Thank You for
25 Years of Shared Success
2012 ANNUAL REPORT
As we celebrate 25 years of business, we
find ourselves reflecting on the great people,
hard work and fresh thinking that have built
First National and keep it thriving today.
A success story like ours is made up of many
smaller stories, from watershed
achievements to little things done right
every day. In this year’s Annual Report,
we share a few of the stories that have
shaped First National. This anniversary is also
a time for sincere thank yous. Some of them are
found in these pages, but ultimately we believe
the best way to thank our managers and employees,
our investors, our brokers and our customers
is to get to work on another 25 years of shared
success – which is exactly what we plan to do.
Letter from the President
Fellow Shareholders:
As First National looks back on 25 years of success,
there is much to celebrate. The Company has grown
steadily since its founding – and in 2012 we contin-
ued to deliver strong financial results, achieving one
of our best years yet.
• Earnings before income taxes, excluding gains
and losses on financial instruments (“Pre-FMV
EBITDA”), grew to $153.2 million from
$125.1 million in 2011, driven by growth in
our servicing portfolio and the net margin
on securitized mortgages.
Among many achievements this year, First National
exceeded $67 billion in mortgages under admini-
stration, and increased our market share to approxi-
mately 16 percent in the mortgage broker
distribution channel.
A strong year for First National
Some of our key performance indicators for 2012:
• Mortgages under administration increased
by 13% over the previous year, to $67.3 billion.
• Mortgage originations hit record levels, with
volume increasing 19% year over year to $14 bil-
lion, driven by gains in both our single-family
residential division ($11.3 billion of originations)
and strong performance in our multi-unit
commercial division ($2.7 billion of originations).
• Revenue grew to $628.6 million from
$464.0 million in 2011, reflecting increased
interest revenue on securitized mortgages.
• Net income before taxes increased by 56% to
$150.8 million from $96.8 million in 2011.
Strong cash flow throughout 2012 enabled our
Board to approve dividend increases in both 2012
and 2013. The annual dividend rate was raised to
$1.30 per common share beginning with the payment
on September 17 (a 4% increase over the previous
rate of $1.25) and, as announced with our year end
results, the annual rate was increased to $1.40 per
share (an 8% increase) starting with the payment
on April 15, 2013.
These are just a few of the recent metrics that
mark First National’s evolution from a startup with
a focus on growth into the largest non-bank lender
in Canada. Our drive to succeed has remained strong
as our Company has grown: in the past four years,
our residential division has moved from fifth place in
market share to second overall and our commercial
division remains the leading non-bank commercial
lender in the country.
March 1988
First National Financial
Corporation opens
for business
Corporate Profile
First National Financial Corporation (TSX: FN) 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 $67 billion in mortgages under administra-
tion, First National is Canada’s largest non-bank originator and underwriter of
mortgages and is among the top three in market share in the mortgage broker
distribution channel. For more information, please visit www.firstnational.ca.
2012 ANNUAL REPORT 1
Letter from the President
June 1991
First National becomes a
CMHC-approved lender
First National’s leadership team is proud of this
performance, and we are proud of the approach
that has made it possible: our commitment to serving
our clients and brokers with excellence, and our
focus on delivering strong results for our investors
and employees.
Investing in relationships
First National has worked consistently to distinguish
itself by the service it provides to its customers, and
by the strength of its relationships with residential
brokers and the commercial real estate community.
Our reputation for outstanding service to brokers
has become an increasingly valuable differentiator.
Our long-standing emphasis on supporting brokers
as they work to meet clients’ needs has resulted
in a clear leadership position in the mortgage broker
distribution channel. This position has yielded
increased benefits as the channel continues to grow,
and Canadian homebuyers take advantage of the
value offered by mortgage brokers.
Sharing our success
First National has always believed in sharing our
successes with those who place their confidence
in us, including our brokers, management team
and staff.
Today, sharing our success also means delivering
strong growth and cash flow to the shareholders
who have supported our Company. These
shareholders have profited as we have announced
three dividend increases in as many years.
In addition to sharing today’s successes,
First National is focused on laying strong foun-
dations for future growth. We remain committed
to maintaining a conservative risk profile and
sustaining a funding mix that enables us to adapt
to new market conditions. Our solid capital base
and strong balance sheet also give us a firm
platform from which to generate reliable future
returns for our shareholders.
Looking ahead
In June 2012, the federal government introduced
new rules that reduce the amount home buyers can
borrow under the government-backed mortgage
insurance program. The industry began to feel the
effects of this move in the fourth quarter of 2012,
and we anticipate moderately lower origination
levels for our residential division in 2013.
Although all lenders will experience some cooling
effects from these new rules, our increased volume
of mortgages under administration, combined with
anticipated renewals, will enable us to continue to
deliver strong earnings and cash flow. Furthermore,
we expect that interest rates will remain low,
helping to keep housing affordable in Canada.
Despite lower origination targets on the residential
side, we anticipate that our commercial division
will maintain the strong origination levels it achieved
in 2012, as the low-rate environment encourages
real estate transactions. With the introduction of
First National mortgage brokerage services and a
new fund product targeting retail investors in 2012,
our commercial division now offers the broadest
product platform in Canada – further evidence of
First National’s commitment to positioning itself for
future growth through adaptation and innovation.
Investments in our business made during 2012
will also promote profitability and cash flow through
2013 as we leverage our investments in the
portfolio of mortgages under securitization and
the servicing portfolio.
2 First NatioNal FiNaNcial corporatioN
A year to celebrate
This year’s performance has been supported by
the dedication of our outstanding team of managers
and employees. In 2012, the First National team
grew to include more than 600 professionals
working across Canada. Our record-setting year
attests to the exceptional quality and dedication
of our team, as well as the sound guidance of
our Board.
For me and my fellow co-founder Moray Tawse,
First National’s success over the past 25 years
is all the more satisfying because it has been
driven by the values on which First National was
founded. Moray and I launched First National
with a commitment to integrity, professionalism,
transparency, supportiveness and a strong convic-
tion that relationships are at the heart of our
business. Since the day we founded the business,
we have built the Company step by step, with
the cooperation and investment of people
we trust and respect. The result is a Company
and a culture of which we are truly proud.
Together, we have helped Canadian families
purchase their first home, partnered with com-
mercial enterprises to create growth and meet
business objectives, and delivered strong returns
to thousands of investors who placed their
confidence in our business. Thank you. We can’t
think of a better way to have spent the last
25 years, and we look forward to another
25 years of shared success.
