Mr. Jason Ellis reports

FIRST NATIONAL FINANCIAL CORPORATION REPORTS FOURTH QUARTER, ANNUAL 2023 RESULTS

First National Financial Corp. today released its financial results for the three and 12 months ended Dec. 31, 2023. 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.

2023 annual summary

• Mortgages under administration (MUA) were a record $143.5-billion compared with $131.0-billion at Dec. 31, 2022.
• Revenue was $2.0-billion compared with $1.6-billion in 2022.
• Net income was $252.8-million ($4.15 per share), compared with $197.7-million ($3.25 per share) in 2022.
• Pre-FMV income was $322.1-million compared with $208.8-million in 2022.

Fourth quarter 2023 summary

• Revenue was $503.4-million compared with $414.8-million a year ago.
• Net income was $44.2-million (72 cents per share), compared with $42.7-million (70 cents per share) a year ago.
• Pre-FMV income was $77.1-million compared with $59.5-million a year ago.

Management commentary

"First National had a very successful year in 2023," said Jason Ellis, president and chief executive officer. "Despite challenging market conditions brought on by the cumulative effect of higher interest rates, total originations including renewals came close to equaling our previous record set in 2022. In the case of our commercial business, annual volumes were best ever at over $13-billion, fuelled by customer demand for high-quality insured multiunit mortgage products. With much higher MUA, revenue increased 29 per cent and operating profitability was up 54 per cent. Two thousand twenty-three was a good example of the efficiency of our business model as well as the team's dedication to supporting customers and partners in both good times and bad. I thank all members of the team for working tirelessly to deliver these strong results. Although we expect lower single-family mortgage origination to start 2024 compared with this time last year due to a market slowdown that was evident in the final quarter, First National is well positioned to compete, serve and execute our business plan. We can also look forward to generating income and cash flow from our expanded servicing and securitization portfolio."

First National's MUA increased 10 per cent to $143.5-billion at Dec. 31, 2023, from $131.0-billion a year earlier and at an annualized rate of 5 per cent since Sept. 30, 2023. At Dec. 31, 2023, single-family MUA was $94.5-billion, up 7 per cent from $88.6-billion at Dec. 31, 2022, while commercial MUA was $49.0-billion, up 16 per cent from $42.4-billion a year ago.

For the fourth quarter of 2023, single-family mortgage origination was $4.4-billion compared with $5.5-billion for the comparative quarter of 2022, a decrease of 20 per cent. For 2023, single-family mortgage origination was $24.4-billion compared with $26.3-billion in 2022 or 7 per cent lower. In both periods, originations reflected the impact of higher Bank of Canada interest rates on residential real estate activity. First National's MERLIN technology and operating systems continued to support efficient and effective mortgage underwriting across the country.

Fourth quarter 2023 commercial mortgage originations were $3.8-billion, 27 per cent or $874-million higher than in the same period of 2022. For all of 2023, commercial mortgage originations were $13.0-billion, 11 per cent or $1.2-billion higher than a year ago. Volumes in both 2023 periods reflected strong demand for insured mortgages and First National's expertise in the multiunit property sector.

Of the company's $37.4-billion of originations in 2023, $24.6-billion was placed with institutional investors to earn placement fees (2022 -- $24.4-billion) and $11.8-billion (2022 -- $12.6-billion) was originated for First National's own securitization programs.

Fourth quarter 2023 revenue of $503.4-million was 21 per cent or $88.6-million higher than the fourth quarter of 2022 reflecting:

• $58-million of net interest revenue -- securitized mortgages, 26 per cent or $12-million higher than a year ago due to portfolio growth, stable interest rates and a successful Excalibur securitization program;
• $38-million of mortgage investment income, 12 per cent or $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;
• $60-million of mortgage servicing income, 24 per cent or $12-million higher than a year ago primarily due to higher MUA and growth in volumes for third party underwriting customers;
• $55-million of placement fees, 4 per cent or $2-million higher than the fourth quarter a year ago on higher volumes placed with institutional investors in the commercial segment;
• $4.9-million of gains on deferred placement fees, approximately the same as a year ago.

For 2023, revenue increased 29 per cent to $2.0-billion from $1.6-billion in 2022 largely due to higher interest rates. In the past 12 months, mortgage rates increased in tandem with the interest rate environment as monetary policy tightened to counteract inflation risks. These changes led to comparatively higher net interest revenue earned on securitized mortgages (plus 28 per cent year over year to $216.6-million), and higher interest earned on mortgage investments (plus 32 per cent year over year to $139.9-million). Additionally, growing MUA, higher interest earned on escrow deposits and third party underwriting activity were reflected in mortgage servicing income (plus 17 per cent to $252.6-million), while gains on deferred placement fee revenue (plus 69 per cent to $25.3-million) primarily related to growth in multiunit residential mortgages originated and sold to institutional investors.

