First National Financial Corporation reports second quarter 2013 results

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TORONTO, July 30, 2013 /CNW/ - First National Financial Corporation (TSX: FN) (the "Company" or "FNFC") today announced its financial results for the second quarter ended June 30, 2013. The Company derived 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 12% year over year to $71.2 billion
  
  
• Mortgage originations lower by 6% to $4.2 billion from $4.4 billion
  
  
• Revenue up 46% to $229.8 million from $157.0 million
  
  
• Net income up 275% to $67.8 million ($1.10 per common share) from $18.1 million ($0.28 per common share)
  
  
• Income before income taxes up 265% to $91.9 million from $25.5 million
  
  
• Pre-FMV EBITDA* up 29% to $51.2 million from $39.6 million

"First National continued to profitably build both its mortgages under administration and mortgages pledged under securitization during the first half of 2013," said Stephen Smith, Chairman and President. "In fact, MUA set new records in each of the first two quarters of 2013 and was up a healthy 4% or 16% annualized since March 31^st. We take this as a positive sign of our strength in the Canadian housing market."

"On the basis of originations, First National continued to enjoy the benefits of our broad Canadian market presence and standing with mortgage brokers," said Moray Tawse, Vice President, Mortgage Investments. "This allowed us to keep single family originations at a healthy $3.5 billion level in the quarter despite government measures that have moderated housing activity. While single family originations were lower than a year ago by 9%, we noted a marked improvement over the start of the year which reflects signs of growing consumer confidence and a soft-landing scenario for real estate. We're also pleased to note our commercial segment's steady results with originations up 7% year over year to $677 million."

First National marked its seventh anniversary as a public company in June 2013. During this seven-year period, the Company has paid $577 million in distributions/dividends to shareholders, representing a pre-tax return of 96% on the IPO price of $10. Including capital appreciation, the total return to an original shareholder has been over 150%.

	Quarter ended		Six months ended
	June 30,    2013	June 30,    2012	June 30,    2013	June 30,    2012
For the Period	($ 000's)
Revenue	229,830	156,983	375,058	290,948
Income before income taxes	91,945	25,499	123,181	61,687
Pre-FMV EBITDA ^(1)	51,193	39,610	88,057	70,837
At Period end
Total assets	18,793,683	13,682,980	18,793,683	13,682,980
Mortgages under administration	71,228,677	63,676,028	71,228,677	63,676,028

(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.

Q2 2013 Results

First National's MUA grew to $71.2 billion at June 30, 2013 from $63.7 billion at June 30, 2012, an increase of 12%.  Between March 31, 2013 and June 30, 2013, MUA grew approximately 4% from $68.5 billion, for an annualized increase of 16%.

Total single-family mortgage originations of $3.5 billion were 9% lower than the $3.8 billion originated in the second 2012 quarter. Commercial segment originations increased 7% to $677 million from $631 million in the same period of 2012. Overall origination was down 6% year over year. Of the $4.2 billion of originations in the quarter, $1.3 billion was originated for securitization purposes.

Second quarter revenue increased 46% to $229.8 million from $157.0 million in 2012 as a result of growth in the business, a large gain on financial instruments (representing 35% of the year over year increase) and an $18 million or 11% increase in interest revenue from securitized mortgages.

Income before income taxes in the quarter increased 260% to $91.9 million from $25.5 million in the second quarter of 2012. Of this $66.7 million improvement, $54.8 million was due to positive changes in gains and losses on financial instruments. Rising interest rate yields in the bond market positively affected the fair value of the Company's interest rate hedges.

Without the impact of gains and losses on financial instruments, which have been volatile, the Company's Pre-FMV EBITDA increased by 29% to $51.2 million from $39.6 million a year ago. This increase is due to the steady growth of the Company's core business, including increased net margin on securitized mortgages and higher mortgage investment income.

Determination of Adjusted Cash Flow and Payout Ratio

The Board declared dividends in the second quarter of 2013 based on an average annual rate of $1.40 per share. For the quarter ended June 30, 2013, the payout ratio was 50% the same as in the second quarter of 2012 despite a 12% year-over-year increase in dividends paid.

Determination of Adjusted Cash Flow and Payout Ratio

	Quarter ended		Six months ended
	June 30,    2013	June 30,    2012	June 30,    2013	June 30,    2012
For the Period	($ 000's)
Cash provided by (used in) operating
activities	(353,329)	101,965	(544,832)	229,593
Add (deduct):
Change in mortgages accumulated for
sale or securitization between periods	396,905	(63,692)	604,307	(172,153)
Adjusted Cash Flow ^(1)	43,576	38,273	59,475	57,440
Less: cash dividends on preference shares	(1,162)	(1,162)	(2,325)	(2,325)
Adjusted Cash Flow available for common shareholders	42,414	37,111	57,150	55,115
Adjusted Cash Flow per Common Share ($/share) ^(1)	0.70	0.62	0.95	0.92
Dividends declared on Common Shares	20,989	18,740	40,978	37,480
Dividends declared per Common Share ($/share)	0.35	0.31	0.68	0.62
Payout Ratio	50%	50%	72%	67%

Note:
(1)	These non-IFRS measures adjust cash provided by (used in) operating activities by accounting for changes between periods in mortgages accumulated for sale or securitization and mortgage securitization activity.

The 2013 second quarter payout ratio was indicative of strong business performance as the increased pre-FMV EBITDA was also reflected in cash flow. Although the Company recorded large gains on account of financial instruments in the quarter, virtually all of these gains were unrealized and had no impact on cash generated by the Company. First National also continued to increase its securitization activities, primarily through the funding of $1.7 billion of mortgages through National Housing Act-Mortgage Backed Securities ("NHA-MBS") programs. For such transactions, the Company paid various costs upfront for the mortgages which it securitized, including brokerage, CMHC, CMB, swap counterparty and syndication fees. These costs decreased operating cash flow by approximately $7.4 million in the quarter. Given the degree of this investment, the Company is pleased with the six months to date payout ratio of 72%.

Outlook

Management considers the second quarter of 2013 to have been very successful. Despite marginally lower origination volumes in the residential segment, the Company was able to maintain its level of securitization activity by taking advantage of its renewal opportunities and demand from the capital markets. For the remainder of 2013, the Company anticipates the low interest rate environment to continue with moderated, but still healthy, mortgage spreads. Despite lower origination targets, management expects to continue to capitalize on higher volumes of mortgage renewals and to generate cash flow from its $15 billion portfolio of mortgages pledged under securitization in order to maximize the Company's financial performance.

Conference Call and Webcast

July 31, 2013 10 a.m. ET

Participant Numbers                                                     416-644-3417 877-974-0446

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 to listeners until 12 a.m. on August 7, 2013. To access the rebroadcast, please dial 416-640-1917 or 877-289-8525 and enter passcode 4628905 followed by the number sign.

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 more than $71 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 uses 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 "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
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Email: [email protected] 

Ernie Stapleton
President
Fundamental Creative Inc.
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