First National Financial Corporation Reports Second Quarter 2022 Results

Toronto, Ontario, July 26, 2022 – 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, 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.

Second Quarter Summary

• Mortgages under administration (“MUA”) increased 5% to a record $127.4 billion compared to $121.5 billion at June 30, 2021
• Revenue increased 14% to $416.8 million from $365.1 million a year ago 
  
• Net income increased to $61.3 million ($1.01 per share) from $52.4 million ($0.86 per share) a year ago
  
• Pre-FMV Income⁽¹⁾ decreased 21% to $55.9 million from $71.2 million a year ago 
  

Management Commentary

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 

First National’s MUA, the source of most of its earnings, increased 5% to $127.3 billion from $121.5 billion at June 30, 2021. At June 30, 2022, single-family MUA was $86.7 billion, up almost 3% from $84.5 billion at June 30, 2021, while commercial MUA was $40.6 billion, up 10% from $36.9 billion a year ago.

New single-family mortgage origination in the quarter was $6.8 billion compared to $7.6 billion in 2021, a decrease of 10%. Volumes reflected reduced housing market activity brought on by rising interest rates but were still well ahead of pre-pandemic levels. (For reference, First National’s Q2 2019 single family originations were $3.9 billion.)  Single-family renewals were $1.6 billion compared to $1.9 billion a year ago, reflecting available renewal opportunities which declined as prepayment speeds were still higher than expected. First National’s MERLIN technology and operating systems continued to support efficient and effective mortgage underwriting across the country.

New commercial segment originations were $3.2 billion compared to $2.7 billion a year ago, a 19% increase, reflecting growth in demand for First National’s insured multi-unit property mortgages, partially offset by lower conventional volumes. Commercial mortgage renewals of $639 million decreased 26% from $869 million a year ago 

Of the $12.2 billion of new originations and renewals in the second quarter, $8.8 billion (Q2 2021 - $8.3 billion) were placed with institutional investors and $3.0 billion (Q2 2021- $4.3 billion) were originated for First National’s own securitization programs.

Revenue increased 14% to $416.8 million from $365.1 million a year ago. Growth largely reflected the rapidly rising interest rate environment – with bond yields and mortgage rates increasing as monetary policy tightened to counteract inflation – leading to $27.2 million of gains on holding financial instruments related to interest rate hedging. By comparison, holding such financial instruments produced a loss of $1.1 million in the second quarter of 2021. The rapidly rising interest rate environment also drove growth in interest revenue-securitized mortgages and interest revenue as noted below. 

Second quarter revenue performance included:

• $98.4 million of placement fees, 10% or $9.2 million higher than a year ago due to a 6% increase in origination volumes sold to institutional investors. This revenue was also favorably affected by product mix in the commercial segment which shifted to a higher proportion of 10-year term insured origination. For residential, a competitive environment resulted in modestly lower per unit placement fees.
• $61.8 million of mortgage servicing income, 12% or $6.5 million higher than a year ago on growing administration revenue from the Company’s larger MUA as well as the third-party underwriting division  
• $40.4 million of net interest revenue – securitized mortgages, 5% or $2.1 million higher than a year ago on 1% portfolio growth despite continued high prepayment speeds in single family. Net interest revenue benefited from reduced indemnities paid in the quarter to NHA MBS bondholders compared to the same quarter in 2021

• $21.5 million of mortgage investment income, 34% or $5.5 million higher than a year ago due primarily to the higher interest rate environment which resulted in more interest income earned on the mortgage loan investment portfolio and mortgages accumulated for securitization

• $2.6 million of gains on deferred placement fees, 50% or $2.6 million lower than a year ago reflecting narrower mortgage spreads on multi-unit residential mortgages originated and sold to institutional investors.

Income before income taxes increased to $83.1 million from $70.1 million a year ago, largely reflecting the impact of changing capital market conditions on the value of financial instruments.  Earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income”) decreased 21% to $55.9 million from $71.2 million in Q2 2021. This reflected a comparatively tighter mortgage spread environment, continued high single-family prepayment speeds, higher interest expenses which include the cost of carrying interest rate hedges, and higher workforce costs on growth in FTE and inflationary wage increases in a competitive job market. First National’s workforce increased 18% year over year to meet the requirements of MUA growth including service commitments to customers.

Net income increased to $61.3 million ($1.01 per share) from $52.4 million ($0.86 per common share) a year ago.

Dividends

Total common share dividends paid or declared in the second quarter amounted to $35.2 million compared to $34.0 million a year ago reflecting an increase in the regular monthly dividend to an annualized rate of $2.35 per common share from $2.10 per common share in June 2021. The common share payout ratio in the second quarter was 58%. If gains and losses on financial instruments are excluded, the dividend payout ratio would have been 87% compared to 65% in the second quarter a year ago.

First National paid $0.7 million of dividends on its preferred shares in the second quarter, unchanged from a year ago. As announced on March 15, 2022, the dividend rate for the Class A Series 2 Preference Shares for the period April 1 to June 30, 2022 was set at 2.685% in accordance with the terms of those shares.  With respect to Class A Series 2 Preference Shares, the dividend rate for the period July 1 to September 30, 2022, was set at 3.547%, 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 June 30, 2022, and July 26, 2022, the Corporation 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 

The second quarter saw the continuation of trends established at the end of 2021: a competitive marketplace and reduced origination activity. The quarter also featured increases in Bank of Canada’s (“BoC”) overnight rate as it addressed risks associated with inflation. Between April 1, 2022 and June 30, 2022, the overnight rate increased by 1.0%. Subsequent to quarter end, the BoC increased the overnight rate by another 1.0% in July 2022 to 2.5%. Equally important as the increases were the Bank’s statements indicating the likelihood of more interest rate hikes to come. These increases have led to significantly higher mortgage rates and reduced the affordability of housing across the country. Despite this 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, net securitization margin and increased renewal opportunities.

In the short term, the expectation for the remainder of 2022 is lower origination as mortgage rates rise in tandem with prime lending rates and bond yields reducing affordability and dampening housing activity. Management recognizes that home purchasing in the past two years has been at levels that are likely unsustainable and that while drivers such as higher immigration might support the market, a further slowdown in housing seems inevitable. Although, management is confident that First National will remain competitive and a leader in the marketplace, it estimates that year-over-year origination will moderate in line with housing activity across Canada. Management anticipates commercial origination will also slow as the market digests changing property valuations given the new underlying financing environment. At this time, the Company foresees a solid third quarter but weaker commitments going into the fourth quarter.        

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. In 2022, the Company expects to enjoy the value of its goodwill with broker partners earned over the last 30+ years and reinforced during the pandemic. Demand for the Company’s mortgages from institutional investors remains strong and securitization markets are robust and provide consistent and reliable source 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 $35 billion portfolio of mortgages pledged under securitization and $90 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 3, 2022 at midnight ET. To access the rebroadcast, please dial (416) 764-8677 or (888) 390-0541 and enter passcode 636024 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.

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 $127 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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