First National Financial Corporation Reports Fourth Quarter and Annual 2017 Results

TORONTO, Feb. 27, 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 and 12 months ended December 31, 2017. The Company derives virtually all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National").

2017 Summary

• Mortgages under administration ("MUA") up 2% to $101.6 billion compared to $99.4 billion at December 31, 2016
• New mortgage originations down 2% to $16.9 billion compared to $17.2 billion in 2016
• Revenue up 3% to $1.08 billion compared to $1.05 billion in 2016
• Net income $209.7 million ($3.42 per common share) compared to $201.8 million ($3.28 per common share) in 2016
• Pre-FMV EBITDA⁽¹⁾ down 8% to $234.3 million compared to $253.5 million in 2016

Fourth Quarter Summary

• MUA increased at an annualized rate of 6% during the fourth quarter of 2017
• New mortgage originations increased 7% to $4.4 billion compared to $4.1 billion a year ago
• Revenue 7% lower at $270.0 million compared to $290.8 million a year ago
• Net income $45.9 million ($0.75 per common share) compared to $71.8 million ($1.18 per common share) a year ago
• Pre-FMV EBITDA⁽¹⁾ unchanged from a year ago at $61.1 million

Management Commentary
"First National's efficient business model and diversified position as Canada's largest non-bank mortgage lender and largest commercial mortgage lender delivered strong shareholder returns in 2017," said Stephen Smith, Chairman and Chief Executive Officer. "After-tax Pre-Fair Market Value return on shareholders' equity was 38%, while the Company paid a record $184.4 million to common shareholders to bring total dividends and distributions to almost $1.1 billion since our initial public offering in 2006. In a year punctuated by legislative interventions in the housing market, these results reflect well on the Company's structural and competitive advantages and on our employees who responded creatively and diligently to the needs of borrowers, their mortgage advisors and funding partners. In a changing marketplace, the ability to expertly provide a full range of residential and commercial mortgage solutions for all our customers will serve us well in 2018."

For the year, total originations together with renewals amounted to $23.2 billion, up 2% from $22.8 billion in 2016 as a 10% decline in single family originations was more than offset by: 13% growth in single-family residential renewals; 21% growth in commercial originations; and, 16% growth in commercial renewals.

"The single-family team more than held its own in the face of greater competition within a market made smaller by new mortgage insurance rules," said Moray Tawse, Executive Vice President. "While new originations were lower than in 2016, single family executed extremely well on available opportunities and our focus on service paid off with higher renewals. On the commercial side, the team did an excellent job converting strong demand for conventional and CMHC financing into new business across multiple asset classes and continued to achieve success with its advisory approach to serving borrowers. We're very pleased with these results as they validate First National's service-oriented strategies."

Q4 2017 Summary and Annual 2017 Review

First National's MUA increased 2% to $101.6 billion from $99.4 billion at December 31, 2016 despite the maturity of $1.0 billion of CMBS mortgages during 2017 and lower new mortgage originations. At year-end 2017, single-family MUA was $77.4 billion while commercial MUA was $24.2 billion, compared to $77.1 billion and $22.2 billion, respectively, a year ago. Between September 30, 2017 and December 31, 2017, MUA increased at an annualized rate of 6%, on the strength of growth in commercial MUA.

For the fourth quarter, single-family mortgage originations increased 4% to $2.8 billion from $2.7 billion, despite regulatory changes that reduced market demand. Single family mortgage renewals were $1.1 billion in the fourth quarter of 2017, unchanged from a year ago. Fourth quarter 2017 commercial segment originations increased 14% to $1.6 billion from $1.4 billion in the same period of 2016, while commercial mortgage renewals amounted to $257 million compared to $349 million a year ago. The Company originated and renewed for securitization purposes $2.4 billion of mortgages in the fourth quarter of 2017 compared to $1.5 billion a year ago.

For the 12 months ended December 31, 2017, single-family mortgage originations of $11.1 billion were 10% lower than in 2016 ($12.4 billion), reflecting regulatory changes that reduced the size of the residential market, including: new mortgage insurance rules announced in October 2016; increases in the cost of portfolio insurance; and, regional measures such as new foreign buyers' taxes. Single family mortgage renewals were $5.2 billion in 2017, up 13% from $4.6 billion in 2016. Commercial segment originations increased 20% to $5.8 billion from $4.8 billion in 2016, while commercial mortgage renewals amounted to $1.1 billion compared to $1.0 billion a year ago. The Company originated and renewed for securitization purposes $8.2 billion of mortgages in 2017 compared to $7.7 billion in 2016.

