For Immediate Release
Toronto, Ontario, October 25, 2016 – 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, 2016. 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 6% to a record $98.6 billion from $92.6 billion at September 30, 2015
- Mortgage originations $6.2 billion, 8% lower than $6.7 billion a year ago
- Revenue up 11% to $273.8 million from $246.6 million a year ago
- Net income $51.4 million ($0.84 per common share) up 75% from $29.3 million ($0.46 per common share) a year ago
- Pre-FMV EBITDA(1) up 11% to $67.5 million compared to $61.0 million a year ago
“First National delivered record performance in the third quarter, marking the continuation of a long-term trend of profitable operations based on its strong and resilient business model,” said Stephen Smith, Chairman and Chief Executive Officer. “To date this year, we’ve faced several challenges including a sizeable decline in market activity in Alberta and Saskatchewan due to the oil industry downturn. First National more than offset these market disruptions to achieve excellent results for our shareholders. We expect our scale, range of single family and commercial mortgage products, diversified sources of funding and proven customer-focused approach will allow us to continue to provide solid results going forward.”
Net income in the third quarter reflected increased earnings from the Company’s servicing division and growing securitization program profits as well as a $3.5 million gain on financial instruments (compared to a loss of $19.1 million in the corresponding period of 2015).
“The value of our business model was once again reaffirmed in the third quarter as profits increased even while production decreased,” said Moray Tawse, Executive Vice President. “Looking at the numbers, new single family mortgage originations, while still strong by historical standards at $3.6 billion, were down 11% in the third quarter. This primarily reflected a 34% decline in activity levels out of our Calgary office as the housing market there continued to contract for economic reasons. In other parts of Canada, volumes were a couple of percentage points lower due to competition from small originators that sought to buy share. As a partial offset, single family renewals increased by 8% to $1.3 billion. Commercial mortgage originations were similarly 11% lower than a year ago, which was a function of timing rather than a change in market prospects. We believe First National more than held its own against these pressures, chose to remain disciplined with respect to pricing and was able to maximize the utility of originations and maintain net placement fee profitability.”
Through the first nine months of 2016, First National’s total new origination and renewals (inclusive of single family and commercial segments) stood at $17.3 billion, up 3% from $16.8 billion in the same period of 2015.
|| Quarter ended
||Nine months ended
September 30, 2016
||September 30, 2015
||September 30, 2016
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|For the period
|| ($ 000's)
|Income before income taxes
|Pre-FMV EBITDA (1)
|At Period end
|Mortgages under administration
(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.
Q3 2016 Results
First National’s MUA increased 6% to $98.6 billion at September 30, 2016 from $92.6 billion at September 30, 2015. Between June 30, 2016 and September 30, 2016, MUA grew at an annualized rate of 8%.
While the single-family real estate market remained strong in most regions of the country, the Company’s single-family mortgage originations decreased 11% to $3.6 billion from $4.1 billion in the third quarter of 2015. This primarily reflected a 34% reduction in originations from the Company’s Calgary office due to the ongoing downturn in Alberta and Saskatchewan’s housing markets and to a lesser extent, competition from smaller originators intent on buying volumes. The Company estimated that competition reduced volumes by between 2% and 5% in certain regions of the country. Single family mortgage renewals amounted to $1.3 billion in the third quarter of 2016, compared to $1.2 billion a year ago on more renewal opportunities. Commercial segment originations decreased 11% to $1.2 billion from $1.3 billion in the same period of 2015, while commercial mortgage renewals amounted to $167 million compared to $192 million a year ago. The Company originated and renewed for securitization purposes $2.0 billion of mortgages in the third quarter, up 25% from $1.6 billion a year ago in order to take advantage of funding opportunities.
Revenue increased 11% to $273.8 million from $246.6 million in the third quarter of 2015 largely due to a change of $22.6 million related to gains and losses on financial instruments. Excluding this change, revenue increased 2% year over year in the third quarter primarily as a result of growth in interest revenue – securitized mortgages (up 5% year over year to $34.1 million) and mortgage servicing income (up 12% to $35.7 million). These revenue categories were positively impacted by higher origination and MUA. Securitized mortgages amounted to $25.8 billion at September 30, 2016, up 6% from $24.3 billion a year ago.
Income before income taxes was $69.8 million compared to $39.6 million in the third quarter of 2015. The year-over-year increase of 76% primarily reflected the $22.6 million change in gains and losses on financial instruments between the quarters. In 2016, a gain of $3.5 million was recorded compared to a loss on financial instruments of $19.1 million in the third quarter a year ago.
