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Toronto, Ontario, October 29, 2024 – 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 nine months ended September 30, 2024. 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.

Third Quarter Summary

• Mortgages Under Administration (“MUA”) increased 6% to a record $150.6 billion from $141.9 billion at September 30, 2023
• Revenue decreased 1% to $560.4 from $562.9 million a year ago
• Pre-FMV Income⁽¹⁾ decreased to $75.3 million from $95.5 million a year ago
• Net income was $36.4 million ($0.59 cents per share) compared to $83.6 million ($1.38 per share) a year ago

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 (except those on mortgage investments). See Non-GAAP measures.

Increase in Common Share Dividend

The Board of Directors today announced an increase in the Company’s regular monthly dividend to an annualized rate of $2.50 per common share from $2.45 per share annualized, effective with the payment on December 13, 2024, for shareholders of record November 29, 2024.

Special Dividend

The Board of Directors also announced a special dividend of $0.50 per common share to be paid on December 13, 2024 to shareholders of record on November 29, 2024. This payment reflects the Board’s determination that First National has generated excess capital in the past year and that the capital needed for near-term growth can be generated from current operations.  

Management Commentary

“The third quarter unfolded as we expected with First National’s diverse revenue sources helping to offset the effects of a challenging marketplace on mortgage origination activity,” said Jason Ellis, President and CEO.  “With recent action by the Bank of Canada to reduce interest rates, we are now seeing a marked increase in residential mortgage commitments which should translate well in coming quarters. The strength of our business model and confidence in the future are reflected in the Board’s decision to increase the common share dividend – for the 18th time in the 18 years since FN listed on the S&P/TSX. Going forward, our focus remains squarely on delivering good service for our customers and partners, which is our foundation for value creation.”

Third Quarter Review

First National’s MUA increased 6% to $150.6 billion at September 30, 2024 from $141.9 billion at September 30, 2023, or 6% on an annualized basis since June 30, 2024. At quarter end, single-family MUA was $95.4 billion, up 1% from $94.6 billion at September 30, 2023, while commercial MUA was $55.2 billion, up 16% from $47.4 billion a year ago. 

Single-family mortgage origination (including renewals) was $6.7 billion compared to $8.3 billion in the third quarter of 2023, a decrease of 20%. This performance reflected increased competition in the mortgage broker distribution channel.  Despite the year-over-year decrease in origination, First National has maintained its relative position within the channel. 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 $2.7 billion compared to $3.3 billion in the third quarter a year ago, a 17% decrease primarily attributable to fewer renewal opportunities in the quarter. Mortgage volume growth of 17% over the first nine months of 2024 reflected continuing demand for insured mortgages in the multi-unit property market.

Third quarter revenue decreased 1% to $560.4 million from $562.9 million a year ago. During the quarter, the Company generated:

• $60.2 million of net interest revenue earned on securitized mortgages (NII) compared to $57.7 million a year ago, a 4% increase as the Company’s portfolio of mortgages pledged under securitization grew 14% year over year to $44.4 billion. Commercial segment earnings increased $3.3 million on a larger portfolio combined with an increase in NII reflecting the success of the Company’s insured construction loan program, while Residential segment NII was lower by $0.8 million on narrower margins on Prime mortgages partially offset by favourable results from the Excalibur securitization program
• $57.1 million of placement fees, down 25% from $75.8 million a year ago due to a 29% reduction in placement activity. Per-unit placement fees were 7% higher year over year  largely due to several residential placement transactions priced at market yields at settlement as opposed to the more common fixed placement fee set at origination
• $66.1 million of mortgage servicing income, compared to $71.1 million a year ago, a 7% decrease reflecting lower revenues from third-party underwriting, partially offset by higher revenues related to MUA including administrative fees
• $40.9 million of mortgage investment income compared to $42.3 million a year ago, a 3% reduction primarily reflecting a smaller mortgage investment portfolio  
• $2.9 million of gains on deferred placement fees compared to $7.0 million a year ago, a 59% decrease as fewer multi-unit residential mortgages were originated and sold to institutional investors combined with generally tighter spreads in this business reflecting a more competitive environment. Of the $9.4 billion of originations in the third quarter, $5.4 billion was placed with institutional investors and $3.8 billion was originated for the Company’s own securitization programs. 