Sincerely,
Stephen Smith
2012 at a glance
D E
A
FUNDING SOURCES
(for the year ended December 31, 2012)
Institutional placements
1% CMB dealers
A 69%
B
C 21% NHA MBS
D 7% ABCP
E
2%
Internal resources
D
B
REVENUE SOURCES PRIOR
TO FAIR VALUE GAINS/LOSSES
(for the year ended December 31, 2012)
A
Institutional placements
A 42%
B 24% Net interest – securitized mortgages
C 24% Mortgage servicing
Investment income
D 10%
C
B
C
D
C
B
MORTGAGES UNDER
ADMINISTRATION
(for the year ended December 31, 2012)
Insured
9% Multi-unit and commercial
A 79%
B
C 12% Conventional single-family residential
D <1% Bridge loans / Alt-A
A
91%
Insured or conventional
single-family residential
2012 ANNUAL REPORT 3
From the beginning, a drive to succeed
Technological innovation for superior service
First National leads the industry in adopting technol-
ogy to enable fast, customized communication with
our clients, brokers and investors. We continue
to evolve MERLIN, our proprietary mortgage
approval and underwriting system. This year, we
will introduce MERLIN in additional business areas,
launching a MERLIN-based portal for investors
and using it to enhance our commercial mortgage
administration. Residential borrowers continue to
benefit from our personalized mortgage manage-
ment tool, My Mortgage, online and by phone.
For 25 years, First National has combined the
entrepreneurial energy of a dynamic startup with
the reliability and professionalism of one of
Canada’s top financial institutions. The result has
been strong, steady growth, supported by prudent
risk management, and our competitive drive and
entrepreneurial spirit continue to move us forward.
In February 2012, we surpassed $60 billion in
mortgages under administration, and by year’s end
we reached $67.3 billion.
Outstanding service every step of the way
Great service has always been fundamental to our
reputation as a solid partner for brokers and as a
trustworthy lender for Canadians. Insisting on top
service is not just how we work, it’s how we grow.
A record of service, a history of growth
First National started out as a small firm in a large
industry. From the outset, we understood that if we
were to earn the trust of Canadians and mortgage
brokers, our expertise, professionalism and integrity
had to come through in everything we did, from the
rigour of our underwriting process to the speed
with which we returned phone calls.
May 1996
First National launches
first ABCP Program
April 2001
First National
launches MERLIN
We value our employees.
Our staff embody our dedication to service and help drive our growth.
4 First NatioNal FiNaNcial corporatioN
Because of our ongoing investments in advanced
technology, we are able to continually raise our
service standards even as our volumes increase.
More than 20% of our residential service requests
are now received online through My Mortgage, and
in 2012 online requests almost doubled from 2011.
As customers become more comfortable with
online technology, we expect our online requests to
increase even further. Our technological readiness
and outstanding staff enable us to rise to these
challenges and deliver on our guaranteed 24-hour
turnaround time.
“I n 1988, it was unusual for a small business
to even own a computer. We saw that
there was a better way of working, so we made
the investment. When we digitized the process,
it became almost instantaneous. We could
respond faster than anyone – much faster.”
– Stephen Smith
2012 at a glance
MORTGAGES UNDER ADMINISTRATION
(in $ billions)
.
6
0
4
.
8
7
4
.
3
3
5
.
6
9
5
.
3
7
6
2008
2009
2010
2011 2012
13% year-over-year
growth 2011 to 2012
MORTGAGE ORIGINATIONS
(in $ billions)
.
9
1
1
.
8
1
1
.
5
0
1
.
8
1
1
.
0
4
1
2008
2009
2010
2011 2012
19% year-over-year
growth 2011 to 2012
REVENUE
(in $ millions)
.
0
4
9
2
.
7
1
4
3
.
3
4
9
3
.
0
4
6
4
.
6
8
2
6
2008
2009
2010
2011 2012
35% year-over-year
growth 2011 to 2012
PRE-FMV EBITDA
(in $ millions)
.
3
2
2
1
.
3
5
6
1
.
8
9
2
1
.
1
5
2
1
.
2
3
5
1
2008
2009
2010
2011 2012
22% year-over-year
growth 2011 to 2012
2012 ANNUAL REPORT 5
Strong relationships, shared success
First National has always taken a win-win
approach to business. Our growth is rooted in
the relationships we have built over a quarter-
century of earning loyalty and keeping promises.
We embrace opportunities to share our success
with our investors, our valued network of
brokers and our staff.
A passionate team
Some of our employees have been with
us since our earliest days. For them, building
a career has been inextricably connected
to building First National. We are pleased
that our tradition of staff retention and
advancement continues: 2012 saw 48 internal
promotions. Our team continues to find new
ways to grow with the Company, not only
sharing in First National’s success but also
driving that success.
June 2006
First National is
listed on the TSX
June 2010
First National reaches
$50 billion in mortgages
under administration
We value our managers.
Our dedicated team has made vital contributions to First National’s
strong performance this year.
6 First NatioNal FiNaNcial corporatioN
“When we started, on any given day you
could find the President shovelling the
snow, checking the computer wires or developing
an NHA MBS joint venture. Everyone on our
team wore many hats in those days.”
– moray tawSe
We value our long-standing employees
celebrating 25 years of service:
Sharon MacKenzie, Josie Bohren,
Scott McKenzie, Peter Cook,
Dru McAuley, Nuala Bourke
2012 at a glance
$150.8 million
Net income before taxes increased to
$150.8 million from $96.8 million in 2011.
$1.40 per common share
In April 2013, a dividend of $1.40 per
common share was issued, which represented
an 8% increase from the previous rate of $1.30.
1,692 commitments
March 29th was a milestone: the busiest day
in the Company’s history, with our residential
division issuing 1,692 commitments for a total
of approximately $440 million.
16%
In 2012 First National’s market share increased
from approximately 13% to approximately 16%, as
a major player exited the market and First National
worked to capture new business.
2012 ANNUAL REPORT 7
Our philosophy
Our philosophy is unique in its simplicity: we deliver service, create
solutions and build success.
By combining innovative mortgage solutions, MERLIN – our industry-
leading mortgage approval and tracking system – and the expertise
of our team, First National has earned the trust of mortgage brokers,
commercial clients and residential customers Canada-wide.
These valued relationships endure because of our unwavering
commitment to service excellence, a commitment shared by senior
management and every member of the First National team.
Delivering Service
We are determined to provide industry-leading
service across all areas of our business.
Fast turnaround of mortgage applications is a
priority at First National. We typically respond to
mortgage broker submissions within four hours
and commercial clients often receive their mortgage
commitment documents in as little as seven days.
A homeowner who becomes a First National client
can expect dedicated service from our experienced
team of customer service representatives, and
access to My Mortgage, their personalized mortgage
management tool available online or by phone.
Creating Solutions
At First National, we put all of our resources and
expertise behind the development, administration
and servicing of mortgage solutions.
Each commercial mortgage inquiry starts with a
professional mortgage consultation and analysis.
Our commercial mortgage experts analyze each
client’s needs and develop customized proposals
detailing the loan strategy, preferred terms, best rate
solution and optimum financing recommendation.
Residential mortgage brokers have access to a
wide range of mortgage solutions, flexible payment
terms and prepayment privileges to suit just about
any lifestyle.
MERLIN, First National’s exclusive online mortgage
approval and tracking system, ensures mortgage
brokers stay connected to the status of their deal
so they can exceed customers’ expectations while
maximizing efficient use of their own time.
