First National Financial Corporation Reports Fourth Quarter, Annual 2023 Results

Toronto, Ontario, March 5, 2024 – First National Financial Corporation (TSX: FN, TSX: FN.PR.A, TSX: FN.PR.B)  today announced its financial results for the three and 12 months ended December 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.

2023 Annual Summary

• Mortgages under administration (“MUA”) were a record $143.5 billion compared to $131.0 billion at December 31, 2022
• Revenue was $2.0 billion compared to $1.6 billion in 2022
• Net income was $252.8 million ($4.15 per share), compared to $197.7 million ($3.25 per share) in 2022
• Pre-FMV Income⁽¹⁾ was $322.1 million compared to $208.8 million in 2022

Fourth Quarter 2023 Summary

• Revenue was $503.4 million compared to $414.8 million a year ago
• Net income was $44.2 million ($0.72 per share), compared to $42.7 million ($0.70 per share) a year ago
• Pre-FMV Income⁽¹⁾ was $77.1 million compared to $59.5 million a year ago

Management Commentary

“First National had a very successful year in 2023,” said Jason Ellis, President and Chief Executive Officer. “Despite challenging market conditions brought on by the cumulative effect of higher interest rates, total originations including renewals came close to equaling our previous record set in 2022. In the case of our commercial business, annual volumes were best-ever at over $13 billion, fueled by customer demand for high-quality insured multi-unit mortgage products. With much higher MUA, revenue increased 29% and operating profitability was up 54%. 2023 was a good example of the efficiency of our business model as well as the team’s dedication to supporting customers and partners in both good times and bad. I thank all members of the team for working tirelessly to deliver these strong results. Although we expect lower single family mortgage origination to start 2024 compared to this time last year due to a market slowdown that was evident in the final quarter, First National is well positioned to compete, serve and execute our business plan. We can also look forward to generating income and cashflow from our expanded servicing and securitization portfolio.”

Performance Review

	Quarter Ended		Year Ended
	December 30, 2023	December 31, 2022	December 31, 2023	December 31, 2022
For the Period	($000's)
Revenue	503,441	414,785	2,024,285	1,574,293
Income before taxes	59,895	58,269	343,907	269,082
Pre-FMV Income (1)	77,125	59,492	322,183	208,762
At Period end
Total assets	45,957,399	43,763,672	45,957,399	43,763,672
Mortgages under administration	143,546,966	131,000,635	143,546,966	131,000,635

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). 

First National’s MUA increased 10% to $143.5 billion at December 31, 2023 from $131.0 billion a year earlier and at an annualized rate of 5% since September 30, 2023. At December 31, 2023, single-family MUA was $94.5 billion, up 7% from $88.6 billion at December 31, 2022, while commercial MUA was $49.0 billion, up 16% from $42.4 billion a year ago.

For the fourth quarter of 2023, single-family mortgage origination was $4.4 billion compared to $5.5 billion for the comparative quarter of 2022, a decrease of 20%. For 2023, single-family mortgage origination was $24.4 billion compared to $26.3 billion in 2022 or 7% lower. In both periods, originations reflected the impact of higher Bank of Canada interest rates on residential real estate activity. First National’s MERLIN technology and operating systems continued to support efficient and effective mortgage underwriting across the country.

Fourth quarter 2023 commercial mortgage originations were $3.8 billion, 27% or $874 million higher than in the same period of 2022. For all of 2023, commercial mortgage originations were $13.0 billion, 11% or $1.2 billion higher than a year ago. Volumes in both 2023 periods reflected strong demand for insured mortgages and First National’s expertise in the multi-unit property sector.

Of the Company’s $37.4 billion of originations in 2023, $24.6 billion was placed with institutional investors to earn placement fees (2022 - $24.4 billion) and $11.8 billion (2022 - $12.6 billion) was originated for First National’s own securitization programs.
 
Fourth quarter 2023 revenue of $503.4 million was 21% or $88.6 million higher than the fourth quarter of 2022 reflecting:

• $58 million of net interest revenue – securitized mortgages, 26% or $12 million higher than a year ago due to portfolio growth, stable interest rates and a successful Excalibur securitization program
• $38 million of mortgage investment income, 12% or $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
• $60 million of mortgage servicing income, 24% or $12 million higher than a year ago primarily due to higher MUA and growth in volumes for third party underwriting customers
• $55 million of placement fees, 4% or $2 million higher than the fourth quarter a year ago on higher volumes placed with institutional investors in the commercial segment
• $4.9 million of gains on deferred placement fees, approximately the same as a year ago

For 2023, revenue increased 29% to $2.0 billion from $1.6 billion in 2022 largely due to higher interest rates. In the past 12 months, mortgage rates increased in tandem with the interest rate environment as monetary policy tightened to counteract inflation risks. These changes led to comparatively higher net interest revenue earned on securitized mortgages (+28% year over year to $216.6 million), and higher interest earned on mortgage investments (+32% year over year to $139.9 million).  Additionally, growing MUA, higher interest earned on escrow deposits and third-party underwriting activity were reflected in mortgage servicing income (+17% to $252.6 million), while gains on deferred placement fee revenue (+69% to $25.3 million) primarily related to growth in multi-unit residential mortgages originated and sold to institutional investors.
These increases were partially offset by an 8% year-over-year reduction in placement fees, which amounted to $248.3 million in 2023 compared to $268.6 million in 2022. This decrease was mainly the result of a shift in placement activity between business segments. Although overall volumes for institutional customers increased by 1% from 2022, placement volume for the residential segment decreased by 10% while volume for commercial segment mortgages increased by 27%. Generally, per-unit fees for commercial placement are much lower than those on residential products. Placement fees for renewed residential mortgages were lower by about $3.7 million partly because the Company elected to securitize renewed mortgages rather than placing them with institutional customers and partly as a consequence of borrowers taking shorter renewal terms. 
 
