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First National Financial Corporation reports fourth quarter and annual 2014 results

Feb 24, 2015

For Immediate Release

Toronto, Ontario, February 24, 2015 – First National Financial Corporation (TSX: FN, TSX: FN.PR.A) (the “Company” or “FNFC”) today announced its financial results for the fourth quarter and year ended December 31, 2014. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP (“FNFLP” or “First National”).

2014 Summary
  • Mortgages under administration (“MUA”) up year over year by 14% to a record $85.9 billion from $75.6 billion at December 31, 2013 
  • Mortgage originations increased 15% to a record $16.2 billion from $14.1 billion in 2013
  • Revenue up 3% to a record $803.1 million from $776.5 million in 2013
  • Net income $104.5 million ($1.62 per common share) compared to $172.1 million ($2.75 per common share), a 39% decrease
  • Income before income taxes $140.5 million compared to $233.5 million in 2013, a 40% decrease
  • Pre-FMV EBITDA(1) $183.1 million compared to $197.6 million in 2013, a 7% decrease
Fourth Quarter Summary
  • MUA up 13% on an annualized basis
  • Mortgage originations higher by 20% to $4.1 billion from $3.4 billion
  • Revenue $198.3 million compared to $200.9 million, a 1.3% decrease
  • Net income $17.9 million ($0.27 per common share) compared to $41.8 million ($0.66 per common share) in the fourth quarter of 2013, a 57% decrease
  • Income before income taxes $23.2 million compared to $57.5 million a year ago, a 60% decrease
  • Pre-FMV EBITDA(1) $43.2 million compared to $53.4 million a year ago, a 19% decrease

“First National’s financial resources, leadership in technology and dedication to service enabled the Company to respond well to opportunity in both residential and commercial markets throughout 2014,” said Stephen Smith, Chairman, President and CEO. “We set records for mortgages under administration, annual mortgage originations, and annual revenues and increased our share in the mortgage broker market. We are pleased with the year’s accomplishments, including the agreement we negotiated to provide mortgage underwriting and fulfillment services to one of Canada’s largest banks starting in 2015. This agreement and associated investments will allow us to provide service to more customers and support our ongoing mandate to create value for First National shareholders.”

Profitability remained solid for the year and for the fourth quarter even though earnings in both reporting periods were lower than a year ago. This was due to both volatility in the bond market, which negatively affected the value of interest rate hedges, and the impact of tighter mortgage spreads.

“First National ended 2014 on a very positive note as we added to MUA in the quarter through year-over-year growth in residential and commercial mortgage originations of 15% and 35% respectively and by achieving solid mortgage renewal rates,” said Moray Tawse, Executive Vice President. “As most of the Company’s earnings come from MUA, either in the form of net interest margin or servicing income, this ongoing expansion of our mortgage book bodes well for the future.”

  Quarter ended Year ended 
   December 31, 2014 December 31, 2013   December 31, 2014 December 31, 2013 
For the period  ($ 000's)
Revenue  198,254  200,928  803,107  776,508
Income before income taxes  23,206  57,531  140,305  233,511
Pre-FMV EBITDA (1)  43,229  53,401  183,130  197,582
At Period end        
Total assets 25,953,914   20,569,217 25,953,914   20,569,217
Mortgages under administration 85,889,561   75,619,003  85,889,561 75,619,003 

(I) 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.

Q4 2014 and 2014 Annual Results

 First National’s MUA increased 14% to $85.9 billion at December 31, 2014 from $75.6 billion at year-end 2013. Between September 30, 2014 and December 31, 2014, MUA grew approximately 3% from $83.2 billion, an annualized increase of 13%.

In the fourth quarter, single-family mortgage originations grew almost 15% to $2.9 billion from $2.5 billion in the fourth 2013 quarter. For all of 2014, single-family originations grew 15% to $12.5 billion from $10.9 billion. In the fourth quarter, commercial segment originations increased 35% to $1.2 billion from $887 million in the same period of 2013. For all of 2014, commercial originations grew 18% to $3.7 billion from $3.1 billion in 2013. The Company originated and renewed for securitization purposes $2.1 billion of mortgages in the fourth quarter and $8.9 billion for all of 2014.