Third quarter income before income taxes was $49.7 million compared to $113.8 million a year ago, reflecting changing capital market conditions which affected the value of financial instruments used to economically hedge residential mortgage commitments. More specifically, during the 2024 third quarter, the Company recorded $25.6 million of losses on financial instruments (excluding losses related to mortgage and loan investments) compared to gains of $18.4 million a year ago on the same basis. This performance reflected a decline in bond yields in 2024 as less restrictive monetary policy led to interest rate cuts compared to 2023 when bond yields increased. Without these changes, revenue grew by 8%, supported by higher revenue from a growing securitization portfolio and higher coupon rates.

Earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income1”), which excludes the impact of these changes, decreased 21% to $75.3 million from $95.5 million in the third quarter of 2023. This reflected lower single-family origination which negatively affected both placement fees and mortgage servicing revenue related to third-party underwriting services. Lower volumes reduced the Company’s operating leverage compared to the prior year's quarter. The Company also invested more heavily in its direct securitization programs which delayed the recognition of revenue to future periods in contrast to the comparative quarter. Higher operating costs, particularly related to technology, further reduced earnings by $4.9 million.

Outstanding Securities

At September 30, 2024 and October 29, 2024, the Corporation had outstanding: 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; 200,000 November 2025 senior unsecured notes; 200,000 September 2026 unsecured notes; and 200,000 November 2027 senior unsecured notes.

Dividends

Common share dividends paid or declared in the third quarter amounted to $36.7 million (payout ratio 104%) compared to $36.0 million a year ago (payout ratio 44%). If gains and losses on financial instruments in the two quarters are excluded, the regular dividend payout ratio for the third quarter of 2024 would have been 68% compared to 52% in the 2023 quarter.  Gains and losses are recorded in the period in which the price of Government of Canada bonds change; however, the offsetting economic impact is generally reflected in narrower or wider spreads in the future once the mortgages have been pledged for securitization. Accordingly, management does not consider such gains and losses to affect its dividend payment policy in the short term.   

First National paid $1.0 million of dividends on its preferred shares in the third quarter, unchanged from a year ago. 

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. This includes the special common share dividend to be paid in December 2024.

Outlook

The third quarter of 2024 unfolded much as the Company expected. In general, management believes housing activity and prices are relatively stable with some regional outperformance observed in Alberta and Quebec. The Company believes lower single-family origination is primarily the result of increased competition particularly in the mortgage broker distribution channel. In the third quarter, the Company continued to build its MUA and its portfolio of mortgages pledged under securitization. It will benefit from both 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 Company now expects increased year-over-year single-family origination in the next two quarters. With the Bank of Canada cutting overnight rates by 0.75% between June and September and  a further reduction of 0.50% on October 23, 2024, not only are mortgage rates lower but the fear of a rising rate environment has been allayed somewhat. Management believes this backdrop may provide confidence to borrowers who have remained on the sidelines. In fact, single-family mortgage commitments issued in the third quarter were approximately 50% higher than those issued during the same quarter last year. Given this growth in mortgage commitments, management expects fourth quarter new origination volumes to exceed those from the same quarter last year. For its commercial segment, the Company anticipates steady new origination volumes as government incentives support the creation of multi-unit housing. These initiatives, including the recent increase of the Canada Mortgage Bond program from $40 to $60 billion, not only enhanced the level of financing available for multi-unit mortgages, but removed uncertainties about such programs in the future. These developments have created a reliable and stable source of funds for the Company to originate CMHC insured multi-unit mortgages. However, given the increased certainty of these programs, other lenders have become more aggressive and mortgage spreads are narrowing from the levels originated in 2023 and those to start 2024 as the Company competes for qualifying mortgages. In both business segments, management is confident that First National will remain a competitive lender in the marketplace.

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. 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 $44 billion portfolio of mortgages pledged under securitization and $104 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 November 6, 2024 at midnight ET. To access the rebroadcast, please dial (888) 660-6345 or (646) 517-4150 and enter passcode 09696 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 more than $150 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 lenders 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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