TORONTO, Oct. 25,
2022 /CNW/ - 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, 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.
Third Quarter Summary
- Mortgages under administration ("MUA") were a record
$129.3 billion compared to
$122.3 billion at September 30, 2021
- Revenue was $392.4 million
compared to $353.7 million a year
ago
- Net income was $40.1 million
($0.66 per share), compared to
$47.6 million ($0.78 per share) a year ago
- Pre-FMV Income(1) was
$48.2 million compared to
$64.9 million a year ago
Common Share Dividend Increase
Today, First National's
Board of Directors announced an increase in the Company's regular
monthly dividend effective with the payment to be made December 15, 2022 to shareholders of record at
the close of business November 30,
2022. At that time, the monthly dividend will rise to an
annualized rate of $2.40 per common
share from the current annualized rate of $2.35 per common share.
Management Commentary
"During this period of market
adjustment brought on by rapidly rising interest rates, we continue
to manage First National with a long-term mindset," said
Jason Ellis, President and Chief
Executive Officer. "Our focus on providing responsive,
differentiated services to Canadian borrowers and independent
mortgage brokers enabled us to profitably originate $6.9 billion of new mortgages in the quarter and
renew $2.3 billion despite much lower
activity levels in most Canadian real estate markets and strong
competition pursing fewer opportunities. For shareholders, solid
performance brought with it the opportunity to increase our
dividend for the 15th time since our initial public
offering in 2006. By growing MUA and adding to our portfolio of
mortgages pledged under securitization, we are creating a platform
for future earnings through mortgage administration, net
securitization margin and renewal opportunities. Going forward, we
will remain locked in on our fundamentals including enhancement of
business processes and efficiencies to ensure First National
performs for all stakeholders."
Third Quarter Review
|
Quarter
Ended
|
Nine months
ended
|
|
September
30,
2022
|
September
30,
2021
|
September
30,
2022
|
September
30,
2021
|
For the
Period
|
($000s)
|
Revenue
|
392,413
|
353,704
|
1,159,508
|
1,055,313
|
Income before
income taxes
|
54,645
|
65,134
|
210,813
|
206,710
|
Pre-FMV Income
(1)
|
48,219
|
64,867
|
149,270
|
200,231
|
At Period
End
|
|
Total
assets
|
42,392,225
|
40,763,169
|
42,392,225
|
40,763,169
|
Mortgages under
administration
|
129,321,654
|
122,311,392
|
129,321,654
|
122,311,392
|
|
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, the source of most of its earnings, increased
6% to $129.3 billion at September 30, 2022 from $122.3 billion a year earlier and at an
annualized rate of 6% since June 30,
2022. At September 30, 2022,
single-family MUA was $87.6 billion,
up 3% from $84.7 billion at
September 30, 2021, while commercial
MUA was $41.7 billion, up 11% from
$37.6 billion a year ago.
New single-family mortgage origination in the quarter was
$4.7 billion compared to $6.1 billion in 2021, a decrease of 23%. Volumes
reflected reduced housing market activity brought on by rising
interest rates and strong competition for fewer origination
opportunities. Even so, new single- family originations were above
the level generated immediately prior to the pandemic. (First
National's Q3 2019 single family originations were $4.2 billion.) Single-family renewals were
$1.9 billion compared to $1.7 billion a year ago, a 12% increase
reflecting available renewal opportunities and normalization of
prepayment speeds that had been elevated in 2021. First National's
MERLIN technology and operating systems continued to support
efficient and effective mortgage underwriting across the
country.
New commercial segment originations were $2.2 billion compared to $2.3 billion a year ago, a 4% decrease, as strong
demand for insured multi-unit property mortgages was offset by
lower volumes of conventional mortgages. Even so, new commercial
originations were well above the level generated immediately prior
to the pandemic. (First National's Q3 2019 commercial mortgage
originations were $1.4 billion.)
Commercial mortgage renewals of $362
million decreased 40% from $604
million a year ago. In 2021, there were $330 million short-term renewals (less than six
months) as commercial borrowers waited to make a longer-term
decision.
Of the Company's $9.1 billion of
new originations and renewals in third quarter of 2022,
$5.5 billion was placed with
institutional investors (Q3 2021 - $7.7
billion) and $3.4 billion was
originated for First National's own securitization programs (Q3
2021 - $2.6 billion).
