First National Financial Corporation Reports Fourth Quarter and Annual 2016 Results

TORONTO, Feb. 28, 2017 /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 12 months ended December 31, 2016. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National").

2016 Summary

• Mortgages under administration ("MUA") up 6% to a record $99.4 billion from $93.8 billion at December 31, 2015 New mortgage originations $17.2 billion compared to $17.3 billion in 2015
• Revenue up 15% to $1.0 billion from $915.3 million in 2015
• Net income $201.8 million ($3.28 per common share) up 84% from $109.4 million ($1.71 per common share) in 2015
• Pre-FMV EBITDA⁽¹⁾ up 21% to $253.5 million from $209.9 million in 2015

Fourth Quarter Summary

• MUA increased at annualized rate of 3% during the fourth quarter of 2016
• New mortgage originations $4.1 billion compared to $4.2 billion in the fourth quarter a year ago
• Revenue up 16% to $290.7 million from $250.0 million a year ago
• Net income $71.8 million ($1.18 per common share) up 75% from $41.1 million ($0.66 per common share) a year ago
• Pre-FMV EBITDA⁽¹⁾ up 11% to $61.1 million compared to $58.5 million a year ago

Common Share Dividend Increase
First National's Board of Directors today increased the common share dividend to the annual equivalent of $1.85 per share, a 9% increase over the current annualized rate of $1.70 per share, effective with the dividend to be paid on April 17, 2017.

Management Commentary
"This was a very successful year for First National as strong contributions made by the Company's residential and commercial business lines and our third-party servicing and fulfillment operation delivered record revenue and earnings," said Stephen Smith, Chairman and Chief Executive Officer. "These results demonstrate the value of the Company's structural advantages as a market diversified, non-bank lender as well as the strength of our employees who dedicate themselves every day to meeting the needs of borrowers, our mortgage broker partners and our investors."

For 2016 as a whole and in the fourth quarter in particular, results benefited from gains on financial instruments as opposed to losses on these items in 2015. The impact of these gains and losses is removed in calculating Pre-FMV EBITDA⁽¹⁾, which is a key measure used by the Company's management in assessing performance and reviewing the common share payout ratio. The substantial growth in annual Pre-FMV EBITDA⁽¹⁾  was due to higher earnings in net placement fees and growth in servicing and securitization.

Mr. Smith noted that today's decision to increase the common share dividend marks "the 10th time that First National has boosted cash payouts to shareholders over the decade since the Company first listed on the TSX. This latest increase is based on performance to date and management's outlook for future years."

Total originations in 2016 were in line with the strong performance delivered in 2015 in spite of obvious regional disparities in market activity.

"Throughout 2016, First National faced the challenge of a substantial reduction in demand in oil-producing regions of Canada and an increase in competition across the country," said Moray Tawse, Executive Vice President. "Even though volumes for our Calgary regional office were much lower, new single family originations of $12.4 billion came within 4% of last year, which we consider a very positive outcome. The growth leader this year was our Commercial business, where new originations were 9% higher than in 2015 at $4.8 billion. Combined with healthy renewal volumes in both business segments, First National's total 2016 production of $22.7 billion was very strong."  

Q4 and Annual 2016 Results Review

First National's MUA increased 6% to $99.4 billion at December 31, 2016 from $93.8 billion at December 31, 2015. Between September 30, 2016, and December 31, 2016, MUA grew at an annualized rate of 3%.

In 2016, the Company's new single-family mortgage originations decreased 4% to $12.4 billion from $12.9 billion in 2015. Fourth quarter 2016 single family originations of $2.7 billion were 7% or $221 million lower than in the fourth quarter of 2015. In both reporting periods, activity levels from the Company's regional office in Calgary were much lower than in 2015 due to lower demand for mortgages in Alberta and Saskatchewan brought about by the downturn in the oil and gas industry.

Single family mortgage renewals amounted to $4.6 billion in 2016, up 7% from $4.3 billion in 2015. For the fourth quarter, single family mortgage renewals were $1.1 billion compared to $1.2 billion in the same period of 2015.

In 2016, commercial segment new originations of $4.8 billion were 9% higher than in 2015 and, at $1.4 billion, were 8% higher in the fourth quarter of 2016 compared to the same period in 2015. Commercial renewals amounted to $974 million for all of 2016, 6% higher than in 2015 and were $349 million in the fourth quarter or 9% higher than in the final quarter of 2015.