These increases were partially offset by an 8-per-cent year-over-year reduction in placement fees, which amounted to $248.3-million in 2023 compared with $268.6-million in 2022. This decrease was mainly the result of a shift in placement activity between business segments. Although overall volumes for institutional customers increased by 1 per cent from 2022, placement volume for the residential segment decreased by 10 per cent while volume for commercial segment mortgages increased by 27 per cent. Generally, per-unit fees for commercial placement are much lower than those on residential products. Placement fees for renewed residential mortgages were lower by about $3.7-million partly because the company elected to securitize renewed mortgages rather than placing them with institutional customers and partly as a consequence of borrowers taking shorter renewal terms.

For the fourth quarter, income before income taxes increased to $59.9-million from $58.3-million in the corresponding period of 2022. Both years included gains and losses on financial instruments. pre-FMV income, which eliminates the effect of such revenue, increased 30 per cent to $77.1-million from $59.5-million in the same period of 2022. This increase was the result of the growth in revenue as previously described against an efficient operating environment.

For 2023, income before income taxes increased 28 per cent to $343.9-million from $269.1-million in 2022. The increase included the effect of changing capital market conditions in both years. Excluding gains and losses related to financial instruments, pre-FMV income for 2023 increased 54 per cent to $322.2-million from $208.8-million in 2022. This change was largely the result of the company's success in growing MUA over the past several years. Higher MUA creates higher servicing revenues, and the larger portfolio of securitized mortgages provides five- and 10-year streams of income which are reflected in higher net interest income. The commercial segment also benefited from increased deferred placement fees.

Net income for the fourth quarter of 2023 was $44.2-million (72 cents per share), compared with $42.7-million (70 cents per share) a year ago. Net income for 2023 was $252.8-million ($4.15 per share), compared with $197.7-million ($3.25 per share) in 2022.

Dividends

The board declared common share dividends of $189.4-million or $3.16 per share in 2023 compared with $141.4-million or $2.36 per share in 2022. Included in 2023 was a special dividend of 75 cents per share as the company had excess capital which it did not require for its operations. In the fourth quarter of 2023, the board of directors also increased First National's monthly common share dividend to annualized rate of $2.45 per share from $2.40 per share, effective with the payment made Dec. 15, 2023. This marked the 16th increase in distributions to shareholders since the company's initial public offering in 2006. In the fourth quarter of 2023, the company paid regular common share dividends of $36.5-million compared with $35.7-million a year ago.

For 2023, the regular common share payout ratio (excluding the special dividend) was 58 per cent compared with 73 per cent in 2022. Excluding the special dividend in 2023, 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 2023 would have been 62 per cent compared with 94 per cent in 2022. Generally, management does not consider such gains and losses in the determination of its dividend policy. The regular common share dividend payout ratio (excluding the special dividend) for the fourth quarter of 2023 was 84 per cent (86 per cent in the fourth quarter of 2022). Excluding the special dividend and gains and losses on financial instruments, fourth quarter 2023 payout ratio would have been 64 per cent compared with 84 per cent in the fourth quarter of 2022.

First National paid $3.9-million of dividends on its preferred shares in 2023 compared with $3.0-million in 2022. As announced on Dec. 15, 2023, the dividend rate on the company's Class A Series 2 preference shares for the period Jan. 1 to March 31, 2024, was set at 7.112 per cent, 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 Dec. 31, 2023, and March 5, 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.

Outlook

In the short term, the company expects significantly lower single-family origination to start 2024 than in the 2023 comparative quarters due to persistent housing affordability challenges and an increasingly competitive marketplace. Although economic indicators have shown decreasing rates of inflation, it is still above the BoC's (Bank of Canada's) target rate of 2 per cent and accordingly, the BoC has yet to reverse any of its recent rate hikes. Prevailing market conditions have affected prospective buyers such that like the last quarter of 2023, the start of 2024 will show reduced activity. In the longer term, higher immigration levels are expected to support demand in the housing market. For its commercial segment, the company anticipates a strong start for origination as recent government announcements have supported the creation of multiunit housing. These initiatives, including the increase of the CMB program from $40-billion to $60-billion, provide a stable market for the company's borrowers to use CMHC insured mortgages for funding. In both business segments, management is confident that First National will remain a competitive leader in the marketplace.

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 $39-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 March 13, 2024, at midnight ET. To access the rebroadcast, please dial 416-764-8677 or 888-390-0541 and enter pass code 781582 followed by the number sign. The webcast is archived on the First National website for three months.

Complete consolidated financial statements for the company as well as management's discussion and analysis are available at SEDAR+ and the company's website.

About First National Financial Corp.

First National Financial is the parent company of First National Financial LP, a Canadian-based originator, underwriter and servicer of predominantly prime residential (single-family and multiunit) and commercial mortgages. With more than $143-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.

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