First National Financial Corporation Reports First Quarter 2024 Results

Toronto, Ontario, April 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 months ended March 31, 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.

First Quarter Summary

• Mortgages Under Administration (“MUA”) increased 9% to a record $145.1 billion compared to $133.0 billion at March 31, 2023
• Revenue increased 20% to $518.0 from $432.1 million a year ago
• Pre-FMV Income⁽¹⁾ increased 5% to $62.7 from $59.7 million a year ago 
• Net income was $49.9 million ($0.82 cents per share) compared to $35.7 million ($0.58 cents per share) a year ago

Management Commentary

“First National translated its business model advantages into positive results for shareholders in the first quarter,” said Jason Ellis President and Chief Executive Officer. “On the strength of mortgage servicing and our securitization strategy, we generated solid profitability. The presence of these income sources and the diversified nature of our lending activities once again proved to be important as we experienced intense competition for new mortgage business. Residential originations including renewals were 20% below last year as two large lenders in the mortgage broker channel discounted rates as part of their market share strategies. This decline was offset by a 39% increase in multi-unit originations including renewals largely on growth in insured mortgages. While the lower single-family volumes affected operational leverage, First National continued to benefit from historically slow prepayment speeds and the impact of higher interest rates on revenue. Looking forward, we expect competition to remain elevated this spring and will approach market opportunities as we always have: with discipline and a focus on service and technology.”

First 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. See Non-GAAP measures.

First quarter 2024 performance met management’s expectations. First National’s MUA increased 9% to $145.1 billion from $133.0 billion at March 31, 2023 reflecting growth in both single-family and commercial mortgage portfolios over the period.  MUA increased at an annualized rate of 4% during the quarter. At March 31, 2024, single-family MUA was $94.4 billion, up 5% from $89.5 billion at March 31, 2023, while commercial MUA was $50.7 billion, up 17% from $43.5 billion a year ago. 

Single-family mortgage origination (including renewals) was $3.5 billion compared to $4.4 billion in 2023, a decrease of 20% as large competitors discounted mortgage rates and offered large broker incentives to grow market share. During this period of intense competition, 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 retention rates.

Commercial segment origination (including renewals) was $3.0 billion compared to $2.2 billion a year ago. This 39% increase reflected strong demand for First National’s insured multi-unit property mortgage products.

Revenue increased 20% to $518.0 million from $432.1 million a year ago largely due to a higher interest rate environment. During the first quarter, First National earned:

• $56.6 million of mortgage servicing income compared to $50.8 million a year ago, an 11% increase, due to growth in MUA, higher interest earned on escrow deposits and growth in its third-party underwriting business
• $54.1 million of net interest–securitized mortgages (NIM) compared to $49.4 million a year ago, a 10% increase due to an 8% increase in the portfolio of mortgages pledged under securitization combined with historically slow mortgage prepayment speeds, success with the company’s Excalibur securitization program and the reduced impact of short-term interest rate volatility on floating rate securitization programs. Residential segment NIM was higher by $1.8 million year over year while Commercial NIM was $2.9 million higher
• $45.2 million of placement fees compared to $51.5 million a year ago, a 12% reduction due to a 12% decrease in placement activity and a shift in the mix favouring commercial segment volumes, which generally attract lower per-unit fees than residential placement. The decrease due to lower per-unit placement fees was offset by an increase in renewal fees in the residential segment
• $31.3 million of mortgage investment income compared to $28.9 million a year ago, an 8% increase due 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
• $5.4 million of gains on deferred placement fees compared to $6.8 million a year ago, a 21% decrease reflecting a 26% decrease in multi-unit residential mortgages placed in these programs

Income before income taxes was $67.9 million in the first quarter of 2024 compared to $48.6 million in the same period of 2023. This 40% increase included the effect of changing capital market conditions in both years which affected the value of financial instruments used to economically hedge residential mortgage commitments. In the first quarter of 2024, the company recorded $5.1 million of gains on financial instruments (excluding gains related to mortgage investments). In the 2023 first quarter, the company recorded $11.1 million of losses on financial instruments (excluding losses related to mortgage investments). The change in these values accounted for a $16.2 million increase in comparative income before income taxes year over year.

Earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income¹”), which excludes the impact of these changes, increased 5% to $62.7 million from $59.7 million in the 2023 comparative quarter. This change was largely the result of First National’s long-term success in growing MUA. 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.

Outstanding Securities

At March 31, 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. On April 1, 2024, the Company issued 200,000 new senior unsecured bonds (“Series 5 notes” with a coupon of 6.261%) to mature on November 1, 2027. There were no other changes in the company’s outstanding securities at April 30, 2024.

Dividends

Total common share dividends paid or declared in the first 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 share effective in December 2023. The common share payout ratio in the first quarter was 75% compared to 103% a year ago. If gains and losses on financial instruments are excluded, the common share dividend payout ratio would have been 81% this year compared to 84% in the first quarter of 2023.

First National paid $1.0 million of dividends on its preferred shares in the first quarter of 2024 compared to $0.9 million in the 2023 quarter.

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

2024 began as expected by the Company – significantly lower single-family origination and growing commercial segment origination. In general, management believes that the housing market overall is solid with stable valuations and continued demand. Lower single-family origination is the result of increased competition, particularly in the mortgage broker distribution channel. In the quarter, the Company 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 lower single-family origination to continue into the second quarter of 2024 as competitors continue to build market share with relatively low mortgage rates and elevated broker incentives. Although the Company does not see weakness in the housing market, the acceleration of activity from expected Bank of Canada rate cuts has been delayed, leaving some prospective buyers on the sidelines. For its commercial segment, the Company anticipates steady origination volumes as 2023 government announcements 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 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 the first quarter of 2024 as the Company competes for qualifying mortgages. 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 $40 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

A taped rebroadcast of the conference call will be available until May 8, 2024 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 570798 followed by the number sign. The webcast is also 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 2024 annual meeting of shareholders on May 2, 2024 at the TMX Market Centre, 120 Adelaide Street West, Toronto, Ontario starting at 10 am EDT. 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 $145 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.

Reconciliation of Quarterly Determination of Pre-FMV Income¹

($000s, except per share amounts)

 ⁽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. For more information, see the Key Performance Indicators section of the MD&A.  

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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