Revenue increased 11% to $392.4
million from $353.7 million a
year ago. This growth reflected a rapidly rising interest rate
environment with bond yields and mortgage rates increasing as
monetary policy tightened to counteract inflation. These changes
had a wide-ranging impact and led to higher interest earned on
securitized mortgages, higher interest revenue earned on mortgages
accumulated for securitization and higher interest earned on
mortgage investments. These revenue increases were partially offset
by the impact of lower residential origination volumes on placement
fees as noted in the summary below.
Third quarter revenue performance included:
- $58.5 million of placement fees,
31% or $26.5 million lower than a
year ago due to lower single-family origination which affected the
volume of mortgages that the Company placed with its institutional
investors
- $55.4 million of mortgage
servicing income, 8% or $4.0 million
higher than a year ago primarily due to growing interest earned on
funds held in escrow as a result of higher overnight interest rates
and to lesser extent, growth in administration revenue
- $43.2 million of net interest
revenue – securitized mortgages, 8% or $3.1
million higher than a year ago on 2% portfolio growth,
despite temporary compression between the Company's prime lending
rate and its short term, CDOR-based funding costs
- $30.0 million of mortgage
investment income, 87% or $14.0
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
- $4.6 million of gains on deferred
placement fees, 31% or $1.1 million
higher than a year ago reflecting a 50% increase in multi-unit
residential mortgages originated and sold to institutional
investors
Income before income taxes decreased 16% to $54.6 million from $65.1
million a year ago. These figures were affected marginally
by the impact of changing capital market conditions between the
comparative quarters. Earnings before income taxes and gains and
losses on financial instruments ("Pre-FMV
Income1") which excludes the impact of these
changes, decreased 26% to $48.2
million from $64.9 million in
the third quarter of 2021. This change was the result of several
factors: a 23% reduction in new residential origination due to
reduced housing transactions with the significant increase in
mortgage rates, the Company's response to competitive pressures to
temporarily increase broker incentives, tight interest rate spreads
for Prime-based securitized floating rate mortgages, and headcount
in relation to current origination levels.
Net income was $40.1 million
($0.66 per share) in the third
quarter of 2022 compared to $47.6
million ($0.78 per share) a
year ago.
Dividends
Total common share dividends paid or
declared in the third quarter amounted to $35.2 million, unchanged from a year ago. The
common share payout ratio in the third quarter was 89%. If gains
and losses on financial instruments are excluded, the dividend
payout ratio would have been 101% compared to 75% in the third
quarter a year ago.
First National paid $0.8 million
of dividends on its preferred shares in the third quarter compared
to $0.7 million in the same period a
year ago. As announced on June 15,
2022, the dividend rate for the Class A Series 2 Preference
Shares 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 (up
from 2.685% in the immediately preceding quarter).
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 September 30, 2022 and October 25, 2022 there were 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 third quarter saw the continuation
of trends established at the beginning of 2022: a competitive
marketplace and reduced origination activity. The quarter also
featured more increases in Bank of Canada's ("BoC") overnight rate as it
addressed risks associated with inflation. Between July 1, 2022 and September
30, 2022, the overnight rate increased by another 100 basis
points. Equally important as the increases were the BoC's
statements indicating the likelihood of more interest rate hikes to
come. 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, net securitization margin and increased renewal
opportunities.
In the short term, the expectation for the remainder of 2022 is
lower origination as higher mortgage rates further reduce housing
affordability and dampen activity across the country. Management
recognizes that home purchasing activity through the second half of
2020 and all of 2021 was unsustainable and that while drivers such
as higher immigration might support the market, a continued
moderation in housing activity is possible. 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 financial environment. At this
time, the Company foresees a solid fourth quarter for commercial
originations but weaker commitments going into
2023.
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 30+ 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 $36 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
October 26, 2022 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 2, 2022 at midnight ET. To access the rebroadcast, please
dial (416) 764-8677 or (888) 390-0541 and enter passcode 618771
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 $129
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
($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)
|
2022
|
|
|
|
|
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
|
2021
|
|
|
|
|
Fourth
quarter
|
$57,111
|
$71
|
($137)
|
$57,045
|
Third
quarter
|
$65,134
|
$383
|
($650)
|
$64,867
|
Second
quarter
|
$70,101
|
$1,217
|
($100)
|
$71,218
|
First
quarter
|
$71,475
|
($7,486)
|
$157
|
$64,146
|
|
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 Key Performance Indicators section of the
Company's MD&A.
|
|
SOURCE First National Financial Corporation