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Press release from CNW Group

First National Reports Second Quarter 2011 Results

Tuesday, July 26, 2011

First National Reports Second Quarter 2011 Results18:10 EDT Tuesday, July 26, 2011Continued growth in mortgages under administration and revenue/NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE U.S./TORONTO, July 26, 2011 /CNW/ - First National FinancialCorporation (TSX: FN) (the "Company" or "FNFC") today announced its financial results for the quarter ended June 30, 2011. The Company derived all of its earnings from its wholly-owned subsidiary, First National Financial LP ("FNFLP" or "First National"). Despite ongoing economic challenges in the business environment, the Company continued to build its portfolio of mortgages under administration and provide steady cash flow in the quarter.First National Financial's Q2 2011 Results Compared to Q2 2010 Results:Mortgages under administration up 11% year-over-year to $56.0 billionMortgage origination volume declined by 6% to $3.0 billionRevenue was $121.6 million, up 35% from the 2010 second quarterIncome before taxes increased 6% year-over-year to $27.8 millionEBITDA increased 6% to $30.6 millionDividends 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 second quarter of 2010In the second quarter of 2011, the Company celebrated its five year anniversary as a public entity after listing on the TSX on June 15, 2006. During those five years, the Company paid out $422 million in distributions and dividends to unitholders and shareholders. This represents a pre-tax return of 71% on the IPO price of $10 per unit. With the appreciation of the value of the Company since the IPO, original unitholders have earned a total return of over 140% (at current share prices) on their investment for the five-year period."In the second quarter of 2011, First National extended its track record of sustained growth and profitability," said Stephen Smith, Chairman and President. "Despite lower origination volumes associated with a tentative real estate market, growing net interest revenue and mortgage servicing helped the Company grow its bottom line. First National's sustained growth in mortgages under administration and revenue continues to reinforce our Company's strong position in the mortgage broker distribution channel.""The prolonged economic uncertainty continues to affect the housing market," said Moray Tawse, Vice President, Mortgage Investments. "In addition, there are a numbers of other factors, including the transition to IFRS and the new capital regulations for federally regulated banks and trust companies that are likely to have an impact on the mortgage industry. The Company believes it is well-positioned to take on these challenges and take advantage of new business opportunities as they emerge."Selected Financial Highlights for First National Financial LP                    Quarterended  Six months ended     June 30,2011  June 30,2010(2)  June 30,2011  June 30,2010(2) For the Period     ($000s) Revenue   121,579  90,411  230,377  173,010 Income before income taxes   27,805  26,244  54,997  57,256 EBITDA (1)   30,643  29,029  60,673  62,826 At Period end     Total assets   9,948,118  7,975,198  9,948,118  7,975,198 Mortgages under administration   56,023,078  50,530,254  56,023,078  50,530,254Note: (1)  This non-GAAP measure adjusts income before income taxes by adding back expenses for amortization of intangible and capital assets. (2)  June 2010 figures have been restated for the Conversion and transition to IFRS.Q2 2011 ResultsMortgages under administration totalled $56.0 billion, up from $50.5 billion at June 30, 2010, a rate of increase of 11%. This compares to $54.4 billion at March 31, 2011, representing a quarter-over-quarter increase of 3% and an annualized increase of 12%.The Canadian single-family real estate market proved steady despite continued economic concerns and government activity to slow down growing consumer debt. In the 2011 second quarter, single-family mortgage originations for the Company decreased by 6% to $2.4 billion from $2.6 billion in the 2010 comparative period. A similar slowing was recorded in the commercial segment, as volumes decreased by 8% from $616 million to $569 million. Overall, second quarter 2011 origination volumes decreased from $3.2 billion to $3.0 billion, or 6%, from the comparative 2010 quarter. For the six-month period to June 30, 2011, single-family origination volume was up 5% and the commercial segment increased by 15% compared to the same period in 2010.The Company securitized a significant portion of its multi-residential mortgage origination in two issuances of the Canada Mortgage Bonds program in the quarter: $103 million in the May 10-year term issue and $185 million in the June five-year term issue. Of the Company's $3.0 billion of originations for the quarter ended June 30, 2011, $638 million was originated for securitization through the NHA-MBS market and $54 million for funding with ABCP.Revenue for the quarter ended June 30, 2011 increased to $121.6 million from $90.4 million in 2010. The growth of 35% is reflective of the increased interest revenue on securitized mortgages, particularly floating rate mortgages indexed to the prime rate which increased from an average of 2.33% in the 2010 quarter to 3.00% for the 2011 quarter. Higher mortgage servicing revenue and the increased placement fee also led to higher revenue.Income before income taxes increased by 6% from $26.2 million in 2010 to $27.8 million in 2011. This increase is due to steady and growing income from the Company's securitization and servicing. Similarly, EBITDA increased by 6% from $29.0 million in 2010 to $30.6 million in 2011 due to the same factors cited above for income before income taxes.Determination of Adjusted Cash Flow and Payout RatioThe Company paid dividends in the second quarter of 2011 based on an annual rate of $1.25 per share. This rate is after the provision for corporate income taxes and can only be compared to the distributions of the Fund if the distributions are adjusted on the same tax basis. The $1.50 per unit distributed in the second quarter of 2010 by the Fund represents approximately $1.08 on an annual after tax basis. Accordingly, the current dividend rate of $1.25 per share represents an increase of 16% from the prior year. Together with payments on account of income tax, the Company distributed $25.8 million in the second quarter of 2011 or $3.3 million more than in the second quarter of 2010, on a tax equivalent basis.For the quarter ended June 30, 2011, the payout ratio was 86%, compared to 75% for the quarter ended June 30, 2010. The increase in the payout ratio is a result of the higher dividend declared in 2011 compared to the tax adjusted distributions made in 2010. If the Company had chosen to distribute the same after tax equivalent as in 2010, the payout ratio in the second quarter of 2011 would have been approximately 75%.Statement of Adjusted Cash Flow                   Quarter ended  Six months ended     June 30,2011  June 30,2010  June 30,2011  June 30,2010For the Period   ($000s)Cash provided by (used in) operating activities   40,711  (30,970)  (197,398)  (17,993)                     Add (deduct):              Cash provided (used) related to pre-amalgamationshareholders of FNFC   —  21,287  (17,635)  22,057 Change in mortgages accumulated for sale or securitizationbetween periods   (18,189)  40,420  256,662  56,074Adjusted cash flow (1)   22,522  30,737  41,629  60,138Less: cash paid on preference shares    (828)  —  (828)  —Adjusted cash flow available for common shareholders   21,694  30,737  40,801  60,138Adjusted Cash Flow per Common Share ($/Share) (1)   0.36  0.51  0.68  1.00Dividends / Distributions declared on common shares / units   18,740  22,488  37,480  44,976Dividends / Distributions declared per common share / unit($/Share) / ($/unit)   0.31  0.38  0.62  0.75Payout Ratio   86%  75%  91%  75%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 and mortgage securitization activity.Transition to IFRS For the Company, the Canadian Accounting Standards Board's decision requiring all publicly accountable entities to report under IFRS has meant a significant change in 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, 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 second 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 WebcastJuly 27, 2011 10:00 a.m. ETParticipant Numbers416-644-3414 or 1-800-814-4859The 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 August 3, 2011. To access the rebroadcast, please dial 416-640-1917 or 1-877-289-8525 and enter passcode 4453362#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 $56 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 Chief Financial Officer First National Financial Corporation Tel:  416-593-1100 Email: rob.inglis@firstnational.ca Steve Wallace Vice President Barnes Communications Inc. Tel:  416-367-5000 Email: swallace@barnesir.com