First National Financial Corporation Reports Fourth Quarter, Annual 2022 Results

Toronto, Ontario, February 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 and 12 months ended December 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.

2022 Annual Summary

• Mortgages under administration (“MUA”) were a record $131.0 billion compared to $123.9 billion at December 31, 2021
• Revenue was $1.57 billion compared to $1.39 billion in 2021
• Net income was $197.7 million ($3.25 per share), compared to $194.6 million ($3.20 per share) in 2021
• Pre-FMV Income⁽¹⁾ was $208.8 million compared to $257.3 million in 2021

Fourth Quarter 2022 Summary

• Revenue was $414.8 million compared to $339.3 million a year ago
• Net income was $42.7 million ($0.70 per share), compared to $42.0 million ($0.69 per share) a year ago
• Pre-FMV Income⁽¹⁾ was $59.5 million compared to $57.0 million a year ago

Management Commentary

“First National more than held its own as Canadian housing activity retreated in the face of rapidly rising interest rates,” said Jason Ellis, President and Chief Executive Officer. “While total mortgage originations were 12% below last year with an impact on operating leverage, our business remained solidly profitable in both the fourth quarter and full year. MUA, the source of most of our earnings, increased again, reflecting our Canada-wide access to residential and commercial mortgage origination and renewal opportunities, dedication to responsive customer service, and long-standing business partnerships. Our MUA and adherence to our business model will support corporate performance in 2023. Our task now is to respond with discipline to a market that we expect will remain challenging in the first half of 2023 before improving later in the year. I am confident that the team at First National can deliver for customers and shareholders in this environment.”

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. See “Reconciliation of Quarterly Determination of Pre-FMV Income.” 

First National’s MUA increased 6% to $131.0 billion at December 31, 2022 from $123.9 billion a year earlier and at an annualized rate of 5% since September 30, 2022. At December 31, 2022, single-family MUA was $88.6 billion, up 4% from $84.9 billion at December 31, 2021, while commercial MUA was $42.4 billion, up 9% from $39.0 billion a year ago.

For the fourth quarter of 2022, new single-family mortgage origination was $3.6 billion compared to $5.2 billion for the comparative quarter of 2021, a decrease of 31% or $1.6 billion. For 2022, new single-family mortgage origination was $19.5 billion, 17% or $3.9 billion lower than in 2021. In both periods, originations were lower due to a slowing real estate market brought on by rising interest rates as well as greater competition for mortgage business.

For the fourth quarter of 2022, single-family mortgage renewals were $1.9 billion, 27% or $400 million higher than the corresponding period a year ago. For 2022, single-family mortgage renewals were $6.8 billion, an 8% or $500 million increase over the prior year. In both 2022 periods, the Company benefitted from available renewal opportunities and a tempering of prepayment speeds which were elevated in 2021.

First National’s MERLIN technology and operating systems continued to support efficient and effective mortgage underwriting across the country.

In the fourth quarter of 2022, new commercial mortgage originations of $2.3 billion were 25% or $768 million below the corresponding period in 2021 as demand for insured mortgages was offset by lower conventional mortgage activity. For 2022, new commercial segment originations were $9.6 billion, compared to $9.7 billion a year ago, a 1% decrease as the Company continued to benefit from its leading position in the insured multi-residential market.

Fourth quarter 2022 commercial mortgage renewals were $689 million, 24% or $213 million lower than in the same period of 2021. For all of 2022, commercial mortgage renewals were $2.2 billion, 19% or $495 million lower than a year ago. Volumes in both 2022 periods reflected a drop in conventional mortgages due to the changing interest rate environment.

For 2022, $24.4 billion ($27.8 billion – 2021) of total new originations and renewals were placed with institutional investors to earn placement fees while $12.6 billion ($12.9 billion – 2021) was originated for First National’s own securitization programs. For 2022, 64% (66% - 2021) of total new originations and renewals were placed with institutional investors.

Fourth quarter 2022 revenue of $414.8 million was 22% or $75.5 million higher than the fourth quarter of 2021 reflecting:

• $275.7 million of net interest revenue – securitized mortgages, 41% or $80.2 million higher than a year ago on 5% portfolio growth, as well as an increase in the average portfolio mortgage rate
• $34.3 million of mortgage investment income, 19% or $16.4 million higher than a year ago due primarily to the higher interest rate environment, which resulted in more interest income earned on both the mortgage loan investment portfolio and mortgages accumulated for securitization
• $48.6 million of mortgage servicing income, 11% or $6.3 million lower than a year ago primarily due to lower fees from the third-party underwriting which was affected, much like the Company, by the decrease in housing activity across the country
• $52.6 million of placement fees, 23% or $15.5 million lower than the fourth quarter a year ago as new origination volumes decreased
• $4.9 million of gains on deferred placement fees, 62% or $1.9 million higher than a year ago reflecting a relative increase in 10-year mortgage placements.

