TORONTO, April 26,
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 months ended
March 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.
First Quarter Summary
- Mortgages under administration ("MUA") increased 4% to a record
$124.7 billion compared to
$119.6 billion at March 31, 2021
- Revenue also increased 4% to $350.3
million from $336.5 million a
year ago
- Net income increased to $53.6
million ($0.88 cents per
share) from $52.6 million
($0.87 per share) a year ago
- Pre-FMV Income1 decreased 29% to $45.2 million from $64.1
million a year ago reflecting a more competitive spread
environment and higher expenses needed to support organizational
growth
Management Commentary
"First National's first quarter
growth reflected good execution in a changing market environment,"
said Jason Ellis, President and
Chief Executive Officer. "Total new mortgage originations increased
to $6.3 billion or 2% over last year.
This reflected growth in commercial volumes of 13% and a 3%
reduction in single family. Mortgage renewals were higher than last
year in both business segments. Coming into 2022, we
anticipated the financial impacts of tighter mortgage spreads and
the growth in our workforce needed to deliver service to our
customers. The results this quarter reflect our expectations. Like
recent quarters, we elected to securitize the majority of 10-year
multifamily mortgage origination, maximizing economic value in
future periods at the expense of current quarter earnings. Looking
ahead, recent actions taken by the Bank of Canada suggest that we have entered a rising
interest rate cycle that may dampen housing market activity in
future quarters. With a large MUA we are prepared for such a
slowdown."
First Quarter Review
|
|
Quarter
Ended
|
|
|
|
March
31,
2022
|
March
31,
2021
|
For the
Period
|
($000s)
|
Revenue
|
|
|
350,321
|
336,492
|
Income before
income taxes
|
|
|
73,087
|
71,475
|
Adjust for gains on
financial instruments
|
|
|
(27,900)
|
(7,329)
|
Pre-FMV Income
1
|
|
|
45,187
|
64,146
|
At Period
End
|
|
Total
assets
|
|
|
42,386,708
|
40,586,601
|
Mortgages under
administration
|
|
|
124,726,642
|
119,617,496
|
|
|
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.
|
First quarter 2022 results generally reflected a competitive
marketplace with a surplus of liquidity for investment in financial
assets. This has resulted in narrower mortgage spreads which has
reduced the profitability of many of the Company's income
streams.
First National's MUA increased 4% to $124.7 billion from $119.6
billion at March 31, 2021 on
new mortgage originations and renewal retention. MUA increased at
an annualized rate of 3% during the quarter. At March 31, 2022, single-family MUA was
$85.0 billion, up 2% from
$83.6 billion at March 31, 2021, while commercial MUA was
$39.7 billion, up 10% from
$36.0 billion a year ago.
New single-family mortgage origination was $4.3 billion compared to $4.4 billion in 2021, a decrease of 3%. Lower
volumes were anticipated due to signs of reduced housing market
activity at the end of 2021 together with a more competitive
marketplace. Single-family renewals increased 25% to $1.5 billion from $1.2
billion a year ago reflecting the value inherent in growing
MUA. First National's MERLIN technology and operating systems
continued to support efficient and effective mortgage underwriting
across the country.
New commercial segment originations were $2.0 billion compared to $1.8 billion a year ago, 13% higher, reflecting
growth in demand for First National's CMHC insured multi-unit
property mortgages offset by reduced conventional mortgage volumes.
Commercial mortgage renewals of $473
million increased 67% from $283
million a year ago on higher renewal opportunities.
