the result of the higher costs for directly securitizing a larger portion of its origination including some significant hedge losses.

Overall in 2011, First National took advantage of its origination and greater capital base by securitizing more than $4 billion in mortgages. Although most of the origination costs for these mortgages have been capitalized, the costs of internal underwriting, large hedge losses and significant fees paid to register the mortgages with the title custodian have all been expensed. The spread from this increased securitization activity will benefit the Company for the five- and 10-year terms of these transactions going forward

Determination of Adjusted Cash Flow and Payout Ratio
The Company paid dividends in 2011 based on an annual rate of $1.25 per share. This rate is after provision for corporate income taxes and can only be compared to the distributions of the Fund if the distributions are adjusted on the same tax basis. The $1.50 annual distribution rate of the Fund in 2010 represents approximately $1.08 on an after tax basis. Accordingly, the current dividend rate of $1.25 per share represents an increase of 16% from the prior year. Together with payments on account of income tax, the Company distributed $108.0 million in 2011 or $18.1 million more than in 2010, on a tax equivalent basis.

                       
  Quarter ended     Year ended
  December 31,
2011
    December 31,
2010
    December 31,
2011
    December 31,
2010
For the Period ($000s)
Cash provided by (used in) operating activities (124,025)     77,834     (456,358)     165,323
Add (deduct):                    
  Cash provided (used) related to pre - amalgamation shareholders
of FNFC
    412         29,746
  Change in mortgages accumulated for sale or securitization
between periods
129,256     (36,293)     532,802     (64,723)
Adjusted Cash Flow (1) 5,231     41,953     76,444     130,346
Less: cash dividends on preference shares  (1,163)         (3,154)    
Adjusted Cash Flow available for common shareholders 4,068     41,953     73,290     130,346
Adjusted Cash Flow per Common Share ($/Share) (1) 0.07     0.70     1.22     2.17
Dividends / Distributions declared on common shares / units 18,740     34,303     74,960     114,444
Dividends / Distributions declared per common share / unit ($/Share) / ($/unit) 0.31     0.57     1.25     1.91
Payout Ratio 443%     81%     102%     88%

For the year ended December 31, 2011, the payout ratio was 102%, up from 88% in the prior year. The increase was the result of the higher dividend declared in 2011 compared to the tax adjusted distributions made in 2010. If the Company had chosen to distribute the same after tax equivalent as in 2010, the payout ratio in 2011 would have been approximately 89%.

For the fourth quarter of 2011, the payout ratio was 443%. This high ratio reflects the large unrealized losses on account of the Company's hedging program incurred in the third quarter.  Although accrued for accounting purposes in the third quarter, these losses became cash losses in the fourth quarter when the Company closed out its hedge positions. Without these items, the payout ratio for the quarter would have been 132%. The increase in the ratio from the full year's ratio of 102% is due to the Company's increased investment in its prime ABCP program within the quarter.

Conference Call and Webcast

Conference Call and Webcast   February 29, 2012 11:00 a.m. ET
Participant Numbers 416-644-3415 or 1-877-974-0445  

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 will be available following the call until 12 a.m. (ET) on March 7, 2012. To access the rebroadcast, please dial 416-640-1917 or 1-877-289-8525 and enter passcode 4509362#.

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) 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 $59 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.

*Non-GAAP Measures
The Company has adopted IFRS as its accounting framework. IFRS are generally accepted accounting principles (GAAP) for Canadian publically 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 "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

For further information:

Rob Inglis
Chief Financial Officer
First National Financial Corporation
Tel: 416-593-1100
Email: rob.inglis@firstnational.ca

Steve Wallace
Vice President
Barnes Communications Inc.
Tel:  416-367-5000
Email: swallace@barnesir.com


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