First National Financial Corporation Reports First Quarter 2018 Results

TORONTO, May 1, 2018 /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, 2018. 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") up 3% to $102.2 billion compared to $99.1 billion at March 31, 2017
• New mortgage originations up 17% to $3.4 billion from $2.9 billion in Q1 2017
• Revenue up 11% to $256.7 million compared to $232.2 million in Q1 2017
• Net income $35.9 million ($0.59 per common share) compared to $36.1 million ($0.58 per common share) in Q1 2017
• Pre-FMV EBITDA⁽¹⁾ down 5% to $50.4 million compared to $53.1 million in 2017

Management Commentary
"The results of the first quarter were broadly positive and reflected steady growth in MUA from increases in new single family and commercial mortgage originations and good customer retention rates," said Stephen Smith, Chairman and Chief Executive Officer. "While earnings, adjusted for fair value considerations were lower by 5%, a large part of this reduction reflected our choice to shift mortgages to securitization programs which delays the earnings process. Despite this factor and tighter spreads, EPS was slightly higher than a year ago, and net income attributable to shareholders provided strong support for the common share dividend. Given the legislative interventions in the housing market over the past 17 months, including new B-20 Guidelines on January 1^st of this year, First National found success by staying resolutely focused on customer service while adopting the latest underwriting standards. We're pleased to mark our 30^th business anniversary with this performance."

In the first quarter, total originations together with renewals amounted to $4.5 billion, up 5% from $4.3 billion in Q1 2017 on a 12% increase in new single-family originations and a 27% increase in commercial originations. Single family renewals were unchanged from a year ago while commercial renewals were 54% below Q1 2017 (which benefitted from one particularly large renewal.)

"In evaluating first quarter originations, it appears there was some acceleration of home-buying activity late in 2017, prior to the advent of new B-20 underwriting guidelines," said Moray Tawse, Executive Vice President. "A portion of those transactions closed in the first quarter, providing a boost to single family originations to open the year. First National's strong market share in the broker channel was also a contributing factor. In our commercial business, First National's continued emphasis on both CMHC and conventional lending added to the momentum that we initiated some five years ago."

Q1 2018 Summary

First National's MUA increased 3% to $102.2 billion from $99.1 billion at March 31, 2017 on higher new mortgage originations and good execution of available renewal opportunities. At March 31, 2018, single-family MUA was $77.5 billion while commercial MUA was $24.7 billion, compared to $76.9 billion and $22.2 billion, respectively, a year ago. Between December 31, 2017 and March 31, 2018, MUA increased at an annualized rate of 2%.

For the first quarter of 2018, new single-family mortgage originations increased 12% to $2.2 billion from $1.9 billion a year ago, as activity levels across Canada (except Alberta) were strong. Single family mortgage renewals were $1.0 billion in the first quarter of 2018, unchanged from a year ago. New commercial segment originations increased 27% to $1.2 billion from $0.9 billion in the first quarter of 2017, while commercial mortgage renewals amounted to $152 million compared to $332 million a year ago. The Company originated and renewed for securitization purposes $2.4 billion of mortgages in the first quarter of 2018 compared to $1.7 billion a year ago.

First quarter 2018 revenue increased 11% to $256.7 million compared to $232.2 million in the first quarter of 2017 primarily as a result of: a 14% increase in interest revenue earned on securitized mortgages ($183.5 million compared to $160.6 million in 2017) due to higher mortgage rates and a larger portfolio of securitized mortgages; a 2% increase in mortgage servicing income ($30.9 million compared to $30.2 million) from growth in MUA; and, a 36% increase in mortgage investment income ($18.9 million compared to $13.9 million) primarily due to an increase in interest rates and growth in the Company's commercial bridge loan program. These increases were partially offset by: a 26% decline in placement fees ($19.7 million compared to $26.6 million in 2017) due to lower residential origination volume placed with institutional customers; and, a 5% decrease in gains on deferred placement fees ($3.5 million compared to $3.7 million in 2017) reflecting tighter spreads on these mortgages.

On January 1, 2018, the Company adopted IFRS 9, which, among other items, provided a different approach to hedge accounting. As a result, gains and losses from the Company's interest rate hedging program, if effective, are now recorded in Other Comprehensive Income or deferred on the balance sheet, as opposed to being recognized immediately in earnings as gains or losses on financial instruments. By adopting hedge accounting under IFRS 9, management hopes that most of the volatility from the hedging program will not affect the income statement. Accordingly, in the first quarter of 2018, the Company recorded gains on short bonds used for the economic hedging program of $0.8 million (2017 – losses of $3.5 million). On its commercial segment hedges, the value of the Company's hedges increased by $5.2 million; however, because of the designation of an effective hedge relationship, virtually the entire amount was recorded in Other Comprehensive Income. This amount will be amortized into the Company's regular income over the terms of the related securitization and placement transactions. For its residential segment, the Company designated hedge relationships to protect the fair value of funded mortgages prior to securitization or placement. The $0.8 million gain in the first quarter reflected the increase in the value of short bonds used to hedge the Company's single-family commitments for which the Company does not attempt to document a hedge relationship. The change in value of the mortgages that were hedged effectively in the first quarter was deferred on the Company's balance sheet through an increase in mortgages accumulated for securitization.

For more information on the adoption of new IFRS Accounting Standards, including IFRS 9 and IFRS 15, please see the Company's financial statements and Management's Discussion and Analysis for the first quarter of 2018.

First quarter 2018 income before income taxes was $49.3 million compared to $49.2 million in the first quarter of 2017. While much of the volatility from changing capital markets conditions was removed from the income statement, the Company's earnings were still affected by gains and losses on financial instruments.

Pre-FMV EBITDA⁽¹⁾, which removes some of this volatility, was $50.4 million in the first quarter of 2018 compared to $53.1 million a year ago. The 5% decline reflected tighter mortgage spreads and increased securitization which delays the earnings process in comparison to placement transactions in which fees are earned in the same period as origination.

Dividends

The Board declared common share dividends in the first quarter of 2018 of $27.7 million compared to $26.2 million a year ago reflecting an increase in the dividend (to $1.85 per share per annum) announced in April 2017.

The dividend payout ratio as a percentage of net income attributable to common shareholders was 79% in Q1 2018 compared to 75% in Q1 2017. The Board also declared $0.7 million of dividends on its preferred shares in the first quarter of 2018, unchanged from the comparable period in 2017.

Shares Outstanding

At March 31, 2018 and May 1, 2018, 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

Management is pleased with the results of the first quarter of 2018. Going into the second quarter 2018, the Company is optimistic that the trend established in the first quarter will continue. The 12% year-over-year increase in new single-family origination represents a return to more normalized markets after the disruption in the first half of 2017 resulting from the increase in qualifying rates for insured mortgages. Despite the impact of new qualifying mortgage rules under B-20 and higher interest rates, 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. While the Company expects growth in origination in the second quarter of 2018, it also expects a tight interest spread environment, similar to what existed in the first quarter of 2018.

The Company will continue to generate income and cash flow from its $28 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 1pm ET on May 9, 2018. To access the rebroadcast, please dial 647-436-0148 and enter passcode 9431190 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 $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