First National Financial Corporation reports third quarter 2013 results

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TORONTO , Oct. 29, 2013 /CNW/ - First National Financial Corporation (TSX: FN, TSX:FN.PR.A) (the "Company" or "FNFC") today announced its financial results for the third quarter ended September 30, 2013 . The Company derived 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 12% year over year to $74.0 billion
  • Mortgage originations lower by 5% to $4.1 billion from $4.3 billion
  • Revenue up 10% to $200.5 million from $181.6 million
  • Net income up 23% to $39.4 million ( $0.63 per common share) from $32.0 million ( $0.51 per common share)
  • Income before income taxes up 20% to $53.0 million from $44.0 million
  • Pre-FMV EBITDA(1) up 38% to $56.1 million from $40.6 million

"First National achieved record third quarter performance on meaningful growth in mortgages under administration and mortgages pledged under securitization," said Stephen Smith , Chairman and President. "Annualized growth in MUA since June 30 th of 16% reflects solid activity levels in Canadian real estate and the Company's ongoing focus on delivering responsive service and competitive mortgage solutions."

"We consider single family originations of $3.4 billion in the third quarter to be favourable given the regulatory changes that the market has absorbed over the past year," said Moray Tawse, Vice President, Mortgage Investments. "In fact, origination activity levels have increased since the first quarter when they were down 20% from 2012 levels. Commercial mortgage originations of $760 million in the quarter, while 2% lower than last year, also reflected a good level of market activity and the strength of First National's relationships in this segment."

         
  Quarter ended Nine months ended
  Sept. 30,
2013
Sept. 30,
     2012
Sept. 30,
    2013
Sept. 30,
2012
For the Period ($000's)
Revenue 200,522 181,573 575,580 472,521
Income before income taxes 53,009 44,047 176,190 105,734
Pre-FMV EBITDA (1) 56,124 40,597 144,181 111,434
At Period end  
Total assets 19,930,780 14,311,584 19,930,780 14,311,584
Mortgages under administration 74,042,024 65,900,106 74,042,024 65,900,106

(1) 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.
   

Q3 2013 Results

First National's MUA grew to $74.0 billion at September 30, 2013 from $65.9 billion at September 30, 2012 , an increase of 12%.  Between June 30, 2013 and September 30, 2013 , MUA grew approximately 4% from $71.2 billion to $74.0 billion , an annualized increase of 16%.

Total single-family mortgage originations of $3.4 billion were 6% lower than the $3.6 billion originated in the third 2012 quarter. Commercial segment originations of $760 million were 2% lower than originations of $774 million in the same period of 2012. Total origination was down 5% year over year. Of the $4.1 billion of originations in the quarter, $1.1 billion were originated for securitization purposes.

Revenue in the third quarter increased 10% to $200.5 million from $181.6 million in the same period of 2012 primarily reflecting higher interest revenue from securitized mortgages that increased revenue by $25.6 million or 14%.

Income before income taxes in the quarter increased 20% to $53.0 million from $44.0 million in the third quarter of 2012, despite declining interest rate yields in the bond market which negatively affected the fair value of the Company's interest rate hedges. Total losses on financial instruments in the third quarter amounted to $1.3 million compared to a gain of $5.6 million in the third quarter a year ago.

Excluding the impact of gains and losses on financial instruments, which have been volatile, the Company's Pre-FMV EBITDA increased 38% to $56.1 million from $40.6 million a year ago. This increase was due to the steady growth of the Company's core business, including increased net margin on securitized mortgages and higher mortgage investment income.

Determination of Adjusted Cash Flow and Payout Ratio

The Board declared dividends in the third quarter of 2013 of $0.35 per common share, based on an average annual rate of $1.40 per share, compared to $0.32 in the third quarter of 2012. Despite the year-over-year increase in the common share dividend, the Company's payout ratio was 62% compared to 58% in 2012.

Determination of Adjusted Cash Flow and Payout Ratio

           
  Quarter ended Nine months ended
  Sept. 30,
2013
Sept. 30, 
2012
Sept. 30, 2013 Sept.30,
2012
For the Period ($000's)
Cash provided by (used in) operating        
  activities 94,327 (149,203) (450,505) 80,390
Add (deduct):        
   Change in mortgages accumulated for        
      sale or securitization between periods (59,534) 183,115 544,773 10,962
Adjusted Cash Flow (1) 34,793 33,912 94,268 91,352
Less: cash dividends on preference shares  (1,163) (1,163) (3,488) (3,488)
Adjusted Cash Flow available for common shareholders 33,630 32,749 90,780 87,864
Adjusted Cash Flow per Common Share ($/share) (1) 0.56 0.65 1.51 1.46
Dividends declared on Common Shares 20,990 19,239 61,968 56,719
Dividends declared per Common Share ($/share) 0.35 0.32 1.03 0.95
Payout Ratio 62% 58% 68% 65%
         

Note:

(1) These non-IFRS measures adjust cash provided by (used in) operating activities by accounting
for changes between periods in mortgages accumulated for sale or securitization and mortgage
securitization activity.
   

The 2013 third quarter payout ratio was indicative of strong business performance as the pre-FMV EBITDA increase was also reflected in cash flow. During the third quarter, the Company crystalized $26.5 million of unrealized gains recorded in the second quarter of 2013. While this increased cash flow in the third quarter, the inflow was offset by First National's investment in securitization activities. This investment was larger than in previous quarters as the Company paid premiums for securitization-related debt due to the same bond yield movements that produced the large fair value gains in the second quarter of 2013. Given the upfront costs of $31.0 million associated with securitization in the third quarter, the Company is pleased with the payout ratio of 68% over the first nine months of 2013.

Outlook

Management considers the third quarter of 2013 a success. Despite marginally lower origination volumes in the residential segment, the Company was able to maintain its level of securitization activity by taking advantage of its renewal opportunities and demand from the capital markets. For the remainder of 2013, the Company anticipates the low interest rate environment to continue with moderated, but still healthy, mortgage spreads. Despite lower origination targets, management expects to continue to capitalize on higher volumes of mortgage renewals and to generate cash flow from its $16 billion portfolio of mortgages pledged under securitization in order to maximize the Company's financial performance.

Conference Call and Webcast

October 30, 2013 10 a.m. ET    Participant Numbers
416-644-3417
877-974-0446

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 will be available to listeners until 12 a.m. on November 7, 2013 . To access the rebroadcast, please dial 416-640-1917 or 877-289-8525 and enter passcode 4643825 followed by the number sign.

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 (FN.TO) 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 $74 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.

*Non-GAAP Measures
The Company uses IFRS as its accounting framework. IFRS are generally accepted accounting principles (GAAP) for Canadian publically 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", "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.

SOURCE First National Financial Corporation

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