TORONTO, Oct. 25, 2016 /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 nine months ended September
30, 2016. The Company derives virtually all of its earnings
from its wholly-owned subsidiary, First National Financial LP
("FNFLP" or "First National").
Third Quarter Summary
- Mortgages under administration ("MUA") up year over year
by 6% to a record $98.6 billion from
$92.6 billion at September 30, 2015
- Mortgage originations $6.2
billion, 8% lower than $6.7
billion a year ago
- Revenue up 11% to $273.8 million
from $246.6 million a year ago
- Net income $51.4 million
($0.84 per common share) up 75% from
$29.3 million ($0.46 per common share) a year ago
- Pre-FMV EBITDA(1) up 11% to $67.5 million compared to $61.0 million a year ago
Management Commentary
"First National delivered
record performance in the third quarter, marking the continuation
of a long-term trend of profitable operations based on its strong
and resilient business model," said Stephen
Smith, Chairman and Chief Executive Officer. "To date this
year, we've faced several challenges including a sizeable decline
in market activity in Alberta and
Saskatchewan due to the oil
industry downturn. First National more than offset these market
disruptions to achieve excellent results for our shareholders. We
expect our scale, range of single family and commercial mortgage
products, diversified sources of funding and proven
customer-focused approach will allow us to continue to provide
solid results going forward."
Net income in the third quarter reflected increased
earnings from the Company's servicing division and growing
securitization program profits as well as a $3.5 million gain on financial instruments
(compared to a loss of $19.1 million
in the corresponding period of 2015).
"The value of our business model was once again reaffirmed in
the third quarter as profits increased even while production
decreased," said Moray Tawse, Executive Vice President. "Looking at
the numbers, new single family mortgage originations, while still
strong by historical standards at $3.6
billion, were down 11% in the third quarter. This primarily
reflected a 34% decline in activity levels out of our Calgary office as the housing market there
continued to contract for economic reasons. In other parts of
Canada, volumes were a couple of
percentage points lower due to competition from small originators
that sought to buy share. As a partial offset, single family
renewals increased by 8% to $1.3
billion. Commercial mortgage originations were similarly 11%
lower than a year ago, which was a function of timing rather than a
change in market prospects. We believe First National more than
held its own against these pressures, chose to remain disciplined
with respect to pricing and was able to maximize the utility of
originations and maintain net placement fee profitability."
Through the first nine months of 2016, First National's total
new origination and renewals (inclusive of single family and
commercial segments) stood at $17.3
billion, up 3% from $16.8
billion in the same period of 2015.
|
|
|
|
Quarter
ended
|
Nine months
ended
|
|
September
30,
2016
|
September
30,
2015
|
September
30,
2016
|
September
30,
2015
|
For the
Period
|
($
000's)
|
|
Revenue
|
273,754
|
246,641
|
759,064
|
665,307
|
|
Income before income
taxes
|
69,840
|
39,653
|
176,432
|
92,292
|
|
Pre-FMV EBITDA
(1)
|
67,469
|
60,955
|
192,475
|
151,406
|
At Period
end
|
|
|
Total
assets
|
30,527,361
|
27,624,359
|
30,527,361
|
27,624,359
|
|
Mortgages under
administration
|
98,572,334
|
92,630,375
|
98,572,334
|
92,630,375
|
(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.
|
Q3 2016 Results
First National's MUA increased 6% to $98.6 billion at September
30, 2016 from $92.6 billion at
September 30, 2015. Between
June 30, 2016 and September 30, 2016, MUA grew at an annualized
rate of 8%.
While the single-family real estate market remained strong in
most regions of the country, the Company's single-family mortgage
originations decreased 11% to $3.6
billion from $4.1 billion in
the third quarter of 2015. This primarily reflected a 34% reduction
in originations from the Company's Calgary office due to the ongoing downturn in
Alberta and Saskatchewan's housing markets and to a lesser
extent, competition from smaller originators intent on buying
volumes. The Company estimated that competition reduced volumes by
between 2% and 5% in certain regions of the country. Single family
mortgage renewals amounted to $1.3
billion in the third quarter of 2016, compared to
$1.2 billion a year ago on more
renewal opportunities. Commercial segment originations decreased
11% to $1.2 billion from $1.3 billion in the same period of 2015, while
commercial mortgage renewals amounted to $167 million compared to $192 million a year ago. The Company originated
and renewed for securitization purposes $2.0
billion of mortgages in the third quarter, up 25% from
$1.6 billion a year ago in order to
take advantage of funding opportunities.
Revenue increased 11% to $273.8
million from $246.6 million in
the third quarter of 2015 largely due to a change of $22.6 million related to gains and losses on
financial instruments. Excluding this change, revenue
increased 2% year over year in the third quarter primarily as a
result of growth in interest revenue – securitized mortgages (up 5%
year over year to $34.1 million) and
mortgage servicing income (up 12% to $35.7
million). These revenue categories were positively impacted
by higher origination and MUA. Securitized mortgages amounted to
$25.8 billion at September 30, 2016, up 6% from $24.3 billion a year ago.
