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First National Financial Corporation reports second quarter 2014 results

29 juil. 2014

For Immediate Release

Toronto, Ontario, July 29, 2014 – First National Financial Corporation (TSX: FN, TSX: FN.PR.A) (the “Company” or “FNFC”) today announced its financial results for the second quarter ended June 30, 2014. 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”) $79.9 billion at June 30, up 12% from $71.2 billion a year earlier
  • New mortgage originations $4.7 billion, up 12% from $4.2 billion in the second quarter of 2013
  • Revenue $201.6 million, 12% lower than $229.8 million a year ago
  • Net income $28.2 million ($0.44 cents per common share) compared to $67.8 million ($1.10 per common share) a year ago
  • Income before income taxes $38.2 million compared to $91.9 million
  • Pre-FMV EBITDA* $48.4 million compared to $51.2 million

“By leveraging the seasonal strength of the Canadian housing market and the execution of our service strategy, First National grew MUA during the second quarter by an annualized rate of 15%,” said Stephen Smith, Chairman, President and CEO, “and once again grew its portfolio of mortgages pledged under securitization. The Company also delivered solid profitability metrics, despite a large swing in gains and losses on financial instruments, which are not truly indicative of the Company’s performance.  We are pleased with operating results as we continue to advance First National’s position as Canada’s largest non-bank originator and underwriter of mortgages.” “New mortgage originations in both our Single Family and Commercial segments were strong in the second quarter, up 8% and 30% respectively over last year,” said Moray Tawse, Executive Vice President. “As part of our strategy, we chose to securitize about $3 billion of our originations this quarter to take advantage of current mortgage spreads. Although this meant forgoing net placement fees and mortgage servicing income in the quarter, it will have a positive impact on net interest margin in future.”First National marked its eighth anniversary as a public company in June 2014. During this period, the Company has paid out $663 million in distributions/dividends to shareholders, representing a pre-tax return of 111% on the IPO price of $10. Including capital appreciation, the total return to an original shareholder has been over 230%.

Quarter ended Six months ended
June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
For the period ($ 000's)
Revenue 201,596 229,830 374,301 375,058
Income before income taxes 38,217 91,945 69,478 123,181
Pre-FMV EBITDA(1) 48,392 51,193 89,780 88,057
At Period end
Total assets 23,902,513 18,793,683 23,902,513 18,793,683
Mortgages under administration 79,914,694 71,228,677 79,914,694 71,228,677

(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.

Q2 2014 Results

First National’s MUA grew to $79.9 billion at June 30, 2014 from $71.2 billion at June 30, 2013, a 12% increase.  Between March 31, 2014 and June 30, 2014, MUA grew approximately 4% from $77.0 billion, an annualized increase of 15%.

Total single-family mortgage originations grew 8% to $3.8 billion from $3.5 billion in the second 2013 quarter. Commercial segment originations increased 30% to $878 million from $677 million in the same period of 2013. Overall origination was up approximately 12% year over year. The Company originated and renewed for securitization purposes $3.0 billion of mortgages in the second quarter.

Second quarter revenue decreased 12% to $201.6 million from $229.8 million a year ago on account of a significant change in gains and losses on financial instruments between the quarters. The comparative period a year ago included a $42.8 million gain as a result of a substantial rise in bond yields. Conversely, bond yields dropped in the second quarter this year resulting in an $8.2 million loss on financial instruments. Excluding these amounts, revenue increased year over year by 12%.  This reflected business growth, including, in particular, a 34% or $34 million year-over-year increase in interest revenues on the securitized mortgage portfolio.

Income before income taxes in the quarter decreased 55% to $38.2 million from $91.9 million in the second quarter of 2013. Of this $53.7 million decline, $51 million was due to changes in gains and losses on financial instruments primarily due to lower interest rate yields in the bond market which negatively affected the fair value of the Company’s interest rate hedges.

