TORONTO, July 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 and six months
ended June 30, 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.
Second Quarter Summary
- Mortgages under administration ("MUA") increased 5% to a record
$127.4 billion compared to
$121.5 billion at June 30, 2021
- Revenue increased 14% to $416.8
million from $365.1 million a
year ago
- Net income increased to $61.3
million ($1.01 per share) from
$52.4 million ($0.86 per share) a year ago
- Pre-FMV Income(1) decreased 21% to $55.9 million from $71.2
million a year ago
Management Commentary
"First National's second quarter performance, including steady
growth in MUA, was delivered in competitive markets that are now
adjusting rapidly to the reality of much higher interest rates,"
said Jason Ellis, President and
Chief Executive Officer. "As an early sign of this adjustment, Q2
single-family volumes were 10% lower than last year and are likely
to soften further as rising mortgage rates reduce affordability for
Canadians and dampen housing activity. Commercial volume growth of
19% provided a partial offset and reflected strong demand for
insured mortgages in the multi-unit market. Including renewals,
total quarterly mortgage production was $12.2 billion, 6% below last year. However, this
was still well ahead of pre-pandemic levels. The quarter's
operating income, excluding gains on financial instruments,
reflected higher workforce and operating costs incurred to meet the
requirements of MUA growth, service commitments to customers and to
retain skilled people in a competitive job market. With the
increase in MUA over the past year, First National has positioned
itself for future earnings from mortgage administration, net
securitization margin and renewal opportunities – and for this next
challenging phase of the market cycle."
Second Quarter Review
|
Quarter
Ended
|
Six months
ended
|
|
June
30, 2022
|
June
30, 2021
|
June 30,
2022
|
June
30, 2021
|
For the
Period
|
($000s)
|
Revenue
|
416,774
|
365,118
|
767,095
|
701,610
|
Income before
income taxes
|
83,081
|
70,101
|
156,168
|
141,576
|
Adjust for gains
on financial instruments
|
(27,217)
|
1,117
|
(55,117)
|
(6,212)
|
Pre-FMV Income
(1)
|
55,864
|
71,218
|
101,051
|
135,364
|
At Period
End
|
|
Total
assets
|
42,927,449
|
41,727,249
|
42,927,449
|
41,727,249
|
Mortgages under
administration
|
127,334,843
|
121,537,940
|
127,334,843
|
121,537,940
|
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
|
First National's MUA, the source of most of its earnings,
increased 5% to $127.3 billion from
$121.5 billion at June 30, 2021. At June 30,
2022, single-family MUA was $86.7
billion, up almost 3% from $84.5
billion at June 30, 2021,
while commercial MUA was $40.6
billion, up 10% from $36.9
billion a year ago.
New single-family mortgage origination in the quarter was
$6.8 billion compared to $7.6 billion in 2021, a decrease of 10%. Volumes
reflected reduced housing market activity brought on by rising
interest rates but were still well ahead of pre-pandemic levels.
(For reference, First National's Q2 2019 single family originations
were $3.9 billion.)
Single-family renewals were $1.6
billion compared to $1.9
billion a year ago, reflecting available renewal
opportunities which declined as prepayment speeds were still higher
than expected. First National's MERLIN technology and operating
systems continued to support efficient and effective mortgage
underwriting across the country.
New commercial segment originations were $3.2 billion compared to $2.7 billion a year ago, a 19% increase,
reflecting growth in demand for First National's insured multi-unit
property mortgages, partially offset by lower conventional volumes.
Commercial mortgage renewals of $639
million decreased 26% from $869
million a year ago
Of the $12.2 billion of new
originations and renewals in the second quarter, $8.8 billion (Q2 2021 - $8.3 billion) were placed with institutional
investors and $3.0 billion (Q2 2021-
$4.3 billion) were originated for
First National's own securitization programs.
