TORONTO, Feb. 28,
2023 /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 12 months
ended December 31, 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.
2022 Annual Summary
- Mortgages under administration ("MUA") were a record
$131.0 billion compared to
$123.9 billion at December 31, 2021
- Revenue was $1.57 billion
compared to $1.39 million in
2021
- Net income was $197.7 million
($3.25 per share), compared to
$194.6 million ($3.20 per share) in 2021
- Pre-FMV Income(1) was $208.8
million compared to $257.3
million in 2021
Fourth Quarter 2022 Summary
- Revenue was $414.8 million
compared to $339.3 million a year
ago
- Net income was $42.7 million
($0.70 per share), compared to
$42.0 million ($0.69 per share) a year ago
- Pre-FMV Income(1) was $59.5
million compared to $57.0
million a year ago
Management Commentary
"First National more than held
its own as Canadian housing activity retreated in the face of
rapidly rising interest rates," said Jason
Ellis, President and Chief Executive Officer. "While total
mortgage originations were 12% below last year with an impact on
operating leverage, our business remained solidly profitable in
both the fourth quarter and full year. MUA, the source of most of
our earnings, increased again, reflecting our Canada-wide access to residential and
commercial mortgage origination and renewal opportunities,
dedication to responsive customer service, and long-standing
business partnerships. Our MUA and adherence to our business model
will support corporate performance in 2023. Our task now is to
respond with discipline to a market that we expect will remain
challenging in the first half of 2023 before improving later in the
year. I am confident that the team at First National can deliver
for customers and shareholders in this environment."
Performance Review
|
Quarter
Ended
|
12 months
ended
|
|
December
31,
2022
|
December
31,
2021
|
December
31,
2022
|
December
31,
2021
|
For the
Period
|
($000s)
|
Revenue
|
414,785
|
339,292
|
1,574,293
|
1,394,606
|
Income before
income taxes
|
58,269
|
57,111
|
269,082
|
263,821
|
Pre-FMV Income
(1)
|
59,492
|
57,045
|
208,762
|
257,276
|
At Period
End
|
|
Total
assets
|
43,763,672
|
42,274,158
|
43,763,672
|
42,274,158
|
Mortgages under
administration
|
131,000,635
|
123,907,627
|
131,000,635
|
123,907,627
|
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 increased 6% to $131.0
billion at December 31, 2022
from $123.9 billion a year earlier
and at an annualized rate of 5% since September 30, 2022. At December 31, 2022, single-family MUA was
$88.6 billion, up 4% from
$84.9 billion at December 31, 2021, while commercial MUA was
$42.4 billion, up 9% from
$39.0 billion a year ago.
For the fourth quarter of 2022, new single-family mortgage
origination was $3.6 billion compared
to $5.2 billion for the comparative
quarter of 2021, a decrease of 31% or $1.6
billion. For 2022, new single-family mortgage origination
was $19.5 billion, 17% or
$3.9 billion lower than in 2021. In
both periods, originations were lower due to a slowing real estate
market brought on by rising interest rates as well as greater
competition for mortgage business.
For the fourth quarter of 2022, single-family mortgage renewals
were $1.9 billion, 27% or
$400 million higher than the
corresponding period a year ago. For 2022, single-family mortgage
renewals were $6.8 billion, an 8% or
$500 million increase over the prior
year. In both 2022 periods, the Company benefitted from available
renewal opportunities and a tempering of prepayment speeds which
were elevated in 2021.
First National's MERLIN technology and operating systems
continued to support efficient and effective mortgage underwriting
across the country.
In the fourth quarter of 2022, new commercial mortgage
originations of $2.3 billion were 25%
or $768 million below the
corresponding period in 2021 as demand for insured mortgages was
offset by lower conventional mortgage activity. For 2022, new
commercial segment originations were $9.6
billion, compared to $9.7
billion a year ago, a 1% decrease as the Company continued
to benefit from its leading position in the insured
multi-residential market.
Fourth quarter 2022 commercial mortgage renewals were
$689 million, 24% or $213 million lower than in the same period of
2021. For all of 2022, commercial mortgage renewals were
$2.2 billion, 19% or $495 million lower than a year ago. Volumes in
both 2022 periods reflected a drop in conventional mortgages due to
the changing interest rate environment.
For 2022, $24.4 billion
($27.8 billion – 2021) of total new
originations and renewals were placed with institutional investors
to earn placement fees while $12.6
billion ($12.9 billion – 2021)
was originated for First National's own securitization programs.
For 2022, 64% (66% - 2021) of total new originations and renewals
were placed with institutional investors.
Fourth quarter 2022 revenue of $414.8
million was 22% or $75.5
million higher than the fourth quarter of 2021
reflecting:
- $275.7 million of net interest
revenue – securitized mortgages, 41% or $80.2 million higher than a year ago on 5%
portfolio growth, as well as an increase in the average portfolio
mortgage rate
- $34.3 million of mortgage
investment income, 19% or $16.4 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
- $48.6 million of mortgage
servicing income, 11% or $6.3 million
lower than a year ago primarily due to lower fees from the
third-party underwriting which was affected, much like the Company,
by the decrease in housing activity across the country
- $52.6 million of placement
fees, 23% or $15.5 million lower
than the fourth quarter a year ago as new origination volumes
decreased
- $4.9 million of gains on
deferred placement fees, 62% or $1.9 million higher than a year ago
reflecting a relative increase in 10-year mortgage placements.
