TORONTO, Feb. 27, 2018 /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 12 months ended December 31,
2017. The Company derives virtually all of its earnings from
its wholly-owned subsidiary, First National Financial LP ("FNFLP"
or "First National").
2017 Summary
- Mortgages under administration ("MUA") up 2% to $101.6 billion compared to $99.4 billion at December
31, 2016
- New mortgage originations down 2% to $16.9 billion compared to $17.2 billion in 2016
- Revenue up 3% to $1.08 billion
compared to $1.05 billion in
2016
- Net income $209.7 million
($3.42 per common share) compared to
$201.8 million ($3.28 per common share) in 2016
- Pre-FMV EBITDA(1) down 8% to $234.3 million compared to $253.5 million in 2016
Fourth Quarter Summary
- MUA increased at an annualized rate of 6% during the fourth
quarter of 2017
- New mortgage originations increased 7% to $4.4 billion compared to $4.1 billion a year ago
- Revenue 7% lower at $270.0
million compared to $290.8
million a year ago
- Net income $45.9 million
($0.75 per common share) compared to
$71.8 million ($1.18 per common share) a year ago
- Pre-FMV EBITDA(1) unchanged from a year ago at
$61.1 million
Management Commentary
"First National's efficient
business model and diversified position as Canada's largest non-bank mortgage lender and
largest commercial mortgage lender delivered strong shareholder
returns in 2017," said Stephen
Smith, Chairman and Chief Executive Officer. "After-tax
Pre-Fair Market Value return on shareholders' equity was 38%, while
the Company paid a record $184.4
million to common shareholders to bring total dividends and
distributions to almost $1.1 billion
since our initial public offering in 2006. In a year punctuated by
legislative interventions in the housing market, these results
reflect well on the Company's structural and competitive advantages
and on our employees who responded creatively and diligently to the
needs of borrowers, their mortgage advisors and funding partners.
In a changing marketplace, the ability to expertly provide a full
range of residential and commercial mortgage solutions for all our
customers will serve us well in 2018."
For the year, total originations together with renewals amounted
to $23.2 billion, up 2% from
$22.8 billion in 2016 as a 10%
decline in single family originations was more than offset by: 13%
growth in single-family residential renewals; 21% growth in
commercial originations; and, 16% growth in commercial
renewals.
"The single-family team more than held its own in the face of
greater competition within a market made smaller by new mortgage
insurance rules," said Moray Tawse, Executive Vice President.
"While new originations were lower than in 2016, single family
executed extremely well on available opportunities and our focus on
service paid off with higher renewals. On the commercial side, the
team did an excellent job converting strong demand for conventional
and CMHC financing into new business across multiple asset classes
and continued to achieve success with its advisory approach to
serving borrowers. We're very pleased with these results as they
validate First National's service-oriented strategies."
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|
|
|
Quarter
ended
|
12 months
ended
|
|
Dec.
31,
2017
|
Dec.
31,
2016
|
Dec.
31,
2017
|
Dec.
31,
2016
|
For the
Period
|
($000's)
|
|
Revenue
|
270,015
|
290,754
|
1,078,768
|
1,049,818
|
|
Income before income
taxes
|
63,158
|
97,697
|
285,402
|
274,129
|
|
Pre-FMV EBITDA
(1)
|
61,093
|
61,064
|
234,278
|
253,539
|
At Period
end
|
|
|
Total
assets
|
32,776,278
|
30,394,465
|
32,776,278
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30,394,465
|
|
Mortgages under
administration
|
101,589,153
|
99,391,490
|
101,589,153
|
99,391,490
|
(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.
|
Q4 2017 Summary and Annual 2017 Review
First National's MUA increased 2% to $101.6 billion from $99.4
billion at December 31, 2016
despite the maturity of $1.0 billion
of CMBS mortgages during 2017 and lower new mortgage originations.
At year-end 2017, single-family MUA was $77.4 billion while commercial MUA was
$24.2 billion, compared to
$77.1 billion and $22.2 billion, respectively, a year ago. Between
September 30, 2017 and December 31, 2017, MUA increased at an annualized
rate of 6%, on the strength of growth in commercial MUA.
For the fourth quarter, single-family mortgage originations
increased 4% to $2.8 billion from
$2.7 billion, despite regulatory
changes that reduced market demand. Single family mortgage renewals
were $1.1 billion in the fourth
quarter of 2017, unchanged from a year ago. Fourth quarter 2017
commercial segment originations increased 14% to $1.6 billion from $1.4
billion in the same period of 2016, while commercial
mortgage renewals amounted to $257
million compared to $349
million a year ago. The Company originated and renewed for
securitization purposes $2.4 billion
of mortgages in the fourth quarter of 2017 compared to $1.5 billion a year ago.
For the 12 months ended December 31,
2017, single-family mortgage originations of $11.1 billion were 10% lower than in 2016
($12.4 billion), reflecting
regulatory changes that reduced the size of the residential market,
including: new mortgage insurance rules announced in October 2016; increases in the cost of portfolio
insurance; and, regional measures such as new foreign buyers'
taxes. Single family mortgage renewals were $5.2 billion in 2017, up 13% from $4.6 billion in 2016. Commercial segment
originations increased 20% to $5.8
billion from $4.8 billion in
2016, while commercial mortgage renewals amounted to $1.1 billion compared to $1.0 billion a year ago. The Company originated
and renewed for securitization purposes $8.2
billion of mortgages in 2017 compared to $7.7 billion in 2016.