Pre-FMV EBITDA(1), which excludes the impact of gain and losses on financial instruments in both periods, increased 11% to $67.5 million from $61.0 million a year ago. The change reflected increased earnings from the Company’s servicing division and growing securitization program profits.
The Board declared common share dividends in the third quarter of 2016 of $25.3 million. On an after-tax Pre-FMV(1) basis, the dividend payout ratio was 53% compared to 54% in the third quarter of 2015. As previously announced, the Company increased the common share dividend to the annualized equivalent of $1.70 per share, effective with the payment made on June 15, 2016, from the previous annualized rate of $1.55 per common share.
The Board also paid $0.69 million of dividends on its preferred shares in the third quarter of 2016 compared to $1.16 million in the same period a year ago. The decrease reflected the April 1, 2016 rate reset of its Class A Series 1 preference shares (fixed rate of 2.79%) and the creation of floating rate Class A Series 2 preference shares which paid 2.621%, for the three months ended September 30, 2016.
At September 30, 2016 and October 25, 2016, 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 notes outstanding.
Subsequent to quarter end, on October 3, 2016, the Ministry of Finance announced new rules on mortgage insurance and other housing related legislation. Most significant for the Company are the mortgage insurance rules that: i) increase the “stress test” for borrowers of five year fixed high ratio mortgages to require qualification based on an interest rate standard determined by the Bank of Canada; and ii) change the eligibility of uninsured mortgages for portfolio insurance.
The new rules surrounding portfolio insurance make eligibility consistent with the existing rules for high-ratio mortgages. This measure includes: raising the interest qualification rate for 5-year term mortgages, limiting the maximum amortization period to 25 years, limiting the property purchase price to $1,000,000, and prohibiting lenders from acquiring insurance on some rental properties and mortgages refinance transactions. These rules will take effect between October 3 and November 30, 2016.
The Company believes these changes to be significant and to have a disproportionate impact on non-bank lenders which use NHA MBS and CMB securitizations as a funding source. The Company has used portfolio insurance in the past several years to insure conventional mortgages. These mortgages were then securitized or sold to institutional investors seeking insured mortgages for their own securitization purposes.
Although these rules will have a negative impact on origination volumes of single family mortgages in 2017 and likely 2018, the Company’s business model has other drivers as follows:
- Due to the economics of new single family originations, they provide little if any earnings in the year they are underwritten. Profits are delivered to shareholders as the Company receives servicing income and the net interest margin from securitized mortgages;
- First National originates approximately $22 billion of mortgages annually consisting of $13 billion of new single family, $5 billion of single family renewals and $4 billion of commercial and multi-residential mortgages. About 50% of new single family volume is high ratio insured mortgage business and about 82% of that would be affected by the new qualifying rate rules. For high ratio origination for the nine months ended September 30, 2016, our analysis indicates that underwriting using the new qualifying rate rather than the contract rate would have reduced our high ratio origination volume by 4.6% or approximately $300 million on an annualized basis. Accordingly, we anticipate a decline in high ratio single family mortgage originations going forward of approximately 6% to 10%, or a range of $360 million to $585 million, about 1% to 3% of overall originations. We do not anticipate any material impact on our other originations and renewals as a result of the new qualifying rules;
- First National earns most of its profit from its large $73 billion servicing portfolio and its $25 billion portfolio of securitized mortgages. These portfolios will continue to provide earnings to the Company over the life of the mortgages;
- First National has diversified funding sources. While some conventional mortgages originated in the past would not now be eligible for NHA MBS securitization, the Company has institutional investors and asset-backed commercial paper conduits that can purchase such mortgages without portfolio insurance.
As a result, we believe that any reduction in origination as a result of these rules will have little to no impact on our 2016 or 2017 earnings. Looking forward, the Company expects the low interest rate environment to continue in 2016 and, despite the new rules on insured mortgages, mortgage affordability will stay at favourable levels. The Company will focus on the significant value of renewal opportunities and its partnerships with institutional customers in order to maximize profitability. Management expects the Company to continue to generate cash flow and profits from its $25 billion portfolio of mortgages pledged under securitization and $73 billion servicing portfolio.
Conference Call and Webcast
|October 26, 2016 10am ET
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 1pm ET on November 2, 2016. To access the rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter passcode 1326150 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 $98 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.
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. regulations.
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