Building Success
Many Canadians dream of buying their first home
whether they are new to our country, growing a
family or simply putting down roots. Together with
their mortgage broker, we are all committed to
helping them make this dream come true as easily
and worry-free as possible.
Time and time again, mortgage brokers tell us
that a key component of excellent service is fast
turnaround time so that they can differentiate
themselves from the competition. First National
responds to 90% of mortgage broker submissions
in under four hours.
8 First NatioNal FiNaNcial corporatioN
A Strong Year for First National
2012 financial statements
Financial Reporting
Table of Contents
Management’s Discussion and Analysis
Financial Statements
11 General Description of the Company
37 Management’s Responsibility
for Financial Reporting
Independent Auditors’ Report
38
39 Consolidated Statements of Financial Position
40 Consolidated Statements of Comprehensive
Income and Retained Earnings
41 Consolidated Statements of Changes
in Shareholders’ Equity
42 Consolidated Statements of Cash Flows
43 Notes to Consolidated Financial Statements
2012 Results Summary
12 Outstanding Securities of the Corporation
13 Selected Quarterly Information
14 Selected Annual Financial Information
for the Company’s Fiscal Year
15 Vision and Strategy
15 Key Performance Drivers
Growth in Portfolio of Mortgages
under Administration
Growth in Origination of Mortgages
16 Lowering Costs of Operations
17 Employing Innovative Securitization
Transactions to Minimize Funding Costs
18 Key Performance Indicators
19 Determination of Adjusted Cash Flow
and Payout Ratio
Revenues and Funding Sources
21 Results of Operations
26 Operating Segment Review
27 Residential Segment
Commercial Segment
Liquidity and Capital Resources
30 Financial Instruments and Risk Management
32 Capital Expenditures
Summary of Contractual Obligations
33 Future Accounting Changes
34 Disclosure Controls and Internal Controls
over Financial Reporting
35 Risk and Uncertainties Affecting the Business
Forward-Looking Information
36 Outlook
10 First NatioNal FiNaNcial corporatioN
Management’s Discussion and Analysis
The following management’s discussion and analysis
(“MD&A”) of financial condition and results of
operations is prepared as of February 26, 2013.
This discussion should be read in conjunction with
the audited consolidated financial statements of
First National Financial Corporation (the “Company”
or “Corporation” or “First National”) as at and for
the year ended December 31, 2012 and the notes
thereto. This discussion should also be read in
conjunction with the audited consolidated financial
statements and notes thereto of the Company for
the year ended December 31, 2011. The audited
consolidated financial statements of the Company
have been prepared in accordance with International
Financial Reporting Standards (“IFRS”).
This MD&A contains forward-looking information.
Please see “Forward-Looking Information” for a
discussion of the risks, uncertainties and assumptions
relating to these statements. The selected financial
information and discussion below also refer to certain
measures to assist in assessing financial performance.
These other measures, such as “Pre-FMV EBITDA”,
“Adjusted Cash Flow” and “Adjusted Cash Flow
per Share”, should not be construed as alternatives
to net income or loss or other comparable measures
determined in accordance with IFRS as an indicator
of performance or as a measure of liquidity and
cash flow. These measures do not have standard
meanings prescribed by IFRS and therefore may not
be comparable to similar measures presented by
other issuers.
Unless otherwise noted, tabular amounts are in
thousands of Canadian dollars.
Additional information relating to the Company
is available in First National Financial Corporation’s
profile on the System for Electronic Data Analysis
and Retrieval (“SEDAR”) website at www.sedar.com.
General Description of the Company
First National Financial Corporation is the parent
company of First National Financial LP (“FNFLP”), a
Canadian-based originator, underwriter and servicer
of predominantly prime residential (single-family
and multi-unit) and commercial mortgages. With
over $67 billion in mortgages under administration
(“MUA”), First National is Canada’s largest non-bank
originator and underwriter of mortgages and is
among the top three in market share in the growing
mortgage broker distribution channel. Pursuant
to a Plan of Arrangement (the “Arrangement”)
and an amalgamation (the “Amalgamation”) effective
January 1, 2011, First National Financial Corporation
succeeded First National Financial Income Fund
(the “Fund”) as the public holding company invested
in FNFLP. The Arrangement and Amalgamation
(together, the “Conversion”) were used to convert
the Fund into a corporate structure.
2012 Results Summary
The Company was very pleased with its results
for 2012. The Canadian real estate market remained
strong and First National’s market share in the
mortgage broker distribution channel continued
to grow. With these fundamentals, the Company
was able to produce record origination levels,
surpassing the previous annual record set in 2008.
This is particularly true for the single-family segment,
where First National originated $11.3 billion of new
mortgages. With these robust origination metrics,
the Company continued to build both its portfolio of
mortgages pledged under securitization and its MUA.
2012 ANNUAL REPORT 11
Management’s Discussion and Analysis
• MUA grew to $67.3 billion at December 31, 2012
from $59.6 billion at December 31, 2011, an
increase of 13%; the growth from September 30,
2012, when MUA was $65.9 billion, was 2%, an
annualized increase of more than 8%.
• The Canadian single-family real estate market
continued to show its strength. In 2012, single-
family mortgage originations for the Company
increased by 24% to $11.3 billion from $9.1 billion
in 2011. The commercial segment had results
consistent with 2011 as this market remained
strong and volumes were approximately
$2.7 billion for both 2012 and 2011. Overall
origination was up over 19% year over year.
• The Company used the Canada Mortgage Bonds
(“CMB”) program to successfully securitize
$931.8 million of multi-unit mortgages in the
10-year program and $1.6 billion of mortgages
in the five-year term programs. In 2012, First
National also securitized $526.6 million of
mortgages through bank-led syndicated National
Housing Act Mortgage-Backed Securities
(“NHA MBS”) transactions.
• Revenue for the year ended December 31, 2012
increased to $628.6 million from $464.0 million
in 2011. The growth of 35% is reflective of
increased placement fees, which increased by
$41.9 million year over year, and interest revenue
on securitized mortgages, which increased
by almost $82.9 million. While the Company
continued to securitize a portion of its origination,
the additional volume originated in 2012 was
placed with institutional investors.
• Income before income taxes in the year increased
significantly, by 56%, from $96.8 million in 2011 to
$150.8 million in 2012. The increase was the result
of a steadily growing business and a turnaround
of revenues on account of fair value of financial
instruments, which increased pre-tax income
by $24.6 million in 2012.
• Without the impact of gains and losses on financial
instruments, which have been volatile, the Com-
pany’s earnings before income taxes, depreciation
and amortization (“Pre-FMV EBITDA”) increased
by 22%, from $125.1 million in 2011 to $153.2 mil-
lion in 2012. This increase is due to the growth of
the Company’s servicing portfolio and the net
margin on securitized mortgages.