Income before income taxes was $69.8
million compared to $39.6
million in the third quarter of 2015. The year-over-year
increase of 76% primarily reflected the $22.6 million change in gains and losses on
financial instruments between the quarters. In 2016, a gain of
$3.5 million was recorded compared to
a loss on financial instruments of $19.1
million in the third quarter a year ago.
Pre-FMV EBITDA(1), which excludes the impact of gain
and losses on financial instruments in both periods, increased 11%
to $67.5 million from $61.0 million a year ago. The change reflected
increased earnings from the Company's servicing division and
growing securitization program profits.
Dividends
The Board declared common share dividends in the third quarter
of 2016 of $25.3 million. On an
after-tax Pre-FMV(1) basis, the dividend payout ratio
was 53% compared to 54% in the third quarter of 2015. As previously
announced, the Company increased the common share dividend to the
annualized equivalent of $1.70 per
share, effective with the payment made on June 15, 2016, from the previous annualized rate
of $1.55 per common share.
The Board also paid $0.69 million
of dividends on its preferred shares in the third quarter of 2016
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 2.621%,
for the three months ended September 30,
2016.
At September 30, 2016 and
October 25, 2016, 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
Subsequent to quarter end, on October 3,
2016, the Ministry of Finance announced new rules on
mortgage insurance and other housing related legislation. Most
significant for the Company are the mortgage insurance rules that:
i) increase the "stress test" for borrowers of five year fixed high
ratio mortgages to require qualification based on an interest rate
standard determined by the Bank of Canada; and ii) change the eligibility of
uninsured mortgages for portfolio insurance.
The new rules surrounding portfolio insurance make eligibility
consistent with the existing rules for high-ratio mortgages. This
measure includes: raising the interest qualification rate for
5-year term mortgages, limiting the maximum amortization period to
25 years, limiting the property purchase price to $1,000,000, and prohibiting lenders from
acquiring insurance on some rental properties and mortgages
refinance transactions. These rules will take effect between October 3 and November 30, 2016.
The Company believes these changes to be significant and to have
a disproportionate impact on non-bank lenders which use NHA MBS and
CMB securitizations as a funding source. The Company has used
portfolio insurance in the past several years to insure
conventional mortgages. These mortgages were then securitized or
sold to institutional investors seeking insured mortgages for their
own securitization purposes.
Although these rules will have a negative impact on origination
volumes of single family mortgages in 2017 and likely 2018, the
Company's business model has other drivers as follows:
- Due to the economics of new single family originations, they
provide little if any earnings in the year they are underwritten.
Profits are delivered to shareholders as the Company receives
servicing income and the net interest margin from securitized
mortgages;
- First National originates approximately $22 billion of mortgages annually consisting of
$13 billion of new single family,
$5 billion of single family renewals
and $4 billion of commercial and
multi-residential mortgages. About 50% of new single family volume
is high ratio insured mortgage business and about 82% of that would
be affected by the new qualifying rate rules. For high ratio
origination for the nine months ended September 30, 2016, our analysis indicates that
underwriting using the new qualifying rate rather than the contract
rate would have reduced our high ratio origination volume by 4.6%
or approximately $300 million on an
annualized basis. Accordingly, we anticipate a decline in high
ratio single family mortgage originations going forward of
approximately 6% to 10%, or a range of $360
million to $585 million, about 1% to 3% of overall
originations. We do not anticipate any material impact on our other
originations and renewals as a result of the new qualifying
rules;
- First National earns most of its profit from its large
$73 billion servicing portfolio and
its $25 billion portfolio of
securitized mortgages. These portfolios will continue to provide
earnings to the Company over the life of the mortgages;
- First National has diversified funding sources. While some
conventional mortgages originated in the past would not now be
eligible for NHA MBS securitization, the Company has institutional
investors and asset-backed commercial paper conduits that can
purchase such mortgages without portfolio
insurance.
As a result, we believe that any reduction in origination as a
result of these rules will have little to no impact on our 2016 or
2017 earnings. Looking forward, the Company expects the low
interest rate environment to continue in 2016 and, despite the new
rules on insured mortgages, mortgage affordability will stay at
favourable levels. The Company will focus on the significant value
of renewal opportunities and its partnerships with institutional
customers in order to maximize profitability. Management expects
the Company to continue to generate cash flow and profits from its
$25 billion portfolio of mortgages
pledged under securitization and $73
billion servicing portfolio.
Conference Call and Webcast
October 26, 2016 10
am ET
|
Participant
Numbers
416-204-9269
800-499-4035
|
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
November 2, 2016. To access the
rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter
passcode 1326150 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 $98
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