First National Financial Corporation Reports Third Quarter 2023 Results, Increases Common Share Dividend and Announces Special Dividend

Toronto, Ontario, October 31, 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 nine months ended September 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.

Third Quarter Summary

• Mortgages Under Administration (“MUA”) increased 10% to a record $141.9 billion compared to $129.3 billion at September 30, 2022
• Revenue increased 43% to $562.9 million from $392.4 million a year ago
• Pre-FMV Income⁽¹⁾ increased 98% to $95.5 million from $48.2 million a year ago
• Net income was $83.6 million ($1.38 cents per share) compared to $40.1 million ($0.66 per share) a year ago

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

Special Dividend

The Board of Directors today announced a special dividend in the amount of $0.75 per common share to be paid on December 15, 2023 to shareholders of record on November 30, 2023. 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.

Increase in Common Share Dividend

The Board also announced an increase in the Company’s regular monthly dividend to an annualized rate of $2.45 per share (from $2.40 annualized) effective with the payment on December 15, 2023 for shareholders of record November 30, 2023.

Management Commentary

“With today’s announcement, First National has now increased dividends 17 times since our IPO in 2006, a clear demonstration of its ability to create long-term value through diversified mortgage lending, servicing and securitization activities,” said Jason Ellis, President and Chief Executive Officer. “We are proud of this performance and committed to sustaining it with deliberate focus on our fundamentals: providing good service, empowering the growth of our partners, investing in technology and developing the skills of our team. As our markets continue to adjust to a higher interest rate environment, these principles will serve us well.”

Third Quarter Review

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

First National’s MUA increased 10% to $141.9 billion at September 30, 2023 from $129.3 billion at September 30, 2022, or 12% on an annualized basis since June 30, 2023. At quarter end, single-family MUA was $94.5 billion, up 8% from $87.6 billion at September 30, 2022, while commercial MUA was $47.4 billion, up 14% from $41.7 billion a year ago. 

Single-family mortgage origination (including renewals) was $8.3 billion compared to $6.6 billion in the third quarter of 2022, an increase of 26%. This performance exceeded management’s expectations which were influenced by Bank of Canada interest rate increases that led to a year-over-year origination decline early in 2023. The surge in real estate activity experienced in the second quarter of 2023 – coincident with a temporary pause in Bank of Canada rate increases – translated into higher mortgage fundings in the third quarter. 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 $3.3 billion compared to $2.5 billion in the third quarter a year ago. This 30% increase reflected demand for First National’s insured multi-family property mortgage programs, partially offset by lower demand for conventional mortgage products. 

Third quarter revenue increased 34% to $526.9 million from $392.4 million a year ago largely due to a higher interest rate environment. During the quarter, the Company earned:

• $75.8 million of placement fees, up 30% from $58.5 million a year ago due to a 23% increase in new residential origination volumes sold to institutional investors, stability in per-unit placement fees between the quarters, and 30% growth in commercial origination volumes (which doubled that segment’s placement fees), partially offset by lower placement fees for renewed residential mortgages
• $71.1 million of mortgage servicing income, 28% above income of $55.4 million a year ago due to growth in MUA, higher interest earned on escrow deposits and higher revenues from third-party underwriting
• $57.7 million of net interest revenue earned on securitized mortgages (NIM) compared to $43.2 million a year ago, a 34% increase on portfolio growth, slower rates of mortgage repayment and the ongoing success of the Company’s Excalibur securitization programs (which continued to perform with almost no loan losses)
• $42.3 million of mortgage investment income, a 41% increase from $30.0 million a year ago, reflecting a substantial rise in interest rates which resulted in more interest income earned on First National’s mortgage and loan investment portfolio and mortgages accumulated for securitization
• $6.9 million of gains on deferred placement fees compared to $4.6 million a year ago, a 50% increase reflecting growth in multi-unit residential mortgages originated and sold to institutional investors

Third quarter income before income taxes was $113.8 million compared to $54.6 million a year ago, due to core operating success as well as changing capital market conditions which affected the value of financial instruments used to economically hedge residential mortgage commitments. During the 2023 third quarter, the Company recorded $18.4 million of gains on financial instruments (excluding losses related to mortgage and loan investments) compared to gains of $6.4 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 98% to $95.5 million from $48.2 million in the third quarter of 2022. This growth reflected the Company’s success in growing MUA over many years. Higher servicing MUA creates higher mortgage administration revenues, including interest on escrow deposits, and a larger securitized mortgage portfolio provides five and 10-year income streams which are reflected in securitization income.

Outstanding Securities

At September 30, 2023, and October 31, 2023, 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; and 200,000 September 2026 unsecured notes.

Dividends

Common share dividends paid or declared in the third quarter amounted to $36.0 million compared to $35.2 million a year ago. The common share payout ratio in the third quarter was 44%. If gains and losses on financial instruments are excluded, the common share dividend payout ratio would have been 52% compared to 101% in the third quarter a year ago.
 
First National paid $1.0 million of dividends on its preferred shares in the third quarter, up from $0.8 million 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 2023.

Outlook 

The third quarter of 2023 featured increased mortgage funding compared to the same quarter last year.  The Company believes this was partially the result of housing activity in the second quarter attributable to the pause in Bank of Canada (“BoC”) monetary policy designed to reduce inflation. At the same time, news of regional bank failures in the United States resulted in a significant, albeit temporary, decrease in benchmark interest rates. Against this backdrop, borrowers entered the market and the Company’s mortgage commitments increased significantly. However, at the end of the second quarter, the BoC began increasing overnight lending rates again. In its June and July meetings, the BoC raised rates by another 50 basis points in aggregate and reiterated its commitment to lowering inflation. This led to increased mortgage rates and more uncertainty about future interest rates. The Company believes these increases contributed to a much slower housing market during the summer months and accordingly lower commitments for future mortgage fundings. Despite this uncertain business environment, the Company successfully grew MUA by 12% in the 2023 third quarter. The Company also continued to build 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 significantly slower single-family origination in the fourth quarter of 2023 than in the 2022 comparative quarter as housing market activity has reduced appreciably across the country due to recent mortgage rate increases and a more uncertain economic environment. Although economic indicators have shown decreasing rates of inflation, the BoC has yet to announce the end of its rate hiking cycle. This uncertainty has affected prospective buyers such that the last quarter of the year and the start of 2024 will show reduced activity than originally expected by the Company. Accordingly, the Company foresees a marked slowdown in mortgage funding in the fourth quarter. In the longer term, higher immigration levels are expected to support demand in the housing market. The Company anticipates commercial origination will also slow as the market digests changing property valuations given the new underlying financial environment.  In both business segments, management is confident that First National will remain a competitive leader 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 $39 billion portfolio of mortgages pledged under securitization and $100 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book. 

Conference Call and Webcast

November 1, 2023 10:00 am ET

(888) 390-0605 or (416) 764-8609 www.firstnational.ca

A taped rebroadcast of the conference call will be available until November 8, 2023 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 955275 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 $141 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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