TORONTO, July 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
three and six months ended June 30,
2017. The Company derives 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 year over year by 3%
to a record $99.5 billion from
$96.6 billion at June 30, 2016
- Total mortgage originations down 14% to $4.7 billion from $5.5
billion a year ago
- Revenue up 15% to $292.2 million
from $253.9 million in the 2016
second quarter
- Net income $68.8 million
($1.13 per common share) compared to
net income of $41.2 million
($0.67 per common share) in the 2016
second quarter
- Pre-FMV EBITDA(1) up 1% to $68.3 million compared to $68.2 million in the 2016 second quarter
Management Commentary
"First National achieved solid
results in the second quarter as we continued to profit from record
MUA," said Stephen Smith, Chairman
and Chief Executive Officer. "Despite lower originations resulting
from government policy interventions, core earnings were largely
unaffected as we generated consistent results from both our
securitization and servicing activities. Taking a broader view, the
available insured residential mortgage market has contracted and
competition has increased. As a result, we anticipate that single
family originations for the balance of 2017 will be lower than in
2016 and that we will incur some higher costs of origination. But
at the same time, we believe that by working together with our
business partners and leveraging the strength and flexibility of
our business model, we will continue to find success for our
customers and shareholders as Canada's largest non-bank mortgage
lender."
Single-family mortgage originations of $3.3 billion in the second quarter of 2017 were
21% lower than a year ago, while commercial mortgage originations
were 7% higher at $1.5 billion.
"First National held its own in the second quarter despite new
mortgage insurance rules, increases in the cost of portfolio
insurance and regional government interventions including
Ontario's foreign buyer's tax,"
said Moray Tawse, Executive Vice President. "These factors resulted
in an average decline of about 30% in single family origination
volumes in Vancouver, Calgary and Montreal and about a 5% drop in our
Ontario and Maritime markets.
Despite these pressures, we still funded $3.3 billion of single family mortgages and
renewed $1.3 billion, which we
consider strong under the circumstances. On the commercial side,
First National continued to exhibit its strength as the largest
lender in the market with a volume of $1.7
billion, including new originations and renewals. Overall,
we're pleased with this performance which reflects First National's
expanded presence in the prime mortgage market."
|
Quarter
ended
|
Six months
ended
|
|
June 30,
2017
|
June 30,
2016
|
June 30,
2017
|
June 30,
2016
|
For the
Period
|
($000's)
|
|
Revenue
|
292,200
|
253,915
|
524,438
|
485,310
|
|
Income before income
taxes
|
93,078
|
55,901
|
142,235
|
106,592
|
|
Pre-FMV EBITDA
(1)
|
68,275
|
68,187
|
121,359
|
125,006
|
At Period
end
|
|
|
Total
assets
|
30,832,883
|
31,011,683
|
30,832,883
|
31,011,683
|
|
Mortgages under
administration
|
99,533,430
|
96,591,558
|
99,533,430
|
96,591,558
|
(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.
|
Q2 2017 Summary
First National's MUA increased 3% to $99.5 billion at June 30,
2017 from $96.6 billion at
June 30, 2016. Between
March 31, 2017 and June 30, 2017, MUA grew at an annualized rate of
2%, as traditionally strong seasonal market activity was reduced
due to the impact of new mortgage insurance rules introduced by the
Department of Finance in late 2016.
Single-family mortgage originations decreased 21% to
$3.3 billion from $4.1 billion in the second quarter of 2016,
reflecting approximately 30% declines in origination activity in
the Company's Vancouver,
Calgary and Montreal operations and a decline of
approximately 5% in the Company's Ontario and Maritime markets. Single family
mortgage renewals amounted to $1.3
billion in the second quarter of 2017, the same as in the
prior year. Commercial segment originations increased 7% to
$1.5 billion from $1.4 billion in the same period of 2016, while
commercial mortgage renewals amounted to $255 million compared to $296 million a year ago. Despite higher total
production in the quarter, Commercial MUA at June 30, 2017 of $22.3
billion was only slightly higher than at December 31, 2016 as a result of the maturity of
about $900 million of CMBS mortgages
taken on in 2007. The Company originated and renewed for
securitization purposes $1.9 billion
of mortgages in the second quarter of 2017 compared to $2.8 billion a year ago.