Fourth quarter 2017 revenue was $270.0 million compared to $290.7 million in the fourth quarter of 2016, a 7% decline reflecting larger gains on financial instruments recorded in the 2016 quarter.  Excluding gains and losses on financial instruments in the respective quarters, revenue increased by 5% year over year. This growth was largely the result of rising interest rates which had a favorable impact on interest on securitized mortgages and mortgage investment income. This increase offset lower placement fee revenues. Annual 2017 revenue was $1.08 billion compared to $1.05 billion in 2016, a 3% increase resulting from rising interest rates which positively affected interest revenue earned on securitized mortgages ($146.8 million compared to $144.3 million in 2016), mortgage servicing income ($140.8 million compared to $131.4 million), mortgage investment income ($68.3 million compared to $57.5 million) and gains on financial instruments ($56.2 million compared to $27.7 million). Placement fees ($144.6 million compared to $176.9 million in 2016) were lower due to lower residential origination volume for institutional customers, while gains on deferred placement fees ($10.0 million compared to $16.3 million in 2016) reflected tighter spreads and lower volumes of multi-unit residential mortgages originated and sold to institutional NHA-MBS issuers.

Securitized mortgages amounted to $27.6 billion at December 31, 2017 compared to $26.1 billion at December 31, 2016, a 6% increase.

Fourth quarter 2017 income before income taxes was $63.2 million compared to $97.7 million in the fourth quarter of 2016, a 35% decrease. This change was almost entirely due to the pace of rising interest rates. In the 2016 quarter, rates rose rapidly and the Company recorded gains of $37.9 million. While rates continued to rise, the pace was slower in 2017 such that just $3.6 million of gains were recognized. Excluding these gains, Pre-FMV EBITDA⁽¹⁾ was $61.1 million in each quarter, demonstrating the consistency of the Company's earnings. For 2017, income before income taxes was $285.4 million compared to $274.1 million in 2016, a 4% increase which was also reflective of changing capital market conditions which affected the Company's economic interest rate hedges. In 2017, the Company recorded an additional $28.5 million of gains on financial instruments compared to 2016.

For 2017, Pre-FMV EBITDA⁽¹⁾ was $234.3 million compared to $253.5 million in 2016, an 8% decrease due to lower placement fee revenue as a result of capital market conditions. The Company calculates that placement fees in 2017 were $14.4 million less than they would have been in a static interest rate environment. Because placement fees are economically hedged, the Company calculated that $14.4 million was earned instead through the gains on financial instruments recorded in the same year. Adjusting for this amount, Pre-FMV EBITDA⁽¹⁾ was lower by 2% year over year because of tighter mortgage spreads and higher broker fees.

Dividends

The Board declared common share dividends in the fourth quarter of 2017 of $102.7 million. This included a special common share dividend of $1.25 per share ($75.0 million in total), paid on December 15, 2017.

For all of 2017, the Company declared common share dividends of $184.4 million or $3.08 per common share, reflecting both the special dividend and a dividend increase in April 2017 that brought the annualized rate to $1.85 per share.

On an after-tax Pre-FMV⁽¹⁾ basis, the dividend payout ratio for 2017, inclusive of the special dividend, was 90% compared to 50% in 2016. Without including the special dividend, the ratio was 53% in 2017. The Board also declared $2.7 million of dividends on its preferred shares in 2017 compared to $3.2 million in 2016.

Shares Outstanding
At December 31, 2017 and February 27, 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 2017. As expected, the market for high ratio insured mortgages slowed as a result of the October 2016 mortgage insurance rules announced by the Department of Finance. Although single-family mortgage originations for the Company were down 10% from 2016, commercial mortgage origination increased by 20% and single-family renewals grew by 15% to $5.2 billion. Altogether, origination including renewals was up 2% and earnings, adjusted for fair value considerations, were lower by 2%. The combination of consistent revenue from both securitization and servicing departments and the value inherent in the Company's renewal opportunities continued to support earnings. Management believes that fourth quarter new single-family origination, which increased year over year by 3%, benefited from new mortgage qualification rules announced for 2018. The new rules require conventional mortgage borrowers to qualify at interest rates higher than the actual rate of the mortgage. Accordingly, the new rules reduce the relative size of mortgage that a borrower could otherwise have taken on under the previous rules. The Company believes this pushed some borrowers to accelerate their decision to purchase real estate into 2017, so as to qualify under the old rules which has had a positive impact on these volumes.

Going into 2018, the Company is optimistic and anticipates similar seasonal origination in the residential segment as experienced in 2017. Despite the impact of new qualifying mortgage rules announced in late 2017, which will have a dampening effect on origination volumes, the Company currently foresees a strong economy which will offset these effects. The Company sees growth in single-family renewals and a stable commercial segment muted by a rising interest rate environment and some increased competition.

The Company earned almost $56 million in gains on financial instruments in 2017. While this revenue increased 2017 net income, the offsetting economic impact will be felt in the Company's future earnings. Net securitization margins will be lower on new securitizations as the Company issues NHA-MBS with coupons that will be higher than the period when the securitized mortgages were initially funded. The negative impact will be recognized over the five- and 10-year terms of the securitization. However, to the extent that the funded mortgages are placed with institutional customers, as the Company did in 2017, the impact will be immediate with lower placement fees in current period earnings. Depending on how the Company elects to fund these mortgage assets, the negative impact associated with the large gains recorded in 2017 could be spread over five- or 10-year terms or it could be realized in the upcoming fiscal year.

The Company will continue to generate income and cash flow from its $27 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 March 7, 2018. To access the rebroadcast, please dial 647-436-0148 and enter passcode 798696 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