Fourth quarter 2017 revenue was $270.0
million compared to $290.7
million in the fourth quarter of 2016, a 7% decline
reflecting larger gains on financial instruments recorded in the
2016 quarter. Excluding gains and losses on financial
instruments in the respective quarters, revenue increased by 5%
year over year. This growth was largely the result of rising
interest rates which had a favorable impact on interest on
securitized mortgages and mortgage investment income. This increase
offset lower placement fee revenues. Annual 2017 revenue was
$1.08 billion compared to
$1.05 billion in 2016, a 3% increase
resulting from rising interest rates which positively affected
interest revenue earned on securitized mortgages ($146.8 million compared to $144.3 million in 2016), mortgage servicing
income ($140.8 million compared to
$131.4 million), mortgage investment
income ($68.3 million compared to
$57.5 million) and gains on financial
instruments ($56.2 million compared
to $27.7 million). Placement fees
($144.6 million compared to
$176.9 million in 2016) were lower
due to lower residential origination volume for institutional
customers, while gains on deferred placement fees ($10.0 million compared to $16.3 million in 2016) reflected tighter spreads
and lower volumes of multi-unit residential mortgages originated
and sold to institutional NHA-MBS issuers.
Securitized mortgages amounted to $27.6
billion at December 31, 2017
compared to $26.1 billion at
December 31, 2016, a 6% increase.
Fourth quarter 2017 income before income taxes was $63.2 million compared to $97.7 million in the fourth quarter of 2016, a
35% decrease. This change was almost entirely due to the pace of
rising interest rates. In the 2016 quarter, rates rose rapidly and
the Company recorded gains of $37.9
million. While rates continued to rise, the pace was slower
in 2017 such that just $3.6 million
of gains were recognized. Excluding these gains, Pre-FMV
EBITDA(1) was $61.1
million in each quarter, demonstrating the consistency of
the Company's earnings. For 2017, income before income taxes was
$285.4 million compared to
$274.1 million in 2016, a 4% increase
which was also reflective of changing capital market conditions
which affected the Company's economic interest rate hedges. In
2017, the Company recorded an additional $28.5 million of gains on financial instruments
compared to 2016.
For 2017, Pre-FMV EBITDA(1) was $234.3 million compared to $253.5 million in 2016, an 8% decrease due to
lower placement fee revenue as a result of capital market
conditions. The Company calculates that placement fees in 2017 were
$14.4 million less than they would
have been in a static interest rate environment. Because placement
fees are economically hedged, the Company calculated that
$14.4 million was earned instead
through the gains on financial instruments recorded in the same
year. Adjusting for this amount, Pre-FMV EBITDA(1) was
lower by 2% year over year because of tighter mortgage spreads and
higher broker fees.
Dividends
The Board declared common share dividends in the fourth quarter
of 2017 of $102.7 million. This
included a special common share dividend of $1.25 per share ($75.0
million in total), paid on December
15, 2017.
For all of 2017, the Company declared common share dividends of
$184.4 million or $3.08 per common share, reflecting both the
special dividend and a dividend increase in April 2017 that brought the annualized rate to
$1.85 per share.
On an after-tax Pre-FMV(1) basis, the dividend payout
ratio for 2017, inclusive of the special dividend, was 90% compared
to 50% in 2016. Without including the special dividend, the ratio
was 53% in 2017. The Board also declared $2.7 million of dividends on its preferred shares
in 2017 compared to $3.2 million in
2016.
Shares Outstanding
At December
31, 2017 and February 27,
2018, 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 notes outstanding.
Outlook
Management is pleased with the results of 2017. As expected, the
market for high ratio insured mortgages slowed as a result of the
October 2016 mortgage insurance rules
announced by the Department of Finance. Although single-family
mortgage originations for the Company were down 10% from 2016,
commercial mortgage origination increased by 20% and single-family
renewals grew by 15% to $5.2 billion.
Altogether, origination including renewals was up 2% and earnings,
adjusted for fair value considerations, were lower by 2%. The
combination of consistent revenue from both securitization and
servicing departments and the value inherent in the Company's
renewal opportunities continued to support earnings. Management
believes that fourth quarter new single-family origination, which
increased year over year by 3%, benefited from new mortgage
qualification rules announced for 2018. The new rules require
conventional mortgage borrowers to qualify at interest rates higher
than the actual rate of the mortgage. Accordingly, the new rules
reduce the relative size of mortgage that a borrower could
otherwise have taken on under the previous rules. The Company
believes this pushed some borrowers to accelerate their decision to
purchase real estate into 2017, so as to qualify under the old
rules which has had a positive impact on these volumes.
Going into 2018, the Company is optimistic and anticipates
similar seasonal origination in the residential segment as
experienced in 2017. Despite the impact of new qualifying mortgage
rules announced in late 2017, which will have a dampening effect on
origination volumes, the Company currently foresees a strong
economy which will offset these effects. The Company sees growth in
single-family renewals and a stable commercial segment muted by a
rising interest rate environment and some increased
competition.
The Company earned almost $56
million in gains on financial instruments in 2017. While
this revenue increased 2017 net income, 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 NHA-MBS with coupons that will be higher than the
period when the securitized mortgages were initially funded. The
negative impact will be recognized over the five- and 10-year terms
of the securitization. However, to the extent that the funded
mortgages are placed with institutional customers, as the Company
did in 2017, the impact will be immediate with lower placement fees
in current period earnings. Depending on how the Company elects to
fund these mortgage assets, the negative impact associated with the
large gains recorded in 2017 could be spread over five- or 10-year
terms or it could be realized in the upcoming fiscal year.
The Company will continue to generate income and cash flow from
its $27 billion portfolio of
mortgages pledged under securitization and $74 billion servicing portfolio and focus on the
value inherent in its significant single-family renewal book.
Conference Call and Webcast
February 28, 2018 10
am ET
|
Participant
Numbers
647-794-4605 or
800-239-9838
|
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
until 1pm ET on March 7, 2018. To access the rebroadcast, please
dial 647-436-0148 and enter passcode 798696 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 more than $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