• The Company was pleased with its results and,
in particular, the amount of cash flow the business
generated. With a strong finish to 2012, First
National is pleased to announce that the Board of
Directors has approved an increase in the dividend
payable on the outstanding common shares.
Effective with the dividend payable on April 15,
2013, the annual dividend rate will be increased
from $1.30 per share to $1.40 per share, an
increase of 7.7%.
Outstanding Securities
of the Corporation
At December 31, 2012 and February 26, 2013,
the Corporation had 59,967,429 common shares,
4,000,000 Class A Series 1 Preferred Shares and
175,000 debentures outstanding.
12 First NatioNal FiNaNcial corporatioN
Selected Quarterly Information
Quarterly results of First National Financial Corporation
($000s, except per share amounts)
2012
Fourth quarter
Third quarter
Second quarter
First quarter
2011
Fourth quarter
Third quarter
Second quarter
First quarter
Net income
for the
period
Net income
per common
share
Revenue
$
$
$
$
$
$
$
$
156,092
181,573
156,983
133,965
118,121
115,522
121,579
108,798
$
$
$
$
$
$
$
$
33,491
32,047
18,099
26,688
17,687
12,107
20,197
20,500
$
$
$
$
$
$
$
$
0.54
0.51
0.28
0.43
0.27
0.18
0.32
0.33
Total assets
$ 15,008,552
$ 14,311,584
$ 13,682,980
$ 13,224,456
$ 11,927,270
$ 10,754,813
$
$
9,948,118
9,261,178
Given First National’s large amount of MUA and
portfolio of mortgages pledged under securitization,
quarterly revenue under IFRS is driven primarily
by mortgage servicing revenue growth, and the
gross interest earned on the mortgages pledged
under securitization. Servicing revenue will change
as the third-party portfolio of mortgages grows
or contracts. The gross interest on the mortgage
portfolio is dependent both on the size of the
portfolio of mortgages pledged under securitization
as well as weighted average mortgage rates. Revenue
will also change as the amount of origination for
institutional investors changes. All of these factors
have increased over the last 24 months as the
Company has steadily increased its MUA and
portfolio of securitized mortgages and increased
placement fees with higher originations for its
institutional investors. Revenue is also dependent
on conditions in the debt markets, which affect the
value of gains and losses on financial instruments
arising from the Company’s interest rate hedging
program. In particular, revenue was reduced by
$14.8 million and $8.4 million losses in the third and
fourth quarters of 2011, respectively. In the second
quarter of 2012, more losses on these items
decreased revenue by $12.0 million. This contrasts
gains of $7.1 million in the first quarter of 2012,
$5.6 million in the third quarter of 2012 and
$5.4 million in the fourth quarter of 2012. These
issues also impacted net income, which was directly
affected on a before-tax basis by these gains
and losses.
Generally, during the first two quarters
of 2011, mortgage spreads tightened steadily as
Canadian capital markets returned to historical
norms following the credit turmoil of 2008. This
trend is evident in net income figures except for
the third and fourth quarters of 2011, when interest
rates fell significantly and caused large mark-to-
market adjustments on financial instruments, which
reduced earnings. In 2012, increased origination
volume and the securitization-related income from
past quarters’ securitizations have come together to
drive earnings higher despite some volatility in the
capital markets. Total assets have increased steadily
as the Company has taken advantage of securitiza-
tion opportunities to grow its mortgage assets
pledged under securitization.
2012 ANNUAL REPORT 13
Management’s Discussion and Analysis
Selected Annual Financial Information for the Company’s Fiscal Year
($000s, except per share/unit amounts)
For the year then ended
Income statement highlights
Revenue
Interest expense – securitized mortgages
Brokerage fees
Salaries, interest and other operating expenses
EBITDA(1)
Amortization of capital assets
Amortization of intangible assets
Provision for income taxes
Net income
Dividends/distributions declared
Per share/unit highlights
Net income per unit/common share
Dividends/distributions declared per common share/unit
At year end
Balance sheet highlights
Total assets
Total long-term financial liabilities
December 31
2012
December 31
2011
December 31
2010
$
628,613
$
464,020
$
394,259
(246,736)
(115,978)
(106,547)
159,352
(2,059)
(6,468)
(40,500)
110,325
80,859
1.76
1.27
(184,291)
(112,530)
(81,480)
(91,642)
106,607
(1,856)
(7,968)
(26,292)
70,491
109,022
1.10
1.25
(70,718)
(81,586)
131,221
(1,796)
(9,468)
(30,040)
89,917
89,623
1.50
1.49
15,008,552
11,927,270
8,403,993
$
181,275
$
184,689
$
178,849
(1) EBITDA is not a recognized earnings measure under IFRS and does not have a standardized meaning prescribed by IFRS.
Therefore, EBITDA may not be comparable to similar measures presented by other issuers. Investors are cautioned that EBITDA
should not be construed as an alternative to net income or loss determined in accordance with IFRS as an indicator of the
Company’s performance or as an alternative to cash flows from operating, investing and financing activities as a measure of
liquidity and cash flows.
(2) Information for 2010 has been restated to conform to presentation under IFRS and for the Conversion.
14 First NatioNal FiNaNcial corporatioN
Vision and Strategy
The Company provides mortgage financing solutions
to virtually the entire mortgage market in Canada.
By offering a full range of mortgage products, with a
focus on customer service and superior technology,
the Company believes that it is the leading non-bank
mortgage lender in the industry. Growth has been
achieved while maintaining a relatively conservative
risk profile. The Company intends to continue
leveraging these strengths to lead the non-bank
mortgage lending industry in Canada, while appropri-
ately managing risk.
The Company’s strategy is built on four corner-
stones: providing a full range of mortgage solutions;
growing assets under administration; employing
leading-edge technology to lower costs and rational-
ize business processes; and maintaining a conservative
risk profile. An important element of the Company’s
strategy is its direct relationship with the mortgage
borrower. Although the Company places most of its
originations with third parties, FNFLP is perceived by
all of its borrowers as the mortgage lender. This is a
critical distinction. It allows the Company to commu-
nicate with each borrower directly throughout the
term of the related mortgage. Through this relation-
ship, the Company can negotiate new transactions
and pursue marketing initiatives. Management believes
this strategy will provide long-term profitability and
sustainable brand recognition for the Company.
Key Performance Drivers
The Company’s success is driven by the
following factors:
• Growth in the portfolio of mortgages
under administration;
• Growth in the origination of mortgages;
• Lowering the costs of operations through the
innovation of systems and technology; and
• Employing innovative securitization transactions
to minimize funding costs.
Growth in Portfolio of Mortgages
under Administration
Management considers the growth in MUA to be a
key element of the Company’s performance. The
portfolio grows in two ways: through mortgages
originated by the Company and through mortgage
servicing portfolios purchased from third parties.