Fourth quarter 2014 revenue declined 1.3% to $198.3 million from $200.9 million in 2013 as the growth of $26.4 million in interest revenue from securitized mortgages was offset by a large swing in the value of financial instruments which reduced revenue by $23.7 million and by tighter margins on deferred placement fees. Annual 2014 revenue grew 3% to $803.1 million from $776.5 million in 2013 for similar reasons as interest on securitized mortgages increased by $121.0 million and the fair value of financial instruments decreased by $78.8 million. Securitized mortgages amounted to $22.3 billion at December 31, 2014, up 26% from $17.7 billion a year ago.

Income before income taxes in the fourth quarter decreased 60% to $23.2 million from $57.5 million in the fourth quarter of 2013 and for all of 2014 decreased 40% to $140.5 million from $233.5 million. To a large degree, the year-over-year change in both 2014 periods reflected volatility in the bond market which negatively affected the Company’s interest rate hedges and led to losses on financial instruments.

Without the impact of gains and losses on financial instruments, which can be volatile, the Company’s Pre-FMV EBITDA for the fourth quarter of 2014 decreased by 19% to $43.2 million from $53.4 million in the fourth quarter of 2013 and by 7% to $183.1 million for all of 2014 from $197.6 million in 2013. The change in both periods reflected lower net 4 interest margin, lower per unit placement fees and Company’s strategic 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.

Dividends and Common Share Dividend Ratio

The Board declared common share dividends in the fourth quarter of 2014 based on the current annual rate of $1.50 per share. The ratio of dividends paid to earnings available to common shareholders was 131% for the quarter and 87% for 2014, compared to 51% and 49% respectively in the corresponding periods of 2013. A significant portion of this change is due to volatility in the bond market, which negatively affected the Company’s interest rate hedges in 2014. In contrast there was a large favourable impact in the 2013 results. These gains or losses are recorded in the period in which the bond yields change; however, the offsetting economic gains or losses are not recorded in the same period. Instead, the resulting economic gain (or loss) will be reflected in wider or narrower spreads on the mortgages pledged for securitization and will be generally realized in net interest margin over the terms of the mortgages. If these amounts are excluded, the common share dividend payout ratio for 2014 would have been 70% versus 60% in 2013 and 74% for the fourth quarter compared to 57% in the fourth quarter of 2013.

During the fourth quarter, the Board also declared regular quarterly dividends on the 4.65% Class A Preference Shares for the period October 1 to December 31, 2014. The dividend of $0.290625 per share was paid on January 15, 2015 to holders of record at the close of business on December 31, 2014. Outlook Looking ahead, the Company anticipates continuing


Looking ahead, the Company anticipates continuing strength in Canadian real estate and the continuation of its leadership position in the mortgage broker distribution channel. With the cut in the Bank of Canada overnight rate announced in January, 2015, the Company’s expectation of a low interest rate environment for 2015 has been reinforced. Low rates will continue to keep mortgage affordability at favourable levels and allay refinancing risk. During the fourth quarter of 2014, the Company incurred employee costs, training, recruiting and other start-up costs in conjunction with the mortgage underwriting and fulfillment processing services agreement it announced on July 16, 2014. Although operations from this agreement commenced in January 2015, revenue will not be earned 5 until the mortgages underwritten fund later in the first quarter. Accordingly to start 2015, this new business may produce little if any marginal earnings for the Company’s bottom line.

By realizing the significant renewal opportunities available in the upcoming year and managing its partnerships with institutional customers, the Company will continue to focus on sustainable profitability. Management expects the Company to continue to generate the cash flow from its $22 billion portfolio of mortgages pledged under securitization and $64 billion servicing portfolio that will maximize financial performance.

Conference call and webcast
February 25, 2015 2 p.m. ET

Participant Numbers



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 $86 billion in mortgages under administration, First National is Canada’s 6 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

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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 “PreFMV 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.

For further information:
Robert Inglis
Chief Financial Officer
First National Financial Corporation
Tel: 416-593-1100

Ernie Stapleton
Tel: 905-648-9354