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Toronto, Ontario, April 28, 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 months ended March 31, 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.

First Quarter Summary

• Mortgages Under Administration (“MUA”) increased 7% to a record $133.0 billion compared to $124.7 billion at March 31, 2022
• Revenue increased 23% to $432.1 million from $350.3 million a year ago
• Pre-FMV Income⁽¹⁾ increased 32% to $59.7 million from $45.2 million a year ago
• Net income was $35.7 million ($0.58 cents per share) compared to $53.6 million ($0.88 per share) a year ago

Management Commentary

“First-quarter results reflected the strength and resiliency of our business in the face of a housing market downturn that began nine months ago,” said Jason Ellis, President and Chief Executive Officer. “As expected, First National remained solidly profitable once again in spite of lower mortgage origination, due to our long-term securitization strategy that creates five- and 10-year income streams. Growth in MUA, including in our $38 billion portfolio of mortgages pledged under securitization, is important at all times and particularly right now as we await the return of a healthier, more sustainable housing market. Such a market could well emerge in the second half of 2023 assuming that interest rates have peaked and catalysts including population growth continue to stimulate demand. Considering current conditions and in keeping with our traditional values, First National remains focused on our business and financial fundamentals: serving customers efficiently and effectively through teamwork and technology, increasing operational leverage, maximizing the future economic value of securitization and maintaining the conservative risk profile that makes us an attractive and reliable value creator.”

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 2023 performance reflected a competitive marketplace – the result of abrupt increases in Bank of Canada (BoC) policy interest rates between March 2022 and January 2023 that led to a decline in housing activity across the country.

First National’s MUA increased 7% to $133.0 billion from $124.7 billion at March 31, 2022 reflecting growth in both single-family and commercial mortgage portfolios.  MUA increased at an annualized rate of 6% during the quarter. At March 31, 2023, single-family MUA was $89.5 billion, up 5% from $85.0 billion at March 31, 2022, while commercial MUA was $43.5 billion, up 10% from $39.7 billion a year ago.

Single-family mortgage origination (including renewals) was $4.3 billion compared to $5.8 billion in 2022, a decrease of 25%. Lower volumes were anticipated due to reduced housing market activity over the prior two quarters. First National’s MERLIN technology and operating systems continued to support efficient and effective mortgage underwriting across the country while the residential team continued to convert mortgage renewal opportunities at traditional levels.

Commercial segment originations (including renewals) were $2.2 billion compared to $2.5 billion a year ago. This 12% decrease was expected and reflected reduced conventional mortgage volumes, partially offset by the continued performance of First National’s insured multi-unit property mortgage programs.

Revenue increased 23% to $432.1 million from $350.3 million a year ago largely due to a higher interest rate environment. During the first quarter, the company earned:

• $51.5 million of placement fees compared to $59.2 million a year ago, a 13% reduction due to a 9% decrease in origination volumes sold to institutional investors and a marginal decrease in per-unit fees as the mix of placed mortgages shifted to the commercial segment where fees are typically lower than those of the residential segment 
• $50.8 million of mortgage servicing income compared to $51.0 million a year ago, a 1% difference, due to the impact of lower housing activity on third-party underwriting business
• $49.4 million of net interest revenue earned on securitized mortgages (NIM) compared to $39.6 million a year ago, a 25% increase on portfolio growth, slower rates of mortgage repayment and the reversal of spread compression on floating rate pools which impaired NIM in the first quarter of 2022 (residential portfolio NIM was higher by $6.7 million year over year while commercial NIM was $3.1 million higher)
• $28.9 million of mortgage investment income compared to $19.8 million a year ago, a 46% 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 
• $6.8 million of gains on deferred placement fees compared to $2.9 million a year ago, a 134% increase reflecting 98% growth in the mortgages originated for these programs as well as wider spreads 

Income before income taxes was $48.6 million compared to $73.1 million a year ago, a 34% decrease due to changing capital market conditions which affected the value of financial instruments used to economically hedge residential mortgage commitments. Specifically, the company recorded $11.1 million of losses on financial instruments in the first quarter of 2023 compared to gains of $27.9 million a year ago.

Earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income¹”), which excludes the impact of these changes, increased 32% to $59.7 million from $45.2 million in the first quarter of 2022. This reflected the cumulative effect of the company’s securitization strategy. By growing its portfolio of securitized mortgages during periods of wide spreads, particularly during the onset of the pandemic, First National created five- and ten-year streams of income. With a shift to placement with its institutional investors in the 2023 first quarter, the company is now benefiting from the value of current placement fees as well as net securitization income from the value of its securitization portfolio.

Outstanding Securities

At March 31, 2023, and April 28, 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

Total common share dividends paid or declared in the first 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 first quarter was 103%. If gains and losses on financial instruments are excluded in the first quarters of both years, the common share dividend payout ratio would have been 84% compared to 108% in the first quarter a year ago.

First National paid $0.9 million of dividends on its preferred shares in the first quarter, up from $0.7 million a year ago. As announced on March 15, 2023, the quarterly dividend rate on its Class A Series 2 Preference Shares for the period April 1 to June 30, 2023, was set at 6.634%, 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 first quarter of 2023 featured a competitive marketplace and reduced origination activity which 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 January 25, 2023, the overnight rate increased eight times from 0.25% to 4.50%. Although the BoC did not increase its overnight target rate during its two most recent meetings, at its April 2023 meeting, it did reiterate its concern with inflationary risks and indicated that it will maintain a restrictive monetary policy.  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 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, and net securitization margin and improving its position to capture increased renewal opportunities. 

In the short term, the expectation for the second quarter of 2023 is for lower single-family origination than in the 2022 quarter as higher mortgage rates continue to dampen activity across the country, particularly in comparison to the second quarter of 2022 which was seasonally very strong. Although the BoC has not announced the end to its rate hiking cycle, indicators have shown decreasing rates of inflation. Without an increase to the overnight rate since January 2023, the Company hopes reduced uncertainty will encourage prospective buyers such that in the second half of the year house buying activity will accelerate. Accordingly, the Company foresees improving origination volumes through the second half of 2023. This positive change will not likely represent a return to the unsustainable volumes recorded in most of 2020 and 2021, but instead a return to pre-pandemic activity in the context of that exhibited in 2019. Higher immigration is also 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 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 $93 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 8, 2023 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 916562 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.

Annual Meeting of Shareholders

First National will host its 2023 annual meeting of shareholders on Tuesday May 16, 2023 at the TMX Market Centre, 120 Adelaide Street West, Toronto, Ontario starting at 10 am ET. Details of the meeting can be found in the company’s Management Information Circular filed on Sedar.

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 $133 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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