For the fourth quarter, income before income taxes increased to $59.9 million from $58.3 million in the corresponding period of 2022. Both years included gains and losses on financial instruments. Pre-FMV Income¹, which eliminates the effect of such revenue, increased 30% to $77.1 million from $59.5 million in the same period of 2022. This increase was the result of the growth in revenue as previously described against an efficient operating environment.

For 2023, income before income taxes increased 28% to $343.9 million from $269.1 million in 2022. The increase included the effect of changing capital market conditions in both years. Excluding gains and losses related to financial instruments, Pre-FMV Income¹ for 2023 increased 54% to $322.2 million from $208.8 million in 2022. This change was largely the result of the Company’s success in growing MUA over the past several years. Higher MUA creates higher servicing revenues, and the larger portfolio of securitized mortgages provides five- and ten-year streams of income which are reflected in higher net interest income. The commercial segment also benefited from increased deferred placement fees.   Net income for the fourth quarter of 2023 was $44.2 million ($ 0.72 per share), compared to $42.7 million ($0.70 per share) a year ago. Net income for 2023 was $252.8 million ($4.15 per share), compared to $197.7 million ($3.25 per share) in 2022.

Dividends

The Board declared common share dividends of $189.4 million or $3.16 per share in 2023 compared to $141.4 million or $2.36 per share in 2022. Included in 2023 was a special dividend of $0.75 per share as the Company had excess capital which it did not require for its operations. In the fourth quarter of 2023, the Board of Directors also increased First National’s monthly common share dividend to annualized rate of $2.45 per share from $2.40 per share, effective with the payment made December 15, 2023. This marked the 16^th increase in distributions to shareholders since the Company’s initial public offering in 2006. In the fourth quarter of 2023, the Company paid regular common share dividends of $36.5 million compared to $35.7 million a year ago.   For 2023, the regular common share payout ratio (excluding the special dividend) was 58% compared to 73% in 2022. Excluding the special dividend in 2023, 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 2023 would have been 62% compared to 94% in 2022. Generally, management does not consider such gains and losses in the determination of its dividend policy. The regular common share dividend payout ratio (excluding the special dividend) for the fourth quarter of 2023 was 84% (86% in the fourth quarter of 2022). Excluding the special dividend and gains and losses on financial instruments, fourth quarter 2023 payout ratio would have been 64% compared to 84% in the fourth quarter of 2022.   First National paid $3.9 million of dividends on its preferred shares in 2023 compared to $3.0 million in 2022. As announced on December 15, 2023, the dividend rate on the Company’s Class A Series 2 Preference Shares for the period January 1 to March 31, 2024 was set at 7.112%, 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, 2023, and March 5, 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; and 200,000 September 2026 unsecured notes.  

Outlook

In the short term, the Company expects significantly lower single-family origination to start 2024 than in the 2023 comparative quarters due to persistent housing affordability challenges and an increasingly competitive marketplace. Although economic indicators have shown decreasing rates of inflation, it is still above the BoC’s target rate of 2% and accordingly, the BoC has yet to reverse any of its recent rate hikes. Prevailing market conditions have affected prospective buyers such that like the last quarter of 2023, the start of 2024 will show reduced activity.  In the longer term, higher immigration levels are expected to support demand in the housing market. For its commercial segment, the Company anticipates a strong start for origination as recent government announcements have supported the creation of multi-unit housing. These initiatives, including the increase of the CMB program from $40 to $60 billion, provide a stable market for the Company’s borrowers to use CMHC insured mortgages for funding. In both business segments, management is confident that First National will remain a competitive leader in the marketplace.   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 $101 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book.

Conference Call and Webcast

March 6, 2024 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 March 13, 2024 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 781582 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 $143 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 Income” 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

($000s)	Income before income tax for the period	Add/ deduct Realized and unrealized losses (gains)	Deduct (losses), add gains related to mortgage and loan investments	Pre-FMV Income for the period (1)
2023
Fourth quarter	$59,895	$16,894	$336	$77,125
Third quarter	$113,830	($18,435)	$61	$95,456
Second quarter	$121,544	($31,690)	$—	$89,854
First quarter	$48,638	$11,110	$—	$59,748
2022
Fourth quarter	$58,269	$1,353	($130)	$59,492
Third quarter	$54,645	($5,846)	($580)	$48,219
Second quarter	$83,081	($27,217)	$—	$55,864
First quarter	$73,087	($27,900)	$—	$45,187

 ⁽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 Key Performance Indicators section in this MD&A. 

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