Revenue increased 4% to $350.3
million from $336.5 million a
year ago. The largest driver of the year-over-year increase in
revenue was the impact of changing capital market conditions on
gains and losses related to financial instruments. In the quarter,
gains on financial instruments were $27.9
million ($7.5 million in Q1
2021). Excluding these changes, revenue was 2% lower year over year
at $322.4 million compared to
$329.2 million in 2021. These
elements describe the change in revenue:
- $59.2 million of placement fees,
4% or $2.3 million lower than a year
ago despite a 3% increase in origination volumes sold to
institutional investors as mortgage spreads returned to
pre-pandemic levels, both mortgages sold on a funded basis and on
commitment attracted lower per unit placement fees and a larger
portion of single-family renewals were allocated to securitization
rather than placement
- $51.0 million of mortgage
servicing income, 2% or $1.0 million
higher than a year ago on growing administration revenue from the
Company's larger MUA
- $39.6 million of net interest
revenue earned on securitized mortgages, 1% or $0.3 million lower than a year ago due to higher
single family prepayment activity (which reduces the value of
mortgages on which spread is earned and accelerated the
amortization of capitalized origination costs) and spread
compression on single-family floating rate mortgages
- $19.8 million of mortgage
investment income, 43% or $6.0
million higher than a year ago due primarily to the higher
interest rate environment which resulted in more interest income
earned on mortgages accumulated for securitization on the balance
sheet
- $2.9 million of gains on deferred
placement fees, 34% or $1.5 million
lower than a year ago reflecting spreads on multi-unit residential
mortgages originated and sold to institutional investors despite
higher transaction volumes
Income before income taxes increased to $73.1 million from $71.5
million a year ago, largely reflecting the impact of
changing capital market conditions on the value of financial
instruments. Earnings before income taxes and gains and
losses on financial instruments ("Pre-FMV Income") decreased 29% to
$45.2 million from $64.1 million in 2021. This reflected the funding
spread environment and a step up in the size of First National's
workforce over the past year in support of maintaining excellent
service levels.
Net income increased to $53.6
million ($0.88 per share) from
$52.6 million ($0.87 per common share) a year ago.
Dividends
Total common share dividends paid or
declared in the first quarter amounted to $35.2 million compared to $31.5 million a year ago reflecting an increase
in the regular monthly dividend to an annualized rate of
$2.35 per common share from
$2.10 per common in June 2021. The common share payout ratio in the
first quarter was 67%. If gains and losses on financial instruments
are excluded, the dividend payout ratio would have been 108%
compared to 68% in the first quarter a year ago.
First National paid $0.7 million
of dividends on its preferred shares in the first quarter,
unchanged from a year ago. As announced on March 15, 2022, the dividend rate for the Class A
Series 2 Preference Shares for the period April 1 to June 30, 2022 was set at 2.685% in
accordance with the terms of those 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 March
31, 2022, and April 26, 2022,
the Corporation 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
The first quarter saw the continuation of
trends at the end of 2021: a competitive marketplace with pressure
on net interest margins. The quarter also featured what appears to
be the beginning of a rising interest rate cycle as the Bank of
Canada's indicated its intention
to address inflationary risks with an increase in its overnight
rate in March 2022 by 0.25%.
Subsequent to quarter end, the BoC increased the overnight rate by
another 0.50% in April 2022 to 1.0%.
Equally important as the increases were the Bank's statements
indicating the likelihood of more interest rate hikes to come.
Despite this 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 2022 is moderately lower
origination as mortgage rates rise in tandem with government bond
yields reducing affordability and dampening housing activity.
Management recognizes that home purchasing in the past two years
has been at levels that are likely unsustainable and that while
drivers such as higher immigration are strong, a market slowdown
seems inevitable. However, management is confident that First
National will remain competitive and a leader in the marketplace.
Management anticipates commercial origination will remain strong in
the short term but is cautious because of the potential impact that
future interest rate increases could have on the value of
apartments and commercial real estate and ultimately, borrower
activity.
During the pandemic, the strength and durability of First
National's business model was 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 during this period. 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. In
2022, the Company expects to enjoy the value of its goodwill with
broker partners earned over the last 30+ years and reinforced
during the pandemic. Demand for the Company's mortgages from
institutional investors remains strong due to the substantial
amount of liquidity in the financial system. Securitization markets
are robust and provide consistent and reliable source 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 $35 billion portfolio of mortgages pledged under
securitization and $87 billion
servicing portfolio and focus on the value inherent in its
significant single-family renewal book.
Conference Call and Webcast
April 27, 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 May 4, 2022 at midnight ET. To access the rebroadcast, please
dial (416) 764-8677 or (888) 390-0541 and enter passcode 583077
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 $124
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