Mr. Jason Ellis reports

FIRST NATIONAL FINANCIAL CORPORATION REPORTS FIRST QUARTER 2024 RESULTS

First National Financial Corp. today released its financial results for the three months ended March 31, 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.

First quarter summary

• Mortgages under administration (MUA) increased 9 per cent to a record $145.1-billion compared with $133.0-billion at March 31, 2023.
• Revenue increased 20 per cent to $518.0-million from $432.1-million a year ago.
• Pre-FMV income increased 5 per cent to $62.7-million from $59.7-million a year ago.
• Net income was $49.9-million (82 cents per share) compared with $35.7-million (58 cents per share) a year ago.

Management commentary

"First National translated its business model advantages into positive results for shareholders in the first quarter," said Jason Ellis, president and chief executive officer. "On the strength of mortgage servicing and our securitization strategy, we generated solid profitability. The presence of these income sources and the diversified nature of our lending activities once again proved to be important as we experienced intense competition for new mortgage business. Residential originations including renewals were 20 per cent below last year as two large lenders in the mortgage broker channel discounted rates as part of their market share strategies. This decline was offset by a 39-per-cent increase in multiunit originations including renewals largely on growth in insured mortgages. While the lower single-family volumes affected operational leverage, First National continued to benefit from historically slow prepayment speeds and the impact of higher interest rates on revenue. Looking forward, we expect competition to remain elevated this spring and will approach market opportunities as we always have: with discipline and a focus on service and technology."

First quarter 2024 performance met management's expectations. First National's MUA increased 9 per cent to $145.1-billion from $133.0-billion at March 31, 2023, reflecting growth in both single-family and commercial mortgage portfolios over the period. MUA increased at an annualized rate of 4 per cent during the quarter. At March 31, 2024, single-family MUA was $94.4-billion, up 5 per cent from $89.5-billion at March 31, 2023, while commercial MUA was $50.7-billion, up 17 per cent from $43.5-billion a year ago.

Single-family mortgage origination (including renewals) was $3.5-billion compared with $4.4-billion in 2023, a decrease of 20 per cent as large competitors discounted mortgage rates and offered large broker incentives to grow market share. During this period of intense competition, First National's Merlin technology and operating systems continued to support efficient and effective mortgage underwriting across the country, while the residential team continued to convert mortgage renewal opportunities at traditional retention rates.

Commercial segment origination (including renewals) was $3.0-billion compared with $2.2-billion a year ago. This 39-per-cent increase reflected strong demand for First National's insured multiunit property mortgage products.

Revenue increased 20 per cent to $518.0-million from $432.1-million a year ago largely due to a higher interest rate environment. During the first quarter, First National earned:

• $56.6-million of mortgage servicing income compared with $50.8-million a year ago, an 11-per-cent increase, due to growth in MUA, higher interest earned on escrow deposits and growth in its third party underwriting business;
• $54.1-million of net interest -- securitized mortgages (NIM) compared with $49.4-million a year ago, a 10-per-cent increase due to an 8-per-cent increase in the portfolio of mortgages pledged under securitization combined with historically slow mortgage prepayment speeds, success with the company's Excalibur securitization program and the reduced impact of short-term interest rate volatility on floating rate securitization programs. Residential segment NIM was higher by $1.8-million year over year while commercial NIM was $2.9-million higher;
• $45.2-million of placement fees compared with $51.5-million a year ago, a 12-per-cent reduction due to a 12-per-cent decrease in placement activity and a shift in the mix favouring commercial segment volumes, which generally attract lower per-unit fees than residential placement. The decrease due to lower per-unit placement fees was offset by an increase in renewal fees in the residential segment;
• $31.3-million of mortgage investment income compared with $28.9-million a year ago, an 8-per-cent increase due to the higher interest rate environment which resulted in more interest income earned on First National's mortgage and loan investment portfolio and mortgages accumulated for securitization;
• $5.4-million of gains on deferred placement fees compared with $6.8-million a year ago, a 21-per-cent decrease reflecting a 26-per-cent decrease in multiunit residential mortgages placed in these programs.

Income before income taxes was $67.9-million in the first quarter of 2024 compared with $48.6-million in the same period of 2023. This 40-per-cent increase included the effect of changing capital market conditions in both years which affected the value of financial instruments used to economically hedge residential mortgage commitments. In the first quarter of 2024, the company recorded $5.1-million of gains on financial instruments (excluding gains related to mortgage investments). In the 2023 first quarter, the company recorded $11.1-million of losses on financial instruments (excluding losses related to mortgage investments). The change in these values accounted for a $16.2-million increase in comparative income before income taxes year over year.

Earnings before income taxes and gains and losses on financial instruments (pre-FMV income), which excludes the impact of these changes, increased 5 per cent to $62.7-million from $59.7-million in the 2023 comparative quarter. This change was largely the result of First National's long-term success in growing MUA. 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.

Outstanding securities

At March 31, 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. On April 1, 2024, the company issued 200,000 new senior unsecured bonds (Series 5 notes with a coupon of 6.261 per cent) to mature on Nov. 1, 2027. There were no other changes in the company's outstanding securities at April 30, 2024.

Dividends

Total common share dividends paid or declared in the first quarter amounted to $36.7-million compared with $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 share effective in December, 2023. The common share payout ratio in the first quarter was 75 per cent compared with 103 per cent a year ago. If gains and losses on financial instruments are excluded, the common share dividend payout ratio would have been 81 per cent this year compared with 84 per cent in the first quarter of 2023.

First National paid $1.0-million of dividends on its preferred shares in the first quarter of 2024 compared with $900,000 in the 2023 quarter.

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

Two thousand twenty-four began as expected by the company -- significantly lower single-family origination and growing commercial segment origination. In general, management believes that the housing market overall is solid with stable valuations and continued demand. Lower single-family origination is the result of increased competition, particularly in the mortgage broker distribution channel. In the quarter, the company continued to build 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 second quarter of 2024 as competitors continue to build market share with relatively low mortgage rates and elevated broker incentives. Although the company does not see weakness in the housing market, the acceleration of activity from expected Bank of Canada rate cuts has been delayed, leaving some prospective buyers on the sidelines. For its commercial segment, the company anticipates steady origination volumes as 2023 government announcements have supported the creation of multiunit housing. These initiatives, including the increase of the CMB program from $40-billion to $60-billion, have not only increased the amount of financing available for multiunit 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 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 the first quarter of 2024 as the company competes for qualifying mortgages. In both business segments, management is confident that First National will remain a competitive leader in the marketplace.

First National is well prepared with execute its business plan. The company expects to enjoy the value of its continued goodwill with broker partners earned over the last 35-plus 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 $40-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

May 1, 2024, 10 a.m. ET 888-390-0605 or 416-764-8609 at the First National website

A taped rebroadcast of the conference call will be available until May 8, 2024, at midnight ET. To access the rebroadcast, please dial 416-764-8677 or 888-390-0541 and enter pass code 570798 followed by the number sign. The webcast is also archived at 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 at the First National website.

Annual meeting of shareholders

First National will host its 2024 annual meeting of shareholders on May 2, 2024, at the TMX Market Centre, 120 Adelaide St. West, Toronto, Ont., starting at 10 a.m. ET. Details of the meeting can be found in the company's management information circular filed on SEDAR+.

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 over $145-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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