TORONTO, Oct. 24, 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 nine months ended September
30, 2017. 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 2%
to a record $100.2 billion from
$98.6 billion at September 30, 2016
- Total mortgage originations up 2% to $4.9 billion from $4.8
billion a year ago
- Revenue up 4% to $284.3 million
from $273.8 million in the 2016 third
quarter
- Net income up 14% to $58.8
million ($0.96 per common
share) compared to net income of $51.4
million ($0.84 per common
share) in the 2016 third quarter
- Pre-FMV EBITDA(1) down 23% to $51.8 million compared to $67.5 million in the 2016 third quarter
Management Commentary
"First National surpassed
$100 billion in Mortgages Under
Administration in the third quarter, reflecting our Company's
growing prominence as a leading provider of mortgage capital,
expertise and service to Canada's
single family and commercial real estate borrowers," said
Stephen Smith, Chairman and Chief
Executive Officer. "We're proud of our team for reaching this
milestone, and doing so profitability, particularly as new mortgage
insurance rules and rising interest rates rapidly changed our
marketplace. These new dynamics had the largest impact on our
single-family lending business, as evidenced by a 12% reduction in
third quarter originations, and will continue to mute growth in the
coming quarters. As the market digests these and other rule changes
on the horizon, it will be First National's scope and scale,
strategic alignment with the mortgage broker community, market
diversification and disciplined method of capital allocation that
will act as the catalysts for our performance for the remainder of
this year and into 2018."
Single-family mortgage originations of $3.2 billion in the third quarter of 2017 were
12% or $450 million lower than a year
ago. This decline was evident across the country and most
pronounced in the Company's Vancouver, Calgary and Montreal operations where volume declines
averaged 19%. In Ontario and the
Maritimes, originations were 5% lower year over year. Commercial
mortgage originations at $1.7 billion
were 47% or $548 million higher than
a year ago.
"Our single family and commercial teams absolutely made the most
of their respective market opportunities in the quarter by
delivering competitive offerings based on value-added customer
service," said Moray Tawse, Executive Vice President. "In single
family, mortgage insurance rules announced last fall effectively
shrank the size of the available market, but by winning our
traditional share of new originations and capitalizing on a large
volume of renewal opportunities, we kept total single-family
production including renewals at $4.9
billion, unchanged from a year ago. On the other hand,
activity in the commercial market was robust and we addressed it
very effectively, growing new commercial originations by 47% and
commercial renewals by $146 million
or 87%. We're pleased with these results and satisfied that First
National is well positioned for a changing market environment."
Special Dividend
The Company's Board of Directors
today announced a special common share dividend in the amount of
$1.25 per share, payable on
December 15, 2017 to shareholders of
record on November 30, 2017. This
payment reflects the Board's determination that the Company has
generated excess capital in the past several years and that the
capital needed for near-term growth can be generated from current
operations.
|
|
|
|
|
|
Quarter
ended
|
Nine months
ended
|
|
|
Sept. 30,
2017
|
Sept. 30,
2016
|
Sept. 30,
2017
|
Sept. 30,
2016
|
For the
Period
|
|
($000's)
|
|
Revenue
|
|
284,315
|
273,754
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808,753
|
759,064
|
|
Income before income
taxes
|
|
80,009
|
69,840
|
222,244
|
176,432
|
|
Pre-FMV EBITDA
(1)
|
|
51,826
|
67,469
|
173,185
|
192,475
|
At Period
end
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|
|
|
|
|
|
Total
assets
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31,548,130
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30,527,361
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31,548,130
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30,527,361
|
|
Mortgages under
administration
|
|
100,176,720
|
98,572,334
|
100,176,720
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98,572,334
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(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 2017 Summary
First National's MUA increased 2% to $100.2 billion at September 30, 2017 from $98.6 billion at September
30, 2016. Between June 30,
2017 and September 30, 2017,
MUA grew at an annualized rate of 3%, as growth from traditionally
strong seasonal market activity was partly offset by the maturity
of several CMBS transactions originally included in MUA in 2007.
Single-family MUA stood at $77.1
billion while commercial MUA was $23.0 billion at September
30, 2017, compared to $76.8
billion and $21.7 billion
respectively a year ago.
Single-family mortgage originations decreased 12% to
$3.2 billion from $3.6 billion in the third quarter of 2016,
reflecting regulatory changes including revised mortgage insurance
rules announced in October 2016.