Mortgage originations not only drive revenues from
placement and interest from securitized mortgages
but, perhaps more importantly, longer-term values
such as servicing fees, mortgage administration fees,
renewal opportunities and growth in customer base
for marketing initiatives. As at December 31, 2012,
MUA totalled $67.3 billion, up from $59.6 billion
at December 31, 2011, an increase of 13%. This
compares to $65.9 billion at September 30, 2012,
representing a quarter-over-quarter increase of
2.1% and an annualized increase of about 8.5%.
Growth in Origination of Mortgages
The origination of mortgages not only drives the
growth of MUA as described above, but leverages
the Company’s origination platform, which has
a large fixed cost component. As more mortgages
are originated, the marginal costs of underwriting
are decreased. The Company can also decide to
securitize more mortgages to take advantage of its
origination in periods of wider mortgage spreads.
Prior to 2008, when the capital markets experienced
some significant turbulence, the prime mortgages
that the Company originated had tight spreads such
that the Company’s strategy was to sell these
mortgages on commitment to institutional investors
and retain the servicing. This strategy changed with
the challenges in the credit environment and the
Company was able to take a larger portion of the
spread for itself. By the end of 2010, much of
the turmoil in the capital markets had waned and
mortgage spreads returned to modest premiums
over pre-crisis levels. This is most evident for
2012 ANNUAL REPORT 15
Management’s Discussion and Analysis
five-year fixed single-family mortgage rates
compared to similar-term Government of Canada
bonds. Prior to 2008, this comparison showed
spreads of approximately 1.25%. With the credit
crisis, these spreads reached as high as 3.00% in
2008. Between 2009 and mid-2011, spreads gradually
tightened as liquidity issues at financial institutions
diminished and the competition for mortgages
increased such that at June 30, 2011, mortgage
spreads were at 1.46%. With renewed global
economic turmoil in 2012, spreads generally widened
again such that by mid-year spreads reached as high
as 1.85%, tightening to about 1.61% by year end.
In 2012, the Company has chosen to opportunisti-
cally securitize a larger portion of its originations,
both in the single-family and multi-family segments,
to take advantage of these still-profitable spreads.
For 2012, the Company originated for securitization
approximately $2.1 billion of single-family mortgages
and $986 million of fixed multi-residential mortgages
in order to take advantage of these wider spreads.
In 2012, the Company securitized through NHA
MBS approximately $494 million of floating rate
single-family mortgages, $1.8 billion of fixed single-
family mortgages and $1.0 billion of fixed
multi-residential mortgages.
Lowering Costs of Operations
Innovation of systems and technology
The Company has always used technology to
provide for efficient and effective operations. This
is particularly true for its MERLIN underwriting
system, Canada’s only web-based, real-time broker
information system. By creating a paperless, 24/7
commitment management platform for mortgage
brokers, the Company is now ranked among the top
three lenders by market share in the broker channel.
This has translated into increased single-family
origination volumes and higher closing ratios (the
percentage of mortgage commitments the Company
issues that actually become closed mortgages).
Increase of bank credit facility
In May and then in December 2012, the Company
increased its revolving line of credit with a syndicate
of banks from $125.0 million to $545.0 million. The
additional $420.0 million commitment was increased
to enable the Company to fund the increasing
amount of mortgages accumulated for securitization
and reduce the amount of mortgages funded with
repurchase obligations. The entire facility is floating
rate and has a four-year term. The Company has
elected to undertake this increased debt for a
number of reasons: (1) the transaction increases the
amount of debt available to fund mortgages origi-
nated for securitization purposes; (2) the debt is
revolving and can be used and repaid as the Company
requires, providing more flexibility than the debenture
debt, which is always fully drawn; (3) the four-year
term extension gives the Company a committed
facility that strategically extends the maturity of this
debt beyond that of the debenture in 2015; and
(4) the cost of borrowing is marginally lower than
of the replaced $125.0 million credit facility.
Preferred share issuance
On January 25, 2011, the Company issued 4,000,000
Class A Series 1 Preferred Shares for gross proceeds
of $100 million. The Company received net pro-
ceeds of $97.4 million after issuance costs, net of
deferred tax assets of $0.9 million. These shares are
rate reset preferred shares having a stated 4.65%
annual dividend rate, subject to Board of Director
approval, and a par of $25 per share. The rate reset
feature is at the discretion of the Company such
that after the initial five-year term the Company can
choose to extend the shares for another five-year
term at a fixed spread (2.07%) over the yield of the
then relevant Government of Canada bond. While
the investors in these shares have an option on
each five-year anniversary to convert their Series 1
holdings into Series 2 Preferred Shares (which pay
floating rate dividends), there are no redemption
16 First NatioNal FiNaNcial corporatioN
options for these shareholders. As such, the
Company considers these shares to represent a
permanent source of capital and classifies the
shares as equity on its balance sheet. Management
believes this capital will give the Company the
opportunity to pursue its strategy of increased
securitization, which requires upfront investment.
Employing Innovative Securitization
Transactions to Minimize Funding Costs
Approval as both an issuer of NHA MBS
and seller to the Canada Mortgage
Bonds program
The Company has been involved in the issuance
of NHA MBS since 1995. This program has been
very successful, with over $5 billion of NHA MBS
issued. In December 2007, the Company was
approved by Canada Mortgage and Housing
Corporation (“CMHC”) as an issuer of NHA MBS
and as a seller to the CMB program. Issuer status
has provided the Company with a funding source
that it can access independently. Perhaps more
importantly, seller status for the CMB gives the
Company direct access to the CMB. Generally,
the demand for high-quality fixed and floating rate
investments increased significantly with the turmoil
in 2009. This demand has continued into 2012
and allowed the Company to fund over $3.3 billion
of mortgages through the NHA MBS and CMB
programs during the year, including $861 million
in the fourth quarter of 2012.
Canada Mortgage Bonds program
The CMB program is an initiative sponsored by
CMHC whereby the Canada Housing Trust
(“CHT”) issues securities to investors in the form
of semi-annual interest-yielding five- and 10-year
bonds. The proceeds of these bonds are used
to buy NHA MBS. In previous years, the Company
entered into an agreement with a Canadian bank that
allowed the Company to indirectly sell a portion of
the Company’s residential mortgage origination into
several CMB issuances. Subsequently, pursuant to
the Company’s approval as a seller into the CMB,
the Company was able to make direct sales into the
program. Because of the similarities to a traditional
Government of Canada bond (both have five-
and 10-year unamortizing terms and a federal gov-
ernment guarantee), the CMB trades in the capital
markets at a modest premium to the yields on
Government of Canada bonds. The ability to sell into
the CMB has given the Company access to lower
cost of funds on both single-family and multi-family
mortgage securitizations. Because these funding
structures do not amortize, the Company can fund
future mortgages through this channel as the original
mortgages amortize or pay out. The Company also
enjoys significant demand for mortgages from
investment dealers who sell directly into the CMB.
Because of the effectiveness of the CMB, there have
been requests from approved CMB sellers for larger
issuances. CHT has indicated that it will not unduly
increase the size of its issuances and has created
guidelines through CMHC that limit the amount that
can be sold by each seller into the CMB each quarter.