For 2022, revenue increased 13% to $1.57
billion from $1.39 billion in
2021. This growth also reflected a rapidly rising interest rate
environment with bond yields and mortgage rates increasing as
monetary policy tightened to counteract inflation. These changes,
coupled with growth in MUA, led to:
- $169.3 million of net interest
earned on securitized mortgages (NIM), a 4% or $6.1 million increase from 2021
- $105.7 million of mortgage
investment income, 65% or $41.8
million higher than in 2021
- $216.8 million of mortgage
servicing income, a 2% or $5.2
million increase year over year
These increases were partially offset by: a 12% or $35.1 million year-over-year reduction in
placement fees, which amounted to $268.6
million in 2022 reflecting lower origination volumes sold to
institutional investors; and, a 7% or $1.1
million decline in gains on deferred placement fees which
amounted to $15.0 million in
2022.
For the fourth quarter, income before income taxes increased 4%
to $58.3 million from $57.1 million in the corresponding period of
2021. Both years included gains and losses on financial
instruments. Pre-FMV Income1, which eliminates
the effect of such revenue, increased 4% to $59.5 million from $57.0
million in the same period of 2021. This increase was the
result of higher revenues which flowed through to the bottom line.
For 2022, income before income taxes increased 2% to
$269.1 million from $263.8 million in 2021 reflecting changing
capital market conditions in both years but particularly in 2022.
Pre-FMV Income1 decreased by 19% to
$208.8 million from $257.3 million in 2021. This decline was the
result of: a 17% reduction in new residential origination as
housing transactions slowed across the country; increased
competition for fewer opportunities which caused the Company to
increase broker incentives for residential mortgage transactions;
tight funding spreads on securitized floating rate mortgages; and
headcount in relation to lower origination levels.
Net income for the fourth quarter of 2022 was $42.7 million ($0.70 per share), compared to $42.0 million ($0.69 per share) a year ago. Net income for 2022
was $197.7 million ($3.25 per share), compared to $194.6 million ($3.20 per share) in 2021.
Dividends
The Board declared common share dividends of
$141.4 million or $2.36 per share in 2022 compared to $210.9 million or $3.52 per share in 2021. The year ago figure
included a special dividend of $1.25
per share as the Company had excess capital which it did not
require for its operations. There was no special dividend paid in
2022. However, in 2022 the Board increased the regular monthly
dividend to an annualized rate of $2.40 per common share effective with the payment
made December 15, 2022. This marked
the 15th increase in distributions to shareholders since
the Company's initial public offering in 2006. In the fourth
quarter of 2022, the Company paid regular common share dividends of
$35.7 million compared to regular
common share dividends paid in the fourth quarter of 2021 of
$35.2 million.
For 2022, the common share payout ratio was 73% compared to 110%
in 2021. Excluding the special dividend in 2021, 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
2022 was 94% compared to 73% in 2021. Generally, management does
not consider such gains and losses in the determination of its
dividend policy. The regular common share dividend payout ratio for
the fourth quarter of 2022 was 86%.
First National paid $3.0 million
of dividends on its preferred shares in 2022 compared to
$2.7 million in 2021. As announced on
December 15, 2022, the dividend rate
on the Company's Class A Series 2 Preference Shares for the period
January 1 to March 31, 2023 was set
at 6.203%, 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, 2022, and February 28, 2023, First National 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
2022 was a year that featured a competitive marketplace and
reduced origination activity which was largely the result of the
Bank of Canada's ("BoC") policy
decisions to reduce inflation by increasing overnight lending rates
which, in turn, led to increased mortgage rates. Between
March 2, 2022 and January 25, 2023, the overnight rate increased
eight times from 0.25% at the beginning of March to 4.50%
currently. Throughout most of these increases (except the most
recent), the BoC's statements indicated the likelihood of more
interest rate hikes to follow. The Company believes 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, and net
securitization margin and improving its position to capture
increased renewal opportunities.
In the short term, the expectation for the start of 2023 is for
lower origination as higher mortgage rates continue to dampen
activity across the country, particularly in comparison to the
first quarter of 2022 which was seasonally very strong. However,
when it announced its latest interest rate increase in January 2023, the BoC indicated that it would now
hold its policy rate at the current level while it assesses the
cumulative impact of recent increases. This may signal the end to
its rate hiking cycle designed to manage inflationary risks. In
turn, the Company hopes this will provide confidence to prospective
buyers that mortgage rates will not increase going forward such
that home buying activity will return to traditional levels.
Accordingly, the Company foresees improving origination volumes
through the second half of 2023. This positive change will not
likely represent a return to the unsustainable volumes recorded in
most of 2020 and 2021, but instead a return to pre-pandemic
activity exhibited in 2019. Higher immigration will also support
the housing market. Management is confident that First National
will remain competitive and a leader in the marketplace. Management
anticipates commercial origination will also slow as the market
digests changing property valuations given the new underlying
financial
environment.
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 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 $37 billion portfolio of mortgages pledged under
securitization and $91 billion
servicing portfolio and focus on the value inherent in its
significant single-family renewal book.
Conference Call and Webcast
March 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
March 8, 2023 at midnight ET. To access the rebroadcast, please
dial (416) 764-8677 or (888) 390-0541 and enter passcode 210488
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 $131
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
|
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
|
|
|
|
|
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
|
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