News articles

Toronto, Ontario, April 26, 2022 – 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, 2022. The Company derives virtually all of its earnings from its wholly owned subsidiary, First National Financial LP (“FNFLP” or “First National”), one of Canada’s largest non-bank mortgage originators and underwriters.

First Quarter Summary

•  Mortgages under administration (“MUA”) increased 4% to a record $124.7 billion compared to $119.6 billion at March 31, 2021
• Revenue also increased 4% to $350.3 million from $336.5 million a year ago
• Net income increased to $53.6 million ($0.88 cents per share) from $52.6 million ($0.87 per share) a year ago
• Pre-FMV Income(1) decreased 29% to $45.2 million from $64.1 million a year ago reflecting a more competitive spread environment and higher expenses needed to support organizational growth

Management Commentary

“First National’s first quarter growth reflected good execution in a changing market environment,” said Jason Ellis, President and Chief Executive Officer. “Total new mortgage originations increased to $6.3 billion or 2% over last year. This reflected growth in commercial volumes of 13% and a 3% reduction in single family. Mortgage renewals were higher than last year in both business segments.  Coming into 2022, we anticipated the financial impacts of tighter mortgage spreads and the growth in our workforce needed to deliver service to our customers. The results this quarter reflect our expectations. Like recent quarters, we elected to securitize the majority of 10-year multifamily mortgage origination, maximizing economic value in future periods at the expense of current quarter earnings. Looking ahead, recent actions taken by the Bank of Canada suggest that we have entered a rising interest rate cycle that may dampen housing market activity in future quarters. With a large MUA we are prepared for such a slowdown.”  

Note:
 ⁽¹⁾ This non-IFRS measure adjusts income before income taxes by eliminating the impact of changes in fair value by adding back losses on the valuation of financial instruments (except those on mortgage investments) and deducting gains on the valuation of financial instruments. 

First quarter 2022 results generally reflected a competitive marketplace with a surplus of liquidity for investment in financial assets. This has resulted in narrower mortgage spreads which has reduced the profitability of many of the Company’s income streams.  

First National’s MUA increased 4% to $124.7 billion from $119.6 billion at March 31, 2021 on new mortgage originations and renewal retention. MUA increased at an annualized rate of 3% during the quarter. At March 31, 2022, single-family MUA was $85.0 billion, up 2% from $83.6 billion at March 31, 2021, while commercial MUA was $39.7 billion, up 10% from $36.0 billion a year ago.

New single-family mortgage origination was $4.3 billion compared to $4.4 billion in 2021, a decrease of 3%. Lower volumes were anticipated due to signs of reduced housing market activity at the end of 2021 together with a more competitive marketplace. Single-family renewals increased 25% to $1.5 billion from $1.2 billion a year ago reflecting the value inherent in growing MUA. First National’s MERLIN technology and operating systems continued to support efficient and effective mortgage underwriting across the country.

New commercial segment originations were $2.0 billion compared to $1.8 billion a year ago, 13% higher, reflecting growth in demand for First National’s CMHC insured multi-unit property mortgages offset by reduced conventional mortgage volumes. Commercial mortgage renewals of $473 million increased 67% from $283 million a year ago on higher renewal opportunities.

Revenue increased 4% to $350.3 million from $336.5 million a year ago. The largest driver of the year-over-year increase in revenue was the impact of changing capital market conditions on gains and losses related to financial instruments. In the quarter, gains on financial instruments were $27.9 million ($7.5 million in Q1 2021). Excluding these changes, revenue was 2% lower year over year at $322.4 million compared to $329.2 million in 2021. These elements describe the change in revenue:

• $59.2 million of placement fees, 4% or $2.3 million lower than a year ago despite a 3% increase in origination volumes sold to institutional investors as mortgage spreads returned to pre-pandemic levels, both mortgages sold on a funded basis and on commitment attracted lower per unit placement fees and a larger portion of single-family renewals were allocated to securitization rather than placement
• $51.0 million of mortgage servicing income, 2% or $1.0 million higher than a year ago on growing administration revenue from the Company’s larger MUA
• $39.6 million of net interest revenue earned on securitized mortgages, 1% or $0.3 million lower than a year ago due to higher single family prepayment activity (which reduces the value of mortgages on which spread is earned and accelerated the amortization of capitalized origination costs) and spread compression on single-family floating rate mortgages
• $19.8 million of mortgage investment income, 43% or $6.0 million higher than a year ago due primarily to the higher interest rate environment which resulted in more interest income earned on mortgages accumulated for securitization on the balance sheet
• $2.9 million of gains on deferred placement fees, 34% or $1.5 million lower than a year ago reflecting spreads on multi-unit residential mortgages originated and sold to institutional investors despite higher transaction volumes

