News articles

Toronto, Ontario, August 1, 2023 – 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 six months ended June 30, 2023. 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.

Second Quarter Summary

• Mortgages Under Administration (“MUA”) increased 8% to a record $137.8 billion compared to $127.3 billion at June 30, 2022
• Revenue increased 26% to $525.9 million from $416.8 million a year ago
• Pre-FMV Income⁽¹⁾ increased 61% to $89.9 million from $55.9 million a year ago
• Net income was $89.2 million ($1.47 cents per share) compared to $61.3 million ($1.01 per share) a year ago

Management Commentary

“Second-quarter results exceeded our expectations which continue to be tempered by the ongoing impact of higher interest rates on real estate activity across Canada,” said Jason Ellis, President and Chief Executive Officer. “In light of this environment, we were pleased to note an increase in both single-family and commercial MUA and a smaller than anticipated reduction in mortgage originations in both segments compared to the same period last year. The combination of higher MUA and interest rates resulted in strong growth in profitability, even in an intensely competitive market. First National’s business model and great execution by the team in serving our customers and partners made all the difference. Looking ahead, we anticipate challenging market conditions to persist for the next two quarters, but we will remain steadfast in delivering the advantages of our business model.”

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 National’s MUA increased 8% to $137.8 billion from $127.3 billion at June 30, 2022 reflecting growth in its single-family and commercial mortgage portfolios.  MUA increased at an annualized rate of 14% during the quarter. At June 30, 2023, single-family MUA was $92.0 billion, up 6% from $86.7 billion at June 30, 2022, while commercial MUA was $45.8 billion, up 13% from $40.6 billion a year ago. 

Single-family mortgage origination (including renewals) was $7.4 billion compared to $8.4 billion in the second quarter of 2022, a decrease of 12%. Lower volumes were anticipated due to Bank of Canada monetary policy tightening since March of 2022 and its impact on housing market activity.  First National’s MERLIN technology and operating systems continued to support efficient and effective mortgage underwriting across the country.

Commercial segment originations (including renewals) were $3.7 billion compared to $3.8 billion a year ago, a 3% decrease reflecting reduced conventional mortgage volumes, partially offset by the continued performance of First National’s insured multi-unit property mortgage programs.

Second quarter revenue increased 26% to $525.9 million from $416.8 million a year ago largely due to a higher interest rate environment. During the second quarter, the Company earned:

• $66.5 million of placement fees, 32% below fees of $98.4 million a year ago  primarily due to a 39% decrease in new residential origination volumes sold to institutional investors reflecting a reduction in opportunities and as borrowers opted for shorter renewal terms (per-unit fees were generally unchanged)
• $70.0 million of mortgage servicing income, 13% above income of $61.8 million a year ago primarily due to growth in MUA augmented by higher interest earned on escrow deposits
• $51.5 million of net interest revenue earned on securitized mortgages (NIM) compared to $40.4 million a year ago, a 27% increase on portfolio growth, slower rates of mortgage repayment and the success of the Company’s Excalibur securitization programs
• $30.3 million of mortgage investment income compared to $21.5 million a year ago, a 41% increase due primarily to the higher interest rate environment which resulted in more interest income earned on First National’s mortgage and loan investment portfolio and mortgages accumulated for securitization
• $6.6 million of gains on deferred placement fees compared to $2.6 million a year ago, a 154% increase reflecting growth in multi-unit residential mortgages originated and sold to institutional investors

Second quarter income before income taxes was $121.5 million compared to $83.1 million a year ago, a 46% increase largely due to core operating success but also to changing capital market conditions which affected the value of financial instruments used to economically hedge residential mortgage commitments. During the 2023 second quarter, the Company recorded $31.7 million of gains on financial instruments (excluding losses related to mortgage and loan investments) compared to gains of $27.2 million a year ago on the same basis.
 
Earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income¹”), which excludes the impact of these changes, increased 61% to $89.9 million from $55.9 million in the second quarter of 2022. This growth reflected the Company’s success in growing MUA over many years. Higher servicing MUA creates higher mortgage administration revenues, and a larger portfolio of securitized mortgages provides five and 10-year income streams. Growth in commercial segment also contributed particularly with increased deferred placement fees.

Outstanding Securities

At June 30, 2023, and August 1, 2023, 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. 

Dividends

Common share dividends paid or declared in the second quarter amounted to $36.0 million compared to $35.2 million a year ago, reflecting an increase in the regular monthly dividend to an annualized rate of $2.40 per common share from $2.35 per effective in December 2022. The common share payout ratio in the second quarter was 41%. If gains and losses on financial instruments are excluded, the common share dividend payout ratio would have been 55% in the second quarter of 2023 compared to 87% in the second quarter a year ago.

First National paid $1.0 million of dividends on its preferred shares in the second quarter, up from $0.7 million a year ago. As announced on June 15, 2023, the quarterly dividend rate on its Class A Series 2 Preference Shares for the period July 1 to September 30, 2023, was set at 6.633%, as determined in accordance with the terms of that Series.

First National, for the purposes of the Income Tax Act (Canada) and any similar provincial legislation, advises that its dividends declared will be eligible dividends, unless otherwise indicated.

Outlook 

The second quarter of 2023 featured a competitive marketplace and reduced origination activity compared to the same quarter last year.  This was largely the result of the Bank of Canada’s (“BoC”) policy decisions to reduce inflation by increasing overnight lending rates which, in turn, led to increased mortgage rates. Between March 2, 2022 and July 12, 2023, the overnight rate increased ten times from 0.25% to 5.00%. After the BoC meeting in January 2023, the market no longer expected additional rate hikes. However, inflation risk remained and after two more policy rate increases, the BoC expressed concern in July that progress towards its 2% inflation target could “stall” and jeopardize a return to price stability. It therefore pledged to continue monetary tightening as necessary. The Company believes these increases have contributed to significantly higher mortgage rates and reduced the affordability of housing across the country. Despite this uncertain business environment, the Company successfully grew MUA, and mortgage origination volumes were lower by just 9% compared the 2022 second quarter. The Company also continued to build its portfolio of mortgages pledged under securitization. It will benefit from MUA and the securitized portfolio in the future: earning income from mortgage administration, net securitization margin and improving its position to capture increased renewal opportunities.

In the short term, the expectation for the third quarter of 2023 is for lower single-family origination than in the 2022 comparative quarter as higher mortgage rates continue to dampen activity across the country. Although indicators have shown decreasing rates of inflation, the BoC has yet to announce the end of its rate hiking cycle. This uncertainty may affect prospective buyers such that the second half of the year may show reduced buying activity than originally expected by the Company. Accordingly, the Company foresees solid third-quarter origination volumes based on commitments made to borrowers in the second quarter but a slowdown in the fourth quarter. Higher immigration levels are expected to support the housing market. Management is confident that First National will remain a competitive leader in the marketplace. Management anticipates commercial origination will also slow as the market digests changing property valuations given the new underlying financial environment. However, the Company remains a leader in insured origination for both existing multi-unit buildings and construction projects.       

First National is well prepared to execute its business plan. The Company expects to enjoy the value of its continued goodwill with broker partners earned over the last 35+ years and reinforced during the pandemic. With diverse relationships over an array of institutional investors and solid securitization markets, the Company has access to consistent and reliable sources 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 $38 billion portfolio of mortgages pledged under securitization and $97 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 August 9, 2023 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 607995 followed by the number sign. The webcast is 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 almost $138 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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