TORONTO, July 30,
2024 /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 six months
ended June 30, 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.
Second Quarter Summary
- Mortgages Under Administration ("MUA") increased 8% to a record
$148.2 billion compared to
$137.8 billion at June 30, 2023
- Revenue increased 2% to $538.4
million from $525.9 million a
year ago
- Pre-FMV Income(1) decreased 14% to $77.5 million from $89.9
million a year ago
- Net income was $54.1 million
($0.93 cents per share) compared to
$89.2 million ($1.47 per share) a year ago
Management Commentary
"Second quarter performance was consistent with our
expectations," said Jason Ellis,
President and Chief Executive Officer. "With the benefit of
diversification and disciplined execution of our longstanding
strategies, First National achieved solid profitability in the face
of elevated competition among bank lenders in the mortgage broker
channel, slightly muted demand for single-family mortgages in
markets across Canada and tighter
spreads. In keeping with our focus, we continued to build MUA and
our portfolio of mortgages pledged under securitization which will
provide future income streams and create the opportunity to capture
higher mortgage renewal volumes. In the context of currently
prevailing market conditions, we are confident that First
National's approach to service, funding and investment is the right
one for our shareholders, customers and partners."
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.
|
Second Quarter Review
|
Quarter
ended
|
Six months
ended
|
|
June 30,
2024
|
June 30,
2023
|
June 30,
2024
|
June 30,
2023
|
For the
Period
|
($000s)
|
Revenue
|
538,450
|
525,897
|
1,056,495
|
957,983
|
Income before
income taxes
|
73,490
|
121,544
|
141,382
|
170,182
|
Pre-FMV Income
(1)
|
77,498
|
89,854
|
140,243
|
149,602
|
At Period
End
|
|
Total
assets
|
50,093,796
|
46,417,841
|
50,093,796
|
46,417,841
|
Mortgages under
administration
|
148,185,494
|
137,846,825
|
148,185,494
|
137,846,825
|
1This
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.
|
First National's MUA increased 8% to $148.2 billion at June 30,
2024 from $137.8 billion at
June 30, 2023 reflecting growth in
its single-family and commercial mortgage portfolios. MUA
increased at an annualized rate of 9% during the quarter. At
June 30, 2024, single-family
residential MUA was $94.8 billion, up
3% from $92.0 billion at June 30, 2023, while commercial MUA was
$53.3 billion, up 16% from
$45.8 billion a year ago.
Single-family mortgage origination (including renewals) was
$6.1 billion compared to $7.4 billion in the second quarter of 2023, a
decrease of 17%. Lower volumes were anticipated as a result of
increased competition among bank lenders in the mortgage brokerage
distribution channel and slightly lower transaction activity in the
market compared to a year ago. First National's MERLIN technology
and operating systems continued to support efficient and effective
mortgage underwriting across the country.
Commercial segment origination (including renewals) was
$5.0 billion, up 35% from
$3.7 billion a year ago reflecting
demand for high quality insured multi-unit mortgage products.
Second quarter revenue increased 2% to $538.4 million from $525.9
million a year ago largely due to a higher interest rate
environment. During the second quarter, the Company earned:
- $70.1 million of mortgage
servicing income compared to $70.0
million a year ago as growth in MUA augmented by interest
earned on escrow deposits was partially offset by lower third-party
underwriting and fulfillment processing revenues
- $53.7 million of net interest
revenue earned on securitized mortgages (NIM) compared to
$51.5 million a year ago, a 4%
increase on 9% portfolio growth, partially offset by lower
residential segment NIM on tighter nominal spreads
- $45.3 million of placement fees,
32% below fees of $66.5 million a
year ago due to a 14% decrease in placement activity and the impact
of a shift favouring renewed mortgages and commercial segment
mortgages, which attract lower per-unit fees than residential
mortgages; residential per-unit fees were also lower than a year
ago as borrowers opted for shorter terms
- $35.7 million of mortgage
investment income compared to $30.3
million a year ago, an 18% increase as the Company decided
to increase its own securitization activities leading to more
mortgages warehoused and more mortgage interest earned in the
period between funding and securitization
- $4.6 million of gains on deferred
placement fees compared to $6.6
million a year ago, a 30% decrease reflecting tighter
spreads for multi-unit residential mortgages originated and sold to
institutional investors
Second quarter income before income taxes was $73.5 million compared to $121.5 million a year ago reflecting changing
capital market conditions which affected the value of financial
instruments used to economically hedge residential mortgage
commitments. During the 2024 second quarter, the Company recorded
$4.0 million of losses on financial
instruments (excluding losses related to mortgage and loan
investments) compared to gains of $31.7
million a year ago on the same basis.
Earnings before income taxes and gains and losses on financial
instruments ("Pre-FMV Income1"), which excludes the
impact of these changes, decreased 14% to $77.5 million from $89.9
million in the second quarter of 2023. This change
reflected: lower single-family residential origination which
negatively affected placement fees; lower third-party mortgage
servicing revenue; higher investments in direct securitization
programs which delayed the recognition of revenue to future
periods; and reduced operational leverage in residential and
third-party businesses.
Outstanding Securities
At June 30, 2024 and July 30, 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; 200,000 September
2026 unsecured notes; and 200,000 November 2027 senior unsecured notes.
Dividends
Common share dividends paid or declared in the second 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 effective in December 2023. The common share payout ratio
in the second quarter was 69%. If gains and losses on financial
instruments are excluded, the common share dividend payout ratio
would have been 66% in the second quarter of 2024 compared to 55%
in the second quarter a year ago.
First National paid $1.0 million
of dividends on its preferred shares in the second quarters of both
2024 and 2023. As announced on June 17,
2024, the quarterly dividend rate on its Class A Series 2
Preference Shares for the period July 1 to
September 30, 2024, was set at 6.942%, as determined in
accordance with the terms of that Series.
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
The second quarter of 2024 materialized much as expected by the
Company – lower single-family origination and growing commercial
segment origination. In general, management believes that the
housing market is solid with stable valuations but slightly muted
demand, especially in comparison to the previous three years. The
Company believes lower single-family origination is primarily the
result of increased competition particularly in the mortgage broker
distribution channel. In the quarter, the Company continued to
build its MUA and 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 third quarter of 2024 as bank
competitors continue to build market share with offers of
relatively low mortgage rates along with elevated broker
incentives. Although the Company does not see weakness in the
housing market, the acceleration of activity anticipated from
Bank of Canada rate cuts has yet
to materialize, leaving some prospective buyers on the sidelines.
For its commercial segment, the Company anticipates steady
origination volumes as government announcements in 2023 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 multi-unit 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 those to start 2024 as the Company competes
for qualifying mortgages. In both business segments, management is
confident that First National will remain a competitive lender 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 $41 billion portfolio of mortgages pledged under
securitization and $104 billion
servicing portfolio and focus on the value inherent in its
significant single-family renewal book.
Conference Call and Webcast
July 31, 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 August 7, 2024 at midnight ET. To access the rebroadcast, please
dial (416) 764-8677 or (888) 390-0541 and enter passcode 930557
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 $148
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.
SOURCE First National Financial Corporation