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Toronto, Ontario, June 30, 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 six months ended June 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.

Second Quarter Summary

• Mortgages Under Administration (“MUA”) increased 8% to a record $148.2 billion compared to $137.8 billion at June 30, 2023
•  Revenue increased 2% to $538.4 million from $525.9 million a year ago
• Pre-FMV Income⁽¹⁾ decreased 14% to $77.5 million from $89.9 million a year ago 
• Net income was $54.1 million ($0.93 cents per share) compared to $89.2 million ($1.47 per share) a year ago

Management Commentary

“Second quarter performance was consistent with our expectations,” said Jason Ellis, President and Chief Executive Officer. “With the benefit of diversification and disciplined execution of our longstanding strategies, First National achieved solid profitability in the face of elevated competition among bank lenders in the mortgage broker channel, slightly muted demand for single-family mortgages in markets across Canada and tighter spreads. In keeping with our focus, we continued to build MUA and our portfolio of mortgages pledged under securitization which will provide future income streams and create the opportunity to capture higher mortgage renewal volumes. In the context of currently prevailing market conditions, we are confident that First National’s approach to service, funding and investment is the right one for our shareholders, customers and partners.”

Second Quarter Review

 ^{(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 $148.2 billion at June 30, 2024 from $137.8 billion at June 30, 2023 reflecting growth in its single-family and commercial mortgage portfolios.  MUA increased at an annualized rate of 9% during the quarter. At June 30, 2024, single-family residential MUA was $94.8 billion, up 3% from $92.0 billion at June 30, 2023, while commercial MUA was $53.3 billion, up 16% from $45.8 billion a year ago. 

• 70.1 million of mortgage servicing income compared to $70.0 million a year ago as growth in MUA augmented by interest earned on escrow deposits was partially offset by lower third-party underwriting and fulfillment processing revenues
• $53.7 million of net interest revenue earned on securitized mortgages (NIM) compared to $51.5 million a year ago, a 4% increase on 9% portfolio growth, partially offset by lower residential segment NIM on tighter nominal spreads 
• $45.3 million of placement fees, 32% below fees of $66.5 million a year ago due to a 14% decrease in placement activity and the impact of a shift favouring renewed mortgages and commercial segment mortgages, which attract lower per-unit fees than residential mortgages; residential per-unit fees were also lower than a year ago as borrowers opted for shorter terms
• $35.7 million of mortgage investment income compared to $30.3 million a year ago, an 18% increase as the Company decided to increase its own securitization activities leading to more mortgages warehoused and more mortgage interest earned in the period between funding and securitization 
• $4.6 million of gains on deferred placement fees compared to $6.6 million a year ago, a 30% decrease reflecting tighter spreads for multi-unit residential mortgages originated and sold to institutional investors

Second quarter income before income taxes was $73.5 million compared to $121.5 million a year ago reflecting changing capital market conditions which affected the value of financial instruments used to economically hedge residential mortgage commitments. During the 2024 second quarter, the Company recorded $4.0 million of losses on financial instruments (excluding losses related to mortgage and loan investments) compared to gains of $31.7 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, decreased 14% to $77.5 million from $89.9 million in the second quarter of 2023. This change reflected: lower single-family residential origination which negatively affected placement fees; lower third-party mortgage servicing revenue; higher investments in direct securitization programs which delayed the recognition of revenue to future periods; and reduced operational leverage in residential and third-party businesses.

Outstanding Securities

At June 30, 2024 and July 30, 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 second quarter amounted to $36.7 million compared to $36.0 million a year ago, reflecting an increase in the regular monthly dividend to an annualized rate of $2.45 per common share from $2.40 per effective in December 2023. The common share payout ratio in the second quarter was 69%. If gains and losses on financial instruments are excluded, the common share dividend payout ratio would have been 66% in the second quarter of 2024 compared to 55% in the second quarter a year ago.

Outlook

The second quarter of 2024 materialized much as expected by the Company – lower single-family origination and growing commercial segment origination. In general, management believes that the housing market is solid with stable valuations but slightly muted demand, especially in comparison to the previous three years. The Company believes lower single-family origination is primarily the result of increased competition particularly in the mortgage broker distribution channel. In the 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 expects lower single-family origination to continue into the third quarter of 2024 as bank competitors continue to build market share with offers of relatively low mortgage rates along with elevated broker incentives. Although the Company does not see weakness in the housing market, the acceleration of activity anticipated from  Bank of Canada rate cuts has yet to materialize, leaving some prospective buyers on the sidelines. For its commercial segment, the Company anticipates steady origination volumes as government announcements in 2023 have supported the creation of multi-unit housing. These initiatives, including the increase of the CMB program from $40 to $60 billion, have not only increased the amount of financing available for multi-unit mortgages but have also 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 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 $41 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 August 7, 2024 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 930557 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 $148 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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