For 2022, revenue increased 13% to $1.57 billion from $1.39 billion in 2021. This growth also reflected a rapidly rising interest rate environment with bond yields and mortgage rates increasing as monetary policy tightened to counteract inflation. These changes, coupled with growth in MUA, led to:

• $169.3 million of net interest earned on securitized mortgages (NIM), a 4% or $6.1 million increase from 2021
• $105.7 million of mortgage investment income, 65% or $41.8 million higher than in 2021
• $216.8 million of mortgage servicing income, a 2% or $5.2 million increase year over year

These increases were partially offset by: a 12% or $35.1 million year-over-year reduction in placement fees, which amounted to $268.6 million in 2022 reflecting lower origination volumes sold to institutional investors; and, a 7% or $1.1 million decline in gains on deferred placement fees which amounted to $15.0 million in 2022.

For the fourth quarter, income before income taxes increased 4% to $58.3 million from $57.1 million in the corresponding period of 2021. Both years included gains and losses on financial instruments. Pre-FMV Income¹, which eliminates the effect of such revenue, increased 4% to $59.5 million from $57.0 million in the same period of 2021. This increase was the result of higher revenues which flowed through to the bottom line.  

For 2022, income before income taxes increased 2% to $269.1 million from $263.8 million in 2021 reflecting changing capital market conditions in both years but particularly in 2022. Pre-FMV Income¹ decreased by 19% to $208.8 million from $257.3 million in 2021. This decline was the result of: a 17% reduction in new residential origination as housing transactions slowed across the country; increased competition for fewer opportunities which caused the Company to increase broker incentives for residential mortgage transactions; tight funding spreads on securitized floating rate mortgages; and headcount in relation to lower origination levels.

Net income for the fourth quarter of 2022 was $42.7 million ($0.70 per share), compared to $42.0 million ($0.69 per share) a year ago. Net income for 2022 was $197.7 million ($3.25 per share), compared to $194.6 million ($3.20 per share) in 2021.

Dividends

The Board declared common share dividends of $141.4 million or $2.36 per share in 2022 compared to $210.9 million or $3.52 per share in 2021. The year ago figure included a special dividend of $1.25 per share as the Company had excess capital which it did not require for its operations. There was no special dividend paid in 2022. However, in 2022 the Board increased the regular monthly dividend to an annualized rate of $2.40 per common share effective with the payment made December 15, 2022. This marked the 15^th increase in distributions to shareholders since the Company’s initial public offering in 2006. In the fourth quarter of 2022, the Company paid regular common share dividends of $35.7 million compared to regular common share dividends paid in the fourth quarter of 2021 of $35.2 million.

For 2022, the common share payout ratio was 73% compared to 110% in 2021. Excluding the special dividend in 2021, as well as recorded gains and losses on account of changes in fair value of financial instruments in both years, the dividend payout ratio for 2022 was 94% compared to 73% in 2021. Generally, management does not consider such gains and losses in the determination of its dividend policy. The regular common share dividend payout ratio for the fourth quarter of 2022 was 86%.

First National paid $3.0 million of dividends on its preferred shares in 2022 compared to $2.7 million in 2021. As announced on December 15, 2022, the dividend rate on the Company’s Class A Series 2 Preference Shares for the period January 1 to March 31, 2023 was set at 6.203%, as determined in accordance with the terms of the Series 2 Preference 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 December 31, 2022, and February 28, 2023, First National 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

2022 was a year that 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% at the beginning of March to 4.50% currently. Throughout most of these increases (except the most recent), the BoC’s statements indicated the likelihood of more interest rate hikes to follow. The Company believes these increases 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 start of 2023 is for lower origination as higher mortgage rates continue to dampen activity across the country, particularly in comparison to the first quarter of 2022 which was seasonally very strong. However, when it announced its latest interest rate increase in January 2023, the BoC indicated that it would now hold its policy rate at the current level while it assesses the cumulative impact of recent increases. This may signal the end to its rate hiking cycle designed to manage inflationary risks. In turn, the Company hopes this will provide confidence to prospective buyers that mortgage rates will not increase going forward such that home buying activity will return to traditional levels. 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 exhibited in 2019. Higher immigration will also support the housing market. Management is confident that First National will remain competitive and a leader in the marketplace. Management anticipates commercial origination will also slow as the market digests changing property valuations given the new underlying financial environment.       

During the pandemic, the value of First National’s business model has been 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. 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. 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 $37 billion portfolio of mortgages pledged under securitization and $91 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 March 8, 2023 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 210488 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 $131 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.

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.

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.

Reconciliation of Quarterly Determination of Pre-FMV Income¹

¹This 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. See Key Performance Indicators section of the Company’s MD&A. 

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