Revenue increased 14% to $416.8
million from $365.1 million a
year ago. Growth largely reflected the rapidly rising interest rate
environment – with bond yields and mortgage rates increasing as
monetary policy tightened to counteract inflation – leading to
$27.2 million of gains on holding
financial instruments related to interest rate hedging. By
comparison, holding such financial instruments produced a loss of
$1.1 million in the second quarter of
2021. The rapidly rising interest rate environment also drove
growth in interest revenue-securitized mortgages and interest
revenue as noted below.
Second quarter revenue performance included:
- $98.4 million of placement fees,
10% or $9.2 million higher than a
year ago due to a 6% increase in origination volumes sold to
institutional investors. This revenue was also favorably affected
by product mix in the commercial segment which shifted to a higher
proportion of 10-year term insured origination. For residential, a
competitive environment resulted in modestly lower per unit
placement fees.
- $61.8 million of mortgage
servicing income, 12% or $6.5 million
higher than a year ago on growing administration revenue from the
Company's larger MUA as well as the third-party underwriting
division
- $40.4 million of net interest
revenue – securitized mortgages, 5% or $2.1
million higher than a year ago on 1% portfolio growth
despite continued high prepayment speeds in single family. Net
interest revenue benefited from reduced indemnities paid in the
quarter to NHA MBS bondholders compared to the same quarter in
2021
- $21.5 million of mortgage
investment income, 34% or $5.5
million higher than a year ago due primarily to the higher
interest rate environment which resulted in more interest income
earned on the mortgage loan investment portfolio and mortgages
accumulated for securitization
- $2.6 million of gains on deferred
placement fees, 50% or $2.6 million
lower than a year ago reflecting narrower mortgage spreads on
multi-unit residential mortgages originated and sold to
institutional investors.
Income before income taxes increased to $83.1 million from $70.1
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 21% to
$55.9 million from $71.2 million in Q2 2021. This reflected a
comparatively tighter mortgage spread environment, continued high
single-family prepayment speeds, higher interest expenses which
include the cost of carrying interest rate hedges, and higher
workforce costs on growth in FTE and inflationary wage increases in
a competitive job market. First National's workforce increased 18%
year over year to meet the requirements of MUA growth including
service commitments to customers.
Net income increased to $61.3
million ($1.01 per share) from
$52.4 million ($0.86 per common share) a year ago.
Dividends
Total common share dividends paid or declared in the second
quarter amounted to $35.2 million
compared to $34.0 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 share in
June 2021. The common share payout
ratio in the second quarter was 58%. If gains and losses on
financial instruments are excluded, the dividend payout ratio would
have been 87% compared to 65% in the second quarter a year ago.
First National paid $0.7 million
of dividends on its preferred shares in the second 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. With respect to
Class A Series 2 Preference Shares, the dividend rate for the
period July 1 to September 30, 2022,
was set at 3.547%, 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 June 30, 2022, and July 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 second quarter saw the continuation of trends established at
the end of 2021: a competitive marketplace and reduced origination
activity. The quarter also featured increases in Bank of
Canada's ("BoC") overnight rate as
it addressed risks associated with inflation. Between April 1, 2022 and June 30,
2022, the overnight rate increased by 1.0%. Subsequent to
quarter end, the BoC increased the overnight rate by another 1.0%
in July 2022 to 2.5%. Equally
important as the increases were the Bank's statements indicating
the likelihood of more interest rate hikes to come. These increases
have led to significantly higher mortgage rates and reduced the
affordability of housing across the country. 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 the remainder of 2022 is
lower origination as mortgage rates rise in tandem with prime
lending rates and 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 might support the
market, a further slowdown in housing seems inevitable. Although,
management is confident that First National will remain competitive
and a leader in the marketplace, it estimates that year-over-year
origination will moderate in line with housing activity across
Canada. Management anticipates commercial origination will
also slow as the market digests changing property valuations given
the new underlying financing environment. At this time, the Company
foresees a solid third quarter but weaker commitments going into
the fourth quarter.
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. 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 and 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 $90 billion
servicing portfolio and focus on the value inherent in its
significant single-family renewal book.
Conference Call and
Webcast
July 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 August 3, 2022 at midnight ET. To access the rebroadcast, please
dial (416) 764-8677 or (888) 390-0541 and enter passcode 636024
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 $127
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