The Company is also subject to these limitations.
2012 ANNUAL REPORT 17
Management’s Discussion and Analysis
Key Performance Indicators
The principal indicators used to measure the
Company’s performance are:
• Earnings before income taxes, depreciation and
amortization, and losses and gains on financial
instruments (“Pre-FMV EBITDA”(1)); and
• Adjusted cash flow from operations (“Adjusted
Cash Flow”).
Pre-FMV EBITDA is not a recognized measure under
IFRS. However, management believes that Pre-FMV
EBITDA is a useful measure that provides investors
with an indication of income normalized for capital
market fluctuations and prior to capital expenditures.
Pre-FMV EBITDA should not be construed as an
alternative to net income determined in accordance
with IFRS or to cash flows from operating, investing
and financing activities. The Company’s method of
calculating Pre-FMV EBITDA may differ from other
issuers and, accordingly, Pre-FMV EBITDA may not
be comparable to measures used by other issuers.
($000s)
Quarter ended
Year ended
For the period
Revenue
Income before income taxes
Pre-FMV EBITDA(1)
At period end
Total assets
December 31
2012
December 31
2011
December 31
2012
December 31
2011
$
156,092
$
118,121
$
628,613
$
464,020
45,091
41,765
24,287
30,849
150,825
153,199
96,783
125,092
15,008,552
11,927,270
15,008,552
11,927,270
Mortgages under administration
67,260,086
59,598,596
67,260,086
59,598,596
(1) This non-IFRS measure adjusts income before income taxes by adding back expenses for amortization of intangible and capital
assets (generally described as EBITDA) but it also eliminates the impact of changes in fair value by adding back losses on the
valuation of financial instruments and deducting gains on the valuation of financial instruments.
Adjusted Cash Flow is not a defined term under
IFRS. Management believes that net cash generated
by the Company prior to investing and financing
activities is an important measure for investors to
monitor. Management cautions investors that, due
to the Company’s nature as a mortgage seller and
securitizer, there will be significant variations in this
measure from quarter to quarter as the Company
collects and invests cash from mortgage transactions.
Adjusted Cash Flow is determined by the Company
as cash provided from operating activities increased/
decreased by the change in mortgages accumulated
for sale or securitization in the period. Mortgages
accumulated for sale or securitization consist
primarily of mortgages that the Company funds
ahead of securitization transactions. Normally
during the three months after funding, the Company
aggregates all relevant mortgages warehoused
to date and creates a pool to sell to the NHA MBS
market or directly to the CMB. As the Company
typically raises term debt through the securitization
markets on these mortgages in the months subse-
quent to the month of funding, there are large
amounts of cash invested at quarter ends. The
Company’s credit facilities provide full financing
for the majority of these mortgage loans. Accord-
ingly, management believes the measure of Adjusted
Cash Flow is only meaningful if the change in
mortgages accumulated for sale between reporting
periods is adjusted.
18 First NatioNal FiNaNcial corporatioN
Determination of Adjusted Cash Flow and Payout Ratio
($000s)
Quarter ended
Year ended
December 31
2012
December 31
2011
December 31
2012
December 31
2011
For the period
Cash provided by (used in) operating activities
$
85,617
$
(124,025)
$
166,007
$
(456,358)
Add (deduct):
Change in mortgages accumulated for
sale or securitization between periods
Adjusted Cash Flow(1)
Less: cash dividends on preferred shares
Adjusted Cash Flow available for common
(53,378)
32,239
(1,162)
129,256
5,231
(1,163)
(42,416)
123,591
(4,365)
532,802
76,444
(3,154)
shareholders
$
31,077
$
4,068
$
119,226
$
73,290
Adjusted Cash Flow per common share
($/share)(1)
Dividends declared on common shares
Dividends declared per common share ($/share)
Payout ratio
0.52
19,489
0.33
63%
0.07
18,740
0.31
443%
1.99
76,208
1.27
64%
1.22
74,960
1.25
102%
(1) These non-IFRS measures adjust cash provided by (used in) operating activities by accounting for changes between periods in
mortgages accumulated for sale or securitization and mortgage securitization activity.
For the year ended December 31, 2012, the payout
ratio was 64%. This is compared to a payout ratio
of 102% for 2011. Generally, the Company recorded
superior results to 2011, and its net income was
consistent with its cash flow from operations.
The lower payout ratio was evident even though the
common share dividend was increased during the
year. The 2011 year also experienced realized losses
on financial instruments of $22.3 million, which
reduced cash flow. For 2012, the Company had just
$10.6 million of realized losses, which detracted
from cash flow. The consistently low payout ratio
in 2012 was an important factor in the Board’s
decision to raise the annual rate of dividends in 2013.
Revenues and Funding Sources
Mortgage origination
The Company derives a significant amount of
its revenue from mortgage origination activities.
The majority of mortgages originated are funded
by either placement with institutional investors
or securitization conduits, in each case with retained
servicing. Depending upon market conditions,
either an institutional placement or a securitization
conduit may be the most cost-effective means
for the Company to fund individual mortgages.
In general, originations are allocated from one funding
source to another, depending on market conditions
and strategic considerations related to maintaining
diversified funding sources. The Company retains
servicing rights on virtually all of the mortgages it
originates, which provides the Company with servicing
fees to complement revenue earned through
2012 ANNUAL REPORT 19
Management’s Discussion and Analysis
originations. For the year ended December 31, 2012,
origination volume increased from $11.8 billion to
$14.0 billion, or 19%, compared to 2011.
Securitization
The Company securitizes a portion of its origination
through various vehicles, including NHA MBS,
CMB and Asset-Backed Commercial Paper (“ABCP”).
Although legally these transactions represent sales
of mortgages, for accounting purposes they do
not meet the requirements for revenue recognition
and instead are accounted for as secured financings.
These mortgages remain as mortgage assets of
the Company for the full term and are funded
with securitization-related debt. Of the Company’s
$14.0 billion of originations for the year ended
December 31, 2012, $3.1 billion was originated
for securitization purposes.
Placement fees and gain on deferred
placement fees
The Company recognizes revenue at the time that
a mortgage is placed with an institutional investor.
Cash amounts received in excess of the mortgage
principal at the time of placement are recognized
in revenue as “placement fees”. The present value
of additional amounts expected to be received over
the remaining life of the mortgage sold (excluding
normal market-based servicing fees) is recorded
as a “deferred placement fee”. A deferred placement
fee arises when mortgages with spreads in excess
of a base spread are sold. Normally the Company
would earn an upfront cash placement fee, but
investors prefer paying the Company over time as
they earn net interest margin on such transactions.
Upon the recognition of a deferred placement fee,
the Company establishes a “deferred placement fee
receivable” that is amortized as the fees are received
by the Company. Of the Company’s $14.0 billion of
originations for the year ended December 31, 2012,
$9.8 billion was placed with institutional investors
and $0.7 billion was originated for institutional
investors involved in the issuance of NHA MBS.