Income before income taxes increased to $73.1 million from $71.5 million a year ago, largely reflecting the impact of changing capital market conditions on the value of financial instruments.  Earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income”) decreased 29% to $45.2 million from $64.1 million in 2021. This reflected the funding spread environment and a step up in the size of First National’s workforce over the past year in support of maintaining excellent service levels.

Net income increased to $53.6 million ($0.88 per share) from $52.6 million ($0.87 per common share) a year ago.

Dividends

Total common share dividends paid or declared in the first quarter amounted to $35.2 million compared to $31.5 million a year ago reflecting an increase in the regular monthly dividend to an annualized rate of $2.35 per common share from $2.10 per common in June 2021. The common share payout ratio in the first quarter was 67%. If gains and losses on financial instruments are excluded, the dividend payout ratio would have been 108% compared to 68% in the first quarter a year ago.

First National paid $0.7 million of dividends on its preferred shares in the first quarter, unchanged from a year ago. As announced on March 15, 2022, the dividend rate for the Class A Series 2 Preference Shares for the period April 1 to June 30, 2022 was set at 2.685% in accordance with the terms of those shares.  For the purposes of the Income Tax Act (Canada) and any similar provincial legislation, First National advises that its dividends are eligible dividends, unless otherwise indicated.

Outstanding Securities

At March 31, 2022, and April 26, 2022, the Corporation had 59,967,429 common shares; 2,984,835 Class A preference shares, Series 1; 1,015,165 Class A preference shares, Series 2; 200,000 November 2024 senior unsecured notes; and 200,000 November 2025 senior unsecured notes outstanding.

Outlook

The first quarter saw the continuation of trends at the end of 2021: a competitive marketplace with pressure on net interest margins. The quarter also featured what appears to be the beginning of a rising interest rate cycle as the Bank of Canada’s indicated its intention to address inflationary risks with an increase in its overnight rate in March 2022 by 0.25%. Subsequent to quarter end, the BoC increased the overnight rate by another 0.50% in April 2022 to 1.0%. Equally important as the increases were the Bank’s statements indicating the likelihood of more interest rate hikes to come. Despite this business environment, the Company successfully grew MUA and continued to build its portfolio of mortgages pledged under securitization. First National will benefit from this growth in the future: earning income from mortgage administration, net securitization margin and increased renewal opportunities.

In the short term, the expectation for 2022 is moderately lower origination as mortgage rates rise in tandem with government bond yields reducing affordability and dampening housing activity. Management recognizes that home purchasing in the past two years has been at levels that are likely unsustainable and that while drivers such as higher immigration are strong, a market slowdown seems inevitable. However, management is confident that First National will remain competitive and a leader in the marketplace. Management anticipates commercial origination will remain strong in the short term but is cautious because of the potential impact that future interest rate increases could have on the value of apartments and commercial real estate and ultimately, borrower activity.       

During the pandemic, the strength and durability of First National’s business model was demonstrated. By designing systems that do not rely on face-to-face interactions, the Company’s business practices have resonated with mortgage brokers and borrowers alike during this period. The economic effects of COVID-19 are expected to slowly diminish although the duration and impact of the pandemic is unknown at this time, as is the long-term efficacy of the government and central bank interventions. It is still not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company and its operating subsidiaries in future periods.

First National is well prepared to execute its business plan. In 2022, the Company expects to enjoy the value of its goodwill with broker partners earned over the last 30+ years and reinforced during the pandemic. Demand for the Company’s mortgages from institutional investors remains strong due to the substantial amount of liquidity in the financial system. Securitization markets are robust and provide consistent and reliable source of funding.

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. The Company will continue to generate income and cash flow from its $35 billion portfolio of mortgages pledged under securitization and $87 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

A taped rebroadcast of the conference call will be available until May 4, 2022 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 583077 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 over $124 billion in mortgages under administration, First National is one of Canada’s largest non-bank mortgage originators and underwriters 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 ‘‘Risks 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.

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