FN First National Financial Corporation

TORONTO, April 30, 2019 /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 months ended March 31, 2019. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National").

First Quarter Summary

• Mortgages Under Administration ("MUA") increased 5% to $107.0 billion from $102.2 billion a year ago
• Revenue increased 12% to $286.3 million from $256.7 million a year ago
• Net income was $23.5 million ($0.38 per share) compared to $35.9 million ($0.59 per common share) a year ago
• Pre-FMV EBITDA⁽¹⁾ was $40.2 million compared to $50.4 million a year ago

Management Commentary
"First National remained profitable in the first quarter despite tighter mortgage spreads, a turbulent interest rate environment and a reduction in single-family originations," said Stephen Smith, Chairman and Chief Executive Officer. "As expected, residential mortgage market activity was naturally lower due to seasonality, and the year-over-year comparison was made worse by an artificially high level of mortgage closings in the same period last year when home purchases completed prior to the implementation of new B-20 Guidelines were funded. This is disappointing, but as we ended the quarter, the tempo of single-family residential originations increased and while we expect tight securitization margins to remain a factor this year, recent volumes done at more attractive spreads cause us to feel more positive as we head into the second quarter."

For the first quarter, new mortgage originations were $3.0 billion compared to $3.4 billion a year ago, reflecting: $1.8 billion of new single-family originations (compared to $2.2 billion a year ago) and $1.2 billion of commercial originations (unchanged from Q1 2018). Total mortgage renewals were $1.3 billion compared to $1.2 billion a year ago reflecting: $386 million of commercial renewals ($152 million a year ago) and $916 million of single-family renewals ($1.1 billion a year ago).

"Looking at our business regionally, single-family volumes in Eastern Canada were almost on par with last year, but this was due to the contribution made by our Excalibur program, which addresses the Ontario alternative mortgage market," said Moray Tawse, Executive Vice President. "Conversely, prime mortgage volumes in Western Canada declined by 35%. Our assessment is that despite these results, First National's single-family national market share held steady. In commercial, where First National is Canada's largest mortgage lender, total originations including renewals were 17% higher than a year ago, so a great start for this business."

Q1 2019 Summary

Between December 31, 2018 and March 31, 2019 (the first quarter), MUA increased at an annualized rate of 3%. For the first quarter of 2019, single-family mortgage originations of $1.8 billion were 18% or $335 million lower than a year ago. The decline reflected unusually high closings at the beginning of 2018 spurred on by buyers accelerating their house purchases in advance of the implementation of new B20 underwriting guidelines that were brought into force January 1, 2018. The reduction was partially offset by the contribution of the Excalibur alternative mortgage program, which was introduced in April 2018 (and consequently had no impact on Q1 2018 results). First quarter 2019 single family mortgage renewals of $0.9 million were 10% or $107 million lower than a year ago, reflecting a smaller renewal pool.  First quarter 2019 commercial segment originations of $1.2 billion were strong and consistent with volumes a year ago, while commercial mortgage renewals more than doubled to $386 million from $152 million a year ago.

The Company originated and renewed for securitization purposes $1.7 billion of mortgages in the first quarter of 2019 compared to $2.4 billion a year ago.

First quarter 2019 revenue was $286.3 million compared to $256.7 million in the first quarter of 2018, a 12% increase reflecting the higher interest rate environment. Looking at the contributors to revenue:

• Q1 2019 mortgage servicing income was $31.1 million, up 1% from Q1 2018 due to higher MUA
• Q1 2019 net interest revenue earned on securitized mortgages was $31.0 million, down 19% from Q1 2018 due to the impact of accounting for financial instruments prior to the adoption of IFRS 9 and tighter weighted average mortgage spreads
• Q1 2019 placement fees were $27.3 million, up 38% from Q1 2018 as a result of a changing funding mix between the quarters
• Q1 2019 mortgage investment income was $20.2 million, up 7% from Q1 2018 due to mortgages accumulated for securitization with higher interest rates
• Q1 2019 gains on deferred placement fees were $2.4 million, down 31% from Q1 2018 due to lower volumes of multi-unit residential mortgages originated and sold to institutional NHA-MBS issuers and in spite of similar spreads and consistent per unit gains

Q1 2019 Pre-FMV EBITDA⁽¹⁾ was $40.2 million, 20% lower than in Q1 2018 largely due to tighter securitization margins and the accounting convention used for economic hedges prior to 2018. Q1 2019 net income was $23.5 million ($0.38 per share) compared to $35.9 million ($0.59 per common share) in Q1 2018.

Dividends

The Company declared common share dividends in the first quarter of 2019 of $28.5 million compared to $27.7 million in the first quarter of 2018, reflecting a dividend increase in December 2018 that brought the annualized rate to $1.90 per share (paid monthly) from $1.85 per share. The common share payout ratio in the first quarter was 125% compared to 79% a year ago. If the losses on financial instruments in the comparative quarters are excluded, the dividend payout ratio for 2019 would have been 102% compared to 79% in 2018.

The Company also paid $0.8 million of dividends on its preferred shares in the first quarter of 2019 compared to $0.7 million in 2018 first quarter.

Shares Outstanding

At March 31, 2019 and April 30, 2019, 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 senior unsecured notes outstanding.

Outlook

The seasonally slow first quarter was comparatively weaker than the comparative quarter in 2018 which featured accelerated volume associated with the transition to new B-20 guidelines within the single-family market. A rapid downward movement in interest rates also had an impact on financial results. Moving into the second quarter, management feels more positive. Single-family mortgage commitments in March 2019 were ahead of 2018 levels by about 10%, mortgages with wider spreads, which were originated during the first quarter, will be securitized in the second quarter and Prime-BA spreads, which effect returns on floating rate mortgage securitizations, returned to normal levels. Activity in the commercial segment also appears strong and interest rates have stabilized. Despite these favorable indications, the Company will continue to be faced with tight securitization margins and the effect of pre-2018 fair value accounting conventions on its income for most of 2019. 

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. The Company will continue to generate income and cash flow from its $31 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

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 May 8, 2019 at 1:00 pm ET. To access the rebroadcast, please dial (647) 436-0148 or (888) 203-1112 and enter passcode 5257032 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 over $107 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