For all institutional placements and mortgages sold
to institutional investors for the NHA MBS market,
the Company earns placement fees. Revenues based
on these originations are equal to either: (1) the
present value of the excess spread, or (2) an
origination fee based on the outstanding principal
amount of the mortgage. This revenue is received
in cash at the time of placement. In addition, under
certain circumstances, additional revenue from
institutional placements and NHA MBS may be
recognized as “gain on deferred placement fees”
as described above.
Mortgage servicing and administration
The Company services virtually all mortgages
generated through its mortgage origination activities
on behalf of a wide range of institutional investors.
Mortgage servicing and administration is a key
component of the Company’s overall business
strategy and a significant source of continuing income
and cash flow. In addition to pure servicing revenues,
fees related to mortgage administration are earned
by the Company throughout the mortgage term.
Another aspect of servicing is the administration
of funds held in trust, including borrowers’ property
tax escrow, reserve escrow and mortgage payments.
As acknowledged in the Company’s agreements,
any interest earned on these funds accrues to the
Company as partial compensation for administration
services provided. The Company has negotiated
favourable interest rates on these funds with
the chartered banks that maintain the deposit
accounts, which has resulted in significant additional
servicing revenue.
In addition to the interest income earned on
securitized mortgages and deferred placement
fees receivable, the Company also earns interest
income on mortgage-related assets, including
mortgages accumulated for sale or securitization,
mortgage and loan investments and purchased
mortgage servicing rights.
20 First NatioNal FiNaNcial corporatioN
Results of Operations
The following table shows the volume of mortgages originated by First National and mortgages under
administration for the periods indicated:
($ millions)
Quarter ended
Year ended
December 31
2012
December 31
2011
December 31
2012
December 31
2011
Mortgage originations by segment
Single-family residential
Multi-unit residential and commercial
Total
Mortgage originations by funding source
Institutional investors – residential
Institutional investors – multi-unit/commercial
NHA MBS for institutional investors
NHA MBS/CMB/ABCP securitization
Internal Company resources
Total
Mortgages under administration
Single-family residential
Multi-unit residential and commercial
Total
$
$
$
$
$
$
1,919
832
2,751
$
$
2,121
796
2,917
$
$
11,280
2,709
13,989
$
$
9,083
2,719
11,802
1,246
$
1,158
$
8,926
$
6,099
192
339
856
118
255
68
1,354
82
838
737
3,135
353
696
710
4,047
250
2,751
$
2,917
$
13,989
$
11,802
49,636
17,624
67,260
$
$
42,251
17,348
59,599
$
$
49,636
17,624
67,260
$
$
42,251
17,348
59,599
Total mortgage origination volumes increased in
the year by 19% as First National took advantage of
strong housing demand and set a new record for
annual single-family origination. Single-family volumes
increased by 24% year over year as demand for
housing remained high amid a historically low interest
rate environment. The Company’s market share
in the mortgage broker channel has also increased
as one of its main competitors slowed down its
origination operations pending an exit from this
channel. Commercial segment originations remained
flat to 2011, overcoming a slow first quarter but
ending the year with its strongest quarter of 2012
with $832 million originated. The low interest
rate environment which existed for most of 2012
increased commercial real estate transactions, which
drove originations for the Company. Origination
for direct securitization into NHA MBS, CMB and
ABCP programs decreased from over $4.0 billion
in 2011 to about $3.1 billion in 2012. The decrease
was most evident in the single-family segment as the
Company was able to securitize significant amounts
of mortgages originated through its renewal pipeline.
Accordingly, it did not need to allocate as much
of its new origination to its securitization programs.
In the fourth quarter of 2012, overall origination
decreased by 6% as the single-family segment
suffered from the federal government’s introduction
of new measures to “strengthen Canada’s housing
system” at the end of June 2012. Although effective
July 9, 2012, these changes designed to slow down
the growth of consumer debt, affected new
commitments entered into after that date.
Accordingly, third-quarter origination was only
marginally impacted but fourth-quarter origination
was fully affected by the new rules, which make
2012 ANNUAL REPORT 21
Management’s Discussion and Analysis
the qualification for mortgage finance more onerous
for single-family buyers. This has slowed down the
real estate markets across Canada such that the
Company’s originations for the fourth quarter fell
by approximately 10% from the 2011 fourth quarter.
For the latter part of 2011, Canadian capital
markets were volatile. Continued global economic
issues and a slowing recovery meant a movement
of capital from equity markets to bond markets,
such that bond prices were bid up and yields fell.
The mortgage market moved in step with these
indicators. For the Company, these conditions had
some significant impacts on its third and fourth
quarter 2011 results. As an originator of mortgages,
the uncertain economic conditions made for a
low interest rate environment, making it marginally
easier for the Company to originate mortgages. The
uncertainty also caused mortgage spreads to widen
and made the decision to securitize a large portion
of its origination an easier one for the Company.
While markets have been less volatile in 2012,
mortgage interest rates have remained low, with
large Canadian banks continuing to offer historically
low rates. This has allowed the Company to offer
competitive mortgage products at profitable spreads.
Total revenues for the year ended December 31,
2012 increased by about 35% compared to the year
ended December 31, 2011, from $464.0 million to
$626.6 million. This increase resulted from more
placement fees and higher interest revenue on a larger
portfolio of mortgages pledged under securitization.
to $13.0 billion as at December 31, 2012. However,
the market for prime mortgages became more
competitive during this period. At December 31,
2011, the Company’s securitized mortgage portfolio
earned gross spreads of approximately 1.11%. By
December 31, 2012, as higher-spread securitizations
amortized down and new securitizations were
entered into at tighter spreads, the weighted average
gross spread decreased to 1.04%. Net interest is also
affected by the amortization of deferred origination
costs and fair value adjustments that are capitalized
on these mortgages. Credit losses were minimal in
the quarter as the Company’s exposure to uninsured
mortgages declined, particularly as the Alt-A and
small conventional mortgages programs ran down.
Placement fees
Placement fee revenue increased 38% to $151.9 mil-
lion from $110.0 million. This increase is due to
the large mortgage volumes originated by the
Company and sold to institutional investors. Total
origination volumes, which drive placement fees,
consisting of mortgages originated for institutional
investors together with the multi-unit residential
mortgages originated for the third-party MBS
program, increased by 40% from 2011 to 2012.
Although per unit placement fees were consistent
from 2011 to 2012, the Company earned lower
placement fees from mortgage renewals as it elected
to securitize more renewal origination in 2012 as
opposed to placing them with institutional investors.
Net interest – securitized mortgages
Comparing the year ended December 31, 2012 to
the year ended December 31, 2011, net interest –
securitized mortgages increased 29% to $90.3 million
from $69.8 million. The increase is due to a larger
portfolio of securitized mortgages offset by tighter
weighted average spreads on the portfolio year over
year. The portfolio of mortgages funded by securitiza-
tion grew from $9.8 billion as at December 31, 2011
Gains on deferred placement fees
Gains on deferred placement fees revenue increased
15% to $7.7 million from $6.7 million. The gains
relate to multi-unit residential mortgages originated
and sold to institutional MBS issuers. While volumes
only increased by 4% from $710 million in 2011
to $737 million in 2012, more 10-year product
was sold, which is more profitable than the typical
five-year term mortgages sold in 2011.
