FN First National Financial Corporation

TORONTO, July 24, 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 six months ended June 30, 2018. 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 4% to a record $103.6 billion from $99.5 billion at June 30, 2017
• New mortgage originations up 9% to $5.1 billion from $4.7 billion a year ago
• Revenue $290.9 million compared to $292.2 million in Q2 2017
• Net income $46.3 million ($0.76 per common share) compared to $68.8 million ($1.13 per common share) in Q2 2017
• Pre-FMV EBITDA⁽¹⁾ $56.0 million compared to $68.3 million in Q2 2017

Management Commentary

"The second quarter was highly productive for First National in both single family and commercial mortgage lending with both segments of the business generating solid growth on the basis of customer service," said Stephen Smith, Chairman and Chief Executive Officer. "As a consequence of strong new originations and renewal volumes, MUA continued to climb, which is broadly positive for future financial performance and illustrates that First National is responding well to changing market conditions.  While earnings, adjusted for fair value considerations, were lower by 18%, this was partially because we shifted mortgages to our securitization programs, which defers the earnings process until the securitization cash flows come in over five and 10-year terms. Considering the housing market interventions made over the past 18 months by various governments, strong competition and tighter mortgage spreads, we are pleased with the Company's ongoing progress."

In the second quarter, total originations together with renewals amounted to $7.3 billion, up 18% from $6.2 billion in Q2 2017. Of this amount, new single-family originations were $3.4 billion, up 5% year over year, while single-family renewals were $1.9 billion, up 45% year over year. New commercial originations of $1.7 billion were 17% higher than a year ago, while commercial renewals of $299 million were 33% above the second quarter of 2017.

"The second quarter marked a significant milestone for First National's commercial business as it surpassed $25 billion in MUA," said Moray Tawse, Executive Vice President. "This growth clearly demonstrates that borrowers in all real estate segments find value in the portfolio of services we offer as Canada's largest commercial mortgage lender and encourages the ongoing development of our 'more than a lender' approach.  The single-family business generated solid new origination growth led by Quebec where production was 24% above last year. Leveraging on the business we did five years before, renewals were also up sharply."

Q2 2018 Summary

First National's MUA increased 4% to $103.6 billion at June 30, 2018 from $99.5 billion at June 30, 2017.  Between March 31, 2018 and June 30, 2018, MUA grew at an annualized rate of 5% as a result of traditionally strong seasonal market activity.

New single-family mortgage originations increased 5% to $3.4 billion from $3.3 billion in the second quarter of 2017, reflecting the relaunch of the Company's Excalibur program earlier this year and steady growth in most markets, led by the Montreal office. New originations were 9% lower in Alberta. Single family mortgage renewals amounted to $1.9 billion in the second quarter of 2018, up 45% from the prior year on higher renewal opportunities and good execution. New commercial segment originations increased 17% to $1.7 billion from $1.5 billion a year ago, reflecting growth in conventional financing, while commercial mortgage renewals amounted to $299 million, up 33% from $225 million a year ago. As a result of strong production in both business segments, June 30, 2018 Single Family MUA was a record $78.0 billion while Commercial MUA was a record $25.6 billion, up $828 million and $3.2 billion, respectively from a year ago. The Company originated and renewed for securitization purposes $3.4 billion of mortgages in the second quarter of 2018 compared to $1.9 billion a year ago.

Second quarter 2018 revenue was $290.9 million compared to $292.2 million a year ago. This 1% decline is a result of changing interest rates and their impact on gains on financial instruments as well as the result of hedge accounting on January 1, 2018 which mitigates the volatility of such changes on earnings. Excluding these factors, revenue would have been 6% higher year over year.  For more information on the adoption of new IFRS Accounting Standards, including IFRS 9 and IFRS 15, please see the Company's financial statements and Management's Discussion and Analysis for the second quarter of 2018.

The Company has several revenue sources. Mortgage servicing income increased 4% to $37.1 million in the second quarter of 2018 from $35.7 million in Q2 2017 as a result of higher MUA and growth in the Company's third-party underwriting business.  Mortgage investment income increased 31% to $21.2 million from $16.2 million in Q2 2017 due primarily to an increase in the Company's commercial bridge loan program. Net interest– securitized mortgages increased 3% to $35.5 million from $34.4 million in Q2 2017 due to a larger portfolio, partially offset by modestly tighter weighted-average spreads. Placement fees were $31.0 million, down 41% from $52.9 million in Q2 2017 due largely to lower new residential origination volume for institutional customers.  Gains on deferred placement fees were flat year over year at $2.4 million.  Securitized mortgages amounted to $29.3 billion at June 30, 2018, up 13% from $26.0 billion a year ago.

Income before income taxes was $63.0 million compared to $93.1 million in Q2 2017, a 32% decline due to changing capital market conditions which created large gains on financial instruments in 2017.  In the second quarter of 2017, interest rates rose quickly, creating large gains on financial instruments. At that time, the Company's hedging instruments did not qualify for hedge accounting and $26.0 million of gains were included in income. In the second quarter of 2018, the Company recorded revenue of $8.3 million on account of financial instruments as interest rates did not change as much as in the 2017 quarter and the Company was able to defer some of the gains through Other Comprehensive Income because of the adoption of hedge accounting in 2018.

Pre-FMV EBITDA⁽¹⁾, which excludes the impact of gains and losses on financial instruments in both periods, decreased 18% to $56.0 million from $68.3 million a year ago. The change reflected tighter mortgage spreads as well as increased securitization, which delays the earnings process in comparison to placement fees which are earned in the same period as origination.

Dividends

The Board declared common share dividends in the second quarter of 2018 of $27.7 million or the annualized equivalent of $1.85 per common share. The dividend payout ratio as a percentage of net income attributable to common shareholders was 61% in Q2 2018. If gains on financial instruments are excluded, the dividend ratio for the second quarter was 70%. The Board also declared $0.7 million of dividends on its preferred shares in the second quarter of 2018, unchanged from the comparable period in 2017.

Outlook

Going into the third quarter of 2018, the Company is optimistic that the trend established in the second quarter will continue. Year-over-year growth of 5% in new single-family origination represents a return to more normalized markets after the disruption in the second half of 2017 resulting from the increase in qualifying rates for insured mortgages. Despite the impact of new qualifying mortgage rules under B-20 and higher interest rates, the Company is confident that its strong relationships with mortgage brokers and diverse funding sources will continue to set First National apart from its competition. While the Company expects growth in origination in the third quarter of 2018, it also expects a tight interest spread environment similar to what existed in the second quarter of 2018.

The Company will continue to generate income and cash flow from its $29 billion portfolio of mortgages pledged under securitization and $72 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

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 August 1, 2018. To access the rebroadcast, please dial 647-436-0148 and enter passcode 3805585 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" 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