For 2016, revenue increased 15% to a record $1.0 billion from $915.3 million in 2015. Excluding the impact of gains on financial instruments in 2016 versus losses on financial instruments in 2015, revenue increased 6% year over year primarily due to 9% growth in interest revenue – securitized mortgages, 7% growth in placement fees and 12% growth in mortgage servicing on higher MUA. Fourth quarter 2016 revenue increased 16% to $290.7 million from $250.0 million a year ago. Excluding the impact of gains and losses on financial instruments, fourth quarter revenue was 1% higher in 2016 on growth in interest revenue – securitized mortgages.

Securitized mortgages amounted to $26.1 billion at December 31, 2016, up 7% from $24.3 billion at year-end 2015.

For 2016, income before income taxes increased 84% to $274.1 million from $148.7 million in 2015, primarily due to the significant effect of changes in the capital markets on the Company's interest rate hedges between 2016 and 2015. For the fourth quarter of 2016, income before income taxes increased 73% to $97.7 million from $56.4 million for similar reasons.

For 2016, Pre-FMV EBITDA⁽¹⁾, which excludes the impact of gain and losses on financial instruments, increased 21% to $253.5 million from $209.9 million in 2015 due primarily to higher earnings in net placement fees and continued growth in servicing and securitization activities. For the fourth quarter of 2016, Pre-FMV EBITDA⁽¹⁾ was $61.1 million, 4% higher than in 2015 due to growth that was in line with the increase in MUA. 

Dividends

The Board declared common share dividends in 2016 of $98.9 million, 9% higher than in 2015. On an after-tax Pre-FMV⁽¹⁾ basis, the dividend payout ratio was 50% in 2016 compared to 64% in 2015. The fourth quarter 2016 payout ratio on the same basis was 58%. As announced today, the Company has increased the common share dividend to the annualized equivalent of $1.85 per share, effective with the payment made on April 17, 2017, from the previous annualized rate of $1.70 per common share.

The Company also paid $2.53 million of dividends on its preferred shares in 2016 compared to $4.65 million in 2015. 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. The floating rate preferred shares paid 2.58%, for the three months ended December 31, 2016. As previously announced, the dividend rate for the Class A Series 2 preference shares for the period until reset due March 2021 will be the 90-day Canadian Treasury Bill plus 2.07% on an actual/365 day count basis per quarter.

At December 31, 2016 and February 28, 2017, 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.

Outlook

In 2017, the Company looks to build on the success of 2016, although with the announcement of new rules on mortgage insurance, rising interest rates and other housing-related legislation, there will be new challenges to manage.

As described in the third quarter MD&A, new mortgage insurance rules increased the "stress test" for borrowers of five-year fixed rate high ratio mortgages, requiring them to qualify based on an interest rate standard determined by the Bank of Canada. Management feels that while not overly significant, this will slow the high ratio insured market activity by some 5–10%, all other factors being equal.

The new mortgage rules also eliminate the insurability on refinance transactions of conventional mortgages. Management believes such transactions were significant across Canada and this rule change will reduce mortgages available for securitization for the Company's NHA-MBS and CMB programs. Although these mortgages can be underwritten on a conventional basis for the Company's institutional investors, placement is generally not as profitable as securitization for First National. As well, the introduction of these rules may reduce the overall availability of insured mortgages across the country and may result in tighter mortgage spreads and higher origination costs as lenders in the securitization industry compete for the remaining insured mortgage volume. Such an outcome would decrease net securitization margins.    

New capital rules for mortgage portfolio default insurance were introduced in 2017. One of the results of these rules is that insurers increased premiums associated with portfolio insurance by over 200%, effective in the first quarter of 2017. The higher cost of such insurance will have a direct impact on net interest margin on any conventional mortgage that the Company elects to insure and securitize.

Regional issues, particularly in oil-dependent areas of the country, had a negative effect on 2016 origination volumes. Recently, real estate companies have reported slowing sales in British Columbia, perhaps associated with the foreign ownership tax. The Company originates about 20% of its single-family mortgages from its Vancouver office. Accordingly, slowing sales there or other regional issues could have a negative impact on origination volumes in 2017.   

In the face of these potential challenges in the residential market for new mortgage originations, the Company will endeavor to grow its commercial segment business, focus on the significant value of single family renewal opportunities and continue to generate cash flow from its $26 billion portfolio of mortgages pledged under securitization and $74 billion servicing portfolio.

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 to listeners until 1pm ET on March 8, 2017. To access the rebroadcast, please dial 647-436-0148 or 888-203-1112 and enter passcode 9858978 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 approximately $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" 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

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