Single family mortgage renewals grew to $1.7
billion in the third quarter of 2017, 31% higher than a year
ago. Commercial segment originations increased 47% to $1.7 billion from $1.2
billion in the same period of 2016, while commercial
mortgage renewals amounted to $313
million compared to $167
million a year ago. The Company originated and renewed for
securitization purposes $2.2 billion
of mortgages in the third quarter of 2017 compared to $2.0 billion a year ago.
Revenue increased 4% to $284.3
million from $273.8 million in
the third quarter of 2016 primarily due to larger gains on
financial instruments this quarter than in the same period a year
ago. Excluding gains on financial instruments in the
respective quarters, revenue decreased 2% year over year as the
lower volume of single family originations and the impact of large
second quarter 2017 gains on financial instruments reduced
placement fee revenue.
With interest rates rising steadily over the past six months,
the value of fixed rate mortgages held for securitization decreased
during the holding period between origination and placement.
Accordingly, when these mortgages were placed with institutional
investors in the third quarter of 2017, the per unit placement fees
were lower than in an otherwise static interest rate environment by
about $14.4 million. Because these
transactions were economically hedged in the second quarter of
2017, the lower fees are effectively offset by a gain of
$14.4 million that was recorded in
gains on financial instruments in that second quarter. Accordingly,
the Company earned the revenue as expected except in the form of
gains on financial instruments in the second quarter as opposed to
placement fees in the third quarter.
Other contributors to revenue were: mortgage servicing (up 8% to
$38.7 million in the third quarter of
2017 from $35.7 million a year ago);
net interest – securitized mortgages (up 7% to $36.5 million from $34.1
million); and mortgage investment income (up 10% to
$18.6 million from $16.9 million). Gains on deferred placement fees
were 49% lower at $2.2 million from
$4.3 million a year ago due to a 15%
decline in multi-unit residential mortgages originated for this
program and tighter spreads on these transactions.
Securitized mortgages amounted to $26.2
billion at September 30, 2017,
up 2% from $25.8 billion a year
ago.
Income before income taxes was $80.0
million, up 15% from $69.8
million in the third quarter of 2016. The year-over-year
increase primarily reflected $25.9
million in additional gains on financial instruments in the
third quarter of 2017 compared to the third quarter a year ago.
Pre-FMV EBITDA(1), which excludes the impact of gain
and losses on financial instruments in both periods, decreased 23%
to $51.8 million from $67.5 million a year ago. The change reflects the
lower placement fee revenue, as noted above, which flowed through
to the bottom line. By adding back $14.4
million to the quarter's Pre-FMV EBITDA, management believes
a more accurate measurement of performance is presented.
Accordingly, earnings on an adjusted basis would be 2% lower than
the 2016 third quarter because of tighter mortgage spreads and
higher broker fees.
Dividends
The Board declared common share dividends in the third quarter
of 2017 of $27.7 million or the
annualized equivalent of $1.85 per
common share, reflecting an increase announced in March 2017. On an after-tax Pre-FMV(1)
basis, the dividend payout ratio for the third quarter of 2017 was
77% compared to 53% in the third quarter of 2016. The Board also
paid $0.69 million of dividends on
its preferred shares in the third quarter of 2017, unchanged from a
year ago.
As noted above, the Company announced a special, one-time
dividend of $1.25 per common share,
which will be paid on December 15,
2017 to common shareholders of record on November 30, 2017.
Outlook
For the remainder of 2017 and into 2018, the Company anticipates
continued lower seasonal origination in the residential segment
pursuant to the impact of new mortgage insurance rules announced in
October 2016. Together with rising
interest rates following the two overnight rate increases announced
by the Bank of Canada in July and
September, higher costs of portfolio insurance, additional
underwriting restrictions recently proposed by OSFI and regional
issues including foreign buyer's taxes, the Company believes new
single-family origination will continue to be lower by a similar
proportion as experienced in its second and third 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.
The Company earned almost $53
million in gains on financial instruments in the nine months
ended September 30, 2017. While this
revenue increased current period 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 mortgage backed securities 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 ten-year terms of the securitization. However, to the
extent that the funded mortgages are placed with institutional
customers, as the Company did in the third quarter of 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 to date in 2017 could be spread over 5 or ten-year
terms or it could be realized in the upcoming fiscal
quarters.
Despite these challenges, the Company will continue to generate
income and cash flow from its $26
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
October 25, 2017 2pm
ET
|
Participant
Numbers 647-794-1827 or
800-274-0251
|
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 5pm ET on
November 1, 2017. To access the
rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter
passcode 8187654 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