Without the impact of gains and losses on financial instruments, which are volatile, the Company’s Pre-FMV EBITDA decreased by 5% to $48.4 million from $51.2 million a year ago. This change reflected the Company’s decision to securitize more of its originations. This strategy will create future income from net interest margin, at the expense of current net placement and mortgage servicing fees in the quarter. 

Determination of Adjusted Cash Flow and Payout Ratio

The Board declared dividends in the second quarter of 2014 based on the current rate of $1.50 per share. For the quarter ended June 30, 2014, the payout ratio was 145% compared to 50% a year ago primarily as a result of the Company’s decision to invest $24.1 million in new securitization transactions compared to only $7.4 million a year ago.   Excluding cash used for securitizations in the most recent period, the payout ratio was 56%. The payout ratio was also affected by $3 million of cash losses on financial instruments in the quarter, compared to small positive cash flows in the corresponding period of 2013.

Determination of Adjusted Cash Flow and Payout Ratio

 

Quarter ended

Six months ended

 

June 30, 2014

June 30, 2013

June 30, 2014

June 30, 2013

For the Period

 

($ 000’s)

Cash provided by (used in) operating activities

(468,136)

(353,329)

(517,822)

(544,832)

Add (deduct):

 

 

 

 

Change in mortgages accumulated for

 

 

 

 

sale or securitization between periods

485,784

396,905

545,620

604,307

Additions to property, plant and equipment

(988)

(541)

(3,482)

(1,840)

Adjusted Cash Flow (1)

16,660

43,035

24,316

57,635

Less: cash dividends on preference shares

(1,162)

(1,162)

(2,325)

(2,325)

Adjusted Cash Flow available for common shareholders

15,498

41,873

21,991

55,310

Adjusted Cash Flow per Common Share ($/share) (1)

0.26

0.70

0.37

0.92

Dividends declared on Common Shares

22,487

20,989

43,975

40,978

Dividends declared per Common Share ($/share)

0.37

0.35

0.73

0.68

Payout Ratio

145%

50%

200%

74%

Note:

  1. These non-IFRS measures adjust cash provided by (used in) operating activities by accounting for changes between periods in mortgages accumulated for sale or securitization and mortgage securitization activity.
Outlook

Management is pleased with the results of second quarter of 2014 particularly with its very strong origination volumes as the Company took advantage of what is typically the strongest seasonal quarter of the year. The Company anticipates continuing strength through the third quarter due to seasonally strong real estate market activity. Management is also delighted with the mortgage underwriting and fulfillment processing services agreement concluded subsequent to quarter end with a major Canadian bank. This agreement is part of a long-term strategy to leverage the Company's expertise in underwriting mortgages and its industry-leading MERLIN technology.

The Company anticipates the low interest rate environment will continue to keep mortgage affordability at favourable levels. By realizing on the significant renewal opportunities available in upcoming quarters and managing its partnerships with institutional customers, the Company will continue to focus on sustainable profitability. Despite modest new origination targets, management expects to continue to capitalize on mortgage renewals and to generate cash flow from its $20 billion portfolio of mortgages pledged under securitization in order to maximize the Company's financial performance.

Conference Call and Webcast

July 30, 2014 10 a.m. ET

Participant Numbers
416-849-1847
866-530-1554

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 1 p.m. on August 5, 2014. To access the rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter passcode 9939037 followed 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) 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 almost $80 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 visitwww.firstnational.ca.

*Non-GAAP Measures

The Company uses IFRS as its accounting framework. IFRS are generally accepted accounting principles (GAAP) for Canadian publically 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”, “Adjusted Cash Flow,” and “Adjusted Cash Flow per Share” 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.

Robert Inglis
Chief Financial Officer
First National Financial Corporation
Tel: 416-593-1100
Email: rob.inglis@firstnational.ca
Ernie Stapleton
President
Fundamental Creative Inc.
Tel: 905-648-9354
Email: ernie@fundamental.ca