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Press release from CNW Group

FIRST NATIONAL REPORTS FIRST QUARTER 2011 RESULTS

Tuesday, May 31, 2011

FIRST NATIONAL REPORTS FIRST QUARTER 2011 RESULTS22:05 EDT Tuesday, May 31, 2011/NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE U.S./Consistent growth in mortgages under administration, revenue and mortgage originationsTORONTO, May 31, 2011 /CNW/ - First National FinancialCorporation (TSX: FN) (the "Company" or "FNFC") today announced its financial results for the quarter ended March 31, 2011. The Company derived all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National"), which reported for the first time under the International Financial Reporting Standards ("IFRS"). The Company was successful in its objective of increasing origination volumes and growing mortgages under administration in the quarter.First National Financial's Q1 2011 Summary:Mortgages under administration up 11.7% year-over-year to $54.4 billionMortgage originations increased by 26% from the 2010 first quarter to $2.4 billionRevenue was $108.8 million, up 32% year-over-yearIncome before taxes decreased 12% year-over-year to $27.2 millionEBITDA was $29.4 million, a 13% decrease year-over-yearDividends declared to common shareholders increased 16% compared to tax equivalent distributions declared by the Company's predecessor, First National Financial Income Fund (the "Fund") in the first quarter of 2010On January 25, 2011, the Company issued 4,000,000 Series 1 Class A Preference shares at a price of $25.00 per share for gross proceeds of $100 million."With continued growth in our mortgages under administration and significant improvement in our mortgage originations from the first quarter of last year, we are pleased with First National's financial results for the quarter," said Stephen Smith, Chairman and President. "Despite increased competition for mortgage product and the resulting tightening of interest rate spreads in the past year, our Company successfully began a new chapter in its history as a dividend-paying corporation and we are confident in our future success.""We see 2011 as a year of opportunity," said Moray Tawse, Vice President, Mortgage Investments. "With the impact of IFRS and more onerous capital rules for financial institutions, First National sees reduced competition from smaller industry participants. By increasing the use of securitization strategies to fund our mortgages, we believe First National can take advantage of market conditions and continue to grow and profit."Selected Financial Highlights for First National Financial LP     Quarter ended   March 31, 2011March 31, 2010(2)For the Period   ($ 000's)Revenue  108,79882,599Income before income taxes  27,19231,012EBITDA (1)  30,03033,797At Period end Total assets  9,261,1787,330,179Mortgages under administration  54,416,71148,726,666Note:(1)     This non-GAAP measure adjusts income before income taxes by adding back expenses for amortization of intangible and capital assets.(2)     March 2010 figures restated for the Conversion and transition to IFRS.Q1 2011 ResultsFirst National's mortgages under administration totalled $54.4 billion, up from $48.7 billion at March 31, 2010, a rate of increase of 12%. This compares to $53.3 billion at December 31, 2010, representing a quarter-over-quarter increase of 2% and an annualized increase of 8%.The Canadian single-family real estate market proved resilient despite continued economic concerns and government regulatory activity to slow down the inflation of house prices. First quarter 2011 single-family mortgage originations for the Company increased by 29% to $1.8 billion from $1.4 billion in the first quarter of 2010. For the commercial segment, the year began with strong demand, as real estate companies began making new acquisitions. Volumes increased by 45% year-over-year, from $452 million to $655 million. Overall, origination volume increased from $1.9 billion to $2.4 billion, or 26%, from the prior quarter.The Company securitized a significant portion of its multi-residential mortgage origination in two issuances of the Canada Mortgage Bonds program in the quarter: $135 million in the February 10-year issue and $140 million in the March five-year issue. The Company has expensed most of its origination and hedging costs associated with these securitizations in the quarter, such that the net interest margin revenue will be earned over the next 10 years. The Company believes that its decision to securitize directly will be more profitable than a comparable placement transaction; however, from an accounting perspective, these profits will be earned over a longer term.Revenue for the quarter ended March 31, 2011 increased to $108.8 million from $82.6 million in 2010. The 32% growth reflects the increased interest revenue on securitized mortgages, particularly floating rate mortgages indexed to the prime rate, which increased from 2.25% in the 2010 quarter to 3.00% for the 2011 first quarter. However, the related funding costs associated with these mortgages also rose, such that the net interest margin on securitized mortgages grew only marginally. The value of higher mortgage servicing revenue and increased origination volumes were offset by tighter mortgage spreads, particularly for delivered placement fees.Income before income taxes decreased by 12% from $31.0 million in 2010 to $27.2 million in 2010. The decrease is due to interest rate spread compression experienced throughout 2010 