Revenue increased 15% to $292.2
million from $253.9 million in
the second quarter of 2016 largely due to gains on financial
instruments this quarter compared to losses on financial
instruments in the same period a year ago. Excluding these
gains and losses on financial instruments in the respective
quarters, revenue increased 1% year over year. This performance
reflected growth in mortgage servicing (up 6% to $35.7 million from $33.6
million) and growth in mortgage investment income (up 29% to
$16.2 million from $12.6 million), which offset lower interest
revenue – securitized mortgages (down 5% year over year to
$34.4 million from $36.3 million), lower placement fees (down 1% to
$52.9 million from $53.0 million) and lower gains on deferred
placement fees (down 47% to $2.4
million from $4.5 million).
Securitized mortgages amounted to $26.0
billion at June 30, 2017, up
4% from $24.9 billion a year ago.
Income before income taxes was $93.1
million, up 66% from $55.9
million in the second quarter of 2016. The year-over-year
increase primarily reflected $26.0
million in gains on financial instruments in 2017 compared
to a loss on financial instruments of $9.9
million in the second quarter a year ago. The net change in
gains and losses between 2017 and 2016 increased income before
income taxes by $35.9 million.
Pre-FMV EBITDA(1), which excludes the impact of gain
and losses on financial instruments in both periods, increased 1%
to $68.3 million from $68.2 million a year ago. The change reflected
higher mortgage investment income and mortgage servicing
income.
Dividends
The Board declared common share dividends in the second quarter
of 2017 of $27.7 million or the
annualized equivalent of $1.85 per
common share, reflecting the previously announced increase enacted
beginning in March 2017. On an
after-tax Pre-FMV(1) basis, the dividend payout ratio
for the second quarter of 2017 was 57% compared to 52% in the
second quarter of 2016.
The Board also paid $0.68 million
of dividends on its preferred shares in the second quarter of 2017
compared to $1.16 million in the same
period 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 which paid 2.55%
for the three months ended June 30,
2017.
Outlook
For the remainder of 2017, the Company anticipates continued
lower seasonal origination in the residential segment as the full
impact of new mortgage insurance rules announced in October 2016 has taken effect. Together with
rising interest rates as announced by the Bank of Canada on July 12,
2017, higher costs of portfolio insurance, additional
underwriting restrictions recently announced by OSFI and regional
issues including foreign buyer's taxes, the Company believes
single-family origination will continue to be lower by a similar
proportion as experienced in the second quarter. Although the
Company sees growth in single-family renewals, a rising rate
environment and increased competition may impact origination in the
commercial segment. In order to take advantage of the seasonally
strong summer market, the Company introduced various temporary
promotions that increased broker fee compensation for new single
family originations. As the mortgages originated under these
promotions fund, the higher costs will be capitalized against
securitized mortgages or recorded as broker fees expense for
mortgages placed with institutional investors.
Although the Company earned almost $26
million in gains on financial instruments in the second
quarter of 2017, the offsetting economic impact will be felt in the
Company's future earnings. Net securitization margins will be lower
on new securitizations as the Company issues mortgage backed
securities with coupons that will be higher than when the
securitized mortgages were initially funded. The negative impact
will be recognized over the five and ten-year terms of the
securitization. To the extent that the funded mortgages are placed
with institutional customers, as the Company did in the second
quarter of 2017, the impact will be realized in lower per unit
placement fees in current period earnings. Depending on how the
Company elects to fund these mortgage assets, the negative impact
associated with the large gain recorded in second quarter 2017
earnings could be spread over 5 or ten-year terms or it could be
realized entirely within the 2017 fiscal
year.
In the face of these challenges the Company will continue to
generate income and cash flow from its $26
billion portfolio of mortgages pledged under securitization
and $73 billion servicing
portfolio.
Conference Call and Webcast
July 26, 2017 10 am
ET
|
Participant
Numbers
416-640-5944 or
800-347-6311
|
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
August 2, 2017. To access the
rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter
passcode 4927830 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 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