and into 2011. As the economic environment has improved, the competition for mortgages has driven mortgage rates down relative to costs of funding such mortgages. These spreads affect the Company's net interest income on securitized mortgages, as well as placement and deferred placement fees revenue. EBITDA decreased by 11% from $33.8 million in 2010 to $30 million in 2011 due to the same factors cited above for income before income taxes.In January 2011, the Company raised additional capital through the issuance of $100 million of rate reset preferred shares. This potentially perpetual capital will provide the Company with the financial resources to pursue a larger direct securitization program without diluting the current shareholders of the Company.Determination of Adjusted Cash Flow and Payout RatioAs announced in the third quarter of 2010, the annual dividend rate of the corporation was increased from the originally disclosed rate of $1.10 per share to $1.25 per share. These rates are after providing for corporate income taxes and can only be compared to the distributions of the Fund if such distributions are adjusted on the same tax basis. The $1.50 distributed in 2010 by the Fund represents approximately $1.08 on an after-tax basis, such that the current dividend rate of $1.25 per share represents an increase of 16% to shareholders. Together with payments on account of income tax, the Company distributed $25.8 million in the first quarter of 2011, $3.3 million more than in the 2010 first quarter on a tax equivalent basis. This additional payout represents a disbursement of an additional $0.06 of adjusted cash flow per share.For the quarter ended March 31, 2011, the payout ratio was 97%, compared to 76% for the first quarter of 2010. The increase in the payout ratio is a result of increased working capital requirements and the higher dividend rate in 2011 compared to the tax adjusted distribution rate in 2010.Statement of Adjusted Cash Flow Quarter ended March 31,  2011March 31,  2010For the Period($ 000's)Cash provided by (used in) operating activities(238,109)12,977         Add (deduct):   Cash provided (used) related to pre-amalgamation shareholders of FNFC(17,635)770 Change in mortgages accumulated for sale or securitization between periods274,85115,654Adjusted cash flow (1)19,10729,401Adjusted Cash Flow per Share ($/Share) (1)0.320.49Dividends / Distributions declared on common shares/units18,74022,488Dividends / Distributions declared per common share/units ($/Share/Units)0.310.37Payout Ratio97%76%Note:(1) These non-GAAP measures adjust cash provided by (used in) operating activities by accounting for changes between periods in mortgages accumulated for sale or securitization.Transition to IFRSFor the Company, the Canadian Accounting Standards Board's decision requiring all publicly accountable entities to report under IFRS has meant a significant change in the First National's financial reporting, particularly in accounting for securitization transactions. Under Canadian GAAP, the Company's securitizations were considered "true sales" for accounting purposes. This resulted in the Company recording gains on securitization when these mortgages were sold to various securitization conduits. Under IFRS standards, these securitizations do not meet the definition of a "true sale" and instead are accounted for as a secured financing. Accordingly, the Company's securitizations (through ABCP, NHA-MBS and the CMB) do not qualify for sale accounting. Its deferred placement transactions will continue to meet the criteria for off-balance sheet treatment as the risk and reward associated with the ownership of these mortgages has been transferred to an arms-length institution.The Company has restated its comparative 2010 financial statements as if IFRS accounting standards had been applied for the past six years. This restatement eliminates all securitization receivables as at December 31, 2009, and puts these mortgages, together with securitization debt related to these transactions, back on the Company's balance sheet.Additionally, the Company has disclosed a restated statement of income under IFRS for the first quarter of 2010. Generally, this quarter featured large volumes of securitized mortgages and, accordingly, under Canadian GAAP, large gains on securitization were recorded. Under IFRS, these revenues are reversed and replaced with the net interest margin from previously recorded securitization transactions.Conference Call and WebcastConference Call and WebcastJune 1, 2011 10:00 a.m. ETParticipant Numbers416-644-3414 or 1-877-974-0445The 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 following the call until 12 a.m. (ET) on June 8, 2011. To access the rebroadcast, please dial 416-640-1917 or 1-877-289-8525 and enter passcode 4432558#.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 CorporationFirst National Financial Corporation (TSX: FN) 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 over $54 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 has adopted 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 "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 InformationCertain 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.  For further information: Rob Inglis       Steve Wallace Chief Financial Officer       Vice President First National Financial Corporation       Barnes Communications Inc. Tel:  416-593-1100       Tel:  416-367-5000 Email: rob.inglis@firstnational.ca       Email: swallace@barnesir.com