22 First NatioNal FiNaNcial corporatioN
Mortgage servicing income
Mortgage servicing income increased 9% to
$89.9 million from $82.4 million. This was primarily
due to the growth in the amount of MUA, which
grew by 13% year over year. The 4% discrepancy
in these growth rates is due to the growth of the
Company’s securitization programs. At Decem-
ber 31, 2012, there were approximately $13.0 billion
of mortgages in MUA on which the Company earns
net interest spread as opposed to servicing revenue.
As the securitized portfolio has grown and become
a larger part of MUA, mortgage servicing has been
sacrificed for wider spreads in net interest –
securitized mortgages within First National’s revenue.
In addition, the Company has experienced slow
prepayment rates in 2012 such that discharge fee
revenue has decreased from 2011.
Mortgage investment income
Mortgage investment income increased 23% to
$35.9 million from $29.3 million. The change is due
primarily to the Company’s larger securitization
program. As the Company elects to securitize more
of its origination, mortgages accumulated for sale or
securitization increase and earn the Company higher
interest income in the warehouse period prior to
securitization. This is particularly true for the CMB,
for which the warehousing period is as long as four
months. The remaining change is a combination of
offsetting factors, including different bond yields than
in the comparative quarter (which affect the interest
earned on deferred placement fees receivable),
and increased amounts of mortgage and loan
investments held during the comparative quarters.
Realized and unrealized gains (losses)
on financial instruments
For First National, this financial statement line item
typically consists of two components: (1) gains and
losses related to the Company’s economic hedging
activities, and (2) gains and losses related to holding
term assets derived using discounted cash flow
methodology. Much like the short bonds which the
Company uses for hedging, the term assets are
affected by changes in credit markets and Govern-
ment of Canada bond yields, which form the risk-free
benchmarks used to price the Company’s deferred
placement fees receivable, mortgages designated
as held for trading (primarily those funded through
ABCP), and some of its mortgage and loan invest-
ments. The Company has summarized these gains
and losses in the following categories:
Summary of realized and unrealized gains (losses) on financial instruments
($000s)
Losses on the economic hedging program
Gains related to the ABCP programs
Gains (losses) on deferred placement fees receivable
Gains (losses) on mortgage and loan investments
Other gains (losses)
Year ended
December 31
2012
December 31
2011
$
(1,644)
$
(31,040)
8,277
(131)
(521)
172
11,179
1,149
1,018
(791)
Total gains (losses) on financial instruments
$
6,153
$
(18,485)
2012 ANNUAL REPORT 23
Management’s Discussion and Analysis
The Company uses short Government of Canada
bonds (primarily CHT-issued bonds) together with
repurchase agreements to create forward interest
rate contracts to hedge interest rate risk associated
with fixed rate mortgages originated for its own
securitization purposes. For accounting purposes,
these do not qualify as valid interest rate hedges as
the bonds used are not “derivatives” but simple
cash-based financial instruments. Under IFRS, these
gains or losses are recorded in the period in which
the securitization debt is taken on; however, the
offsetting economic gains or losses are not recorded
in the same period. Instead, the resulting economic
gain (or loss) will be reflected in wider or narrower
spreads on the mortgages pledged for securitization
and will be realized in net interest margin over the
terms of the mortgages and the related debts. In
2012, the Company recorded losses on these hedges
of $1.6 million (2011 – $31.0 million). These mostly
unrealized losses are due to an environment of falling
bond yields experienced in both years, although 2011
demonstrated a much more sudden and steep drop
as the United States had its credit ratings reduced.
The Company’s testing indicated that the hedges
were appropriate; accordingly, the gross spread on
the related portfolio of securitized mortgages going
forward will be proportionally larger, as the Com-
pany profits from lower interest yields on the
securitized debt it raised to fund these mortgages.
Economic sentiment about the global economy
fluctuated during the year as opening optimism
quickly waned for the remainder of the year until
the fourth quarter, when some economic measures
began to improve such that bond yields rose
marginally from year to year. Generally, five-year
Government of Canada bond yields increased from
approximately 1.30% at the beginning of the year
to 1.38% at the end of the year. Accordingly, the
Company’s deferred placement fees receivable and
approximately $5.0 million of mortgages in mortgage
and loan investments are less valuable on a compara-
tive basis at year end than at the end of 2011. The
Company recorded losses related to holding these
assets of less than $0.7 million in the year.
The portion of the Company’s mortgages
which are held at fair value (primarily those funded
through ABCP) were negatively affected by the
change in yields; however, these losses were more
than offset by gains on the value of the interest
rate swaps which were used to hedge the fixed rate
mortgages in this portfolio. The mortgages were also
favourably affected by lower rates of prepayment,
and the tightening of mortgage funding spreads
experienced within the year which make existing
mortgages more valuable. The Company also levered
on mortgages which it renewed for additional five-
year terms and measured at fair value. Those
renewals created immediate gains for the Company
as renewed mortgages typically do not require the
payment of an upfront brokerage fee. The net fair
value of the gains and losses on this portfolio of
mortgages was $8.3 million for the year.
Brokerage fees expense
Brokerage fees expense increased 42% to
$116.0 million from $81.5 million. This increase
is largely explained by higher origination for institu-
tional investors, which grew by 40%. The remainder
of the increase is largely explained by changing per
unit broker fees. The increase is due partially to
a change in product mix in 2012 with more 10-year
product. In 2011, the Company originated almost
no 10-year product. This compares to $1.7 billion
originated in 2012. The brokerage fees for 10-year
origination are approximately 40% higher than
for five-year mortgages. With 10-year product
24 First NatioNal FiNaNcial corporatioN
comprising 15% of First National’s 2012 total
residential origination, the higher brokerage fees
should account for about a 6% increase in overall
brokerage fees. On August 17, 2012, First National
announced reductions to its broker compensation
program for commitments going forward. The bene-
fits of these reductions had virtually no impact on
broker fees for the first three quarters of 2012 as the
new commitments, to which the new fees related,
funded in the fourth quarter. The Company realized
the benefits of these lower fees in the fourth quarter,
which had a small impact on the year as a whole.
Salaries and benefits expense
Salaries and benefits expense increased 15% in 2012,
to $56.3 million from $48.8 million. The increase
is due primarily to employee costs associated
with commercial segment origination. The Company
compensates its commercial sales staff with com-
missions based on origination volumes. Although
commercial origination was similar in 2012 to the
2011 volume, the value of this origination increased
such that sales compensation increased by $3.5 mil-
lion year over year. Sales incentives compensation
has also been accrued for the residential origination
division, which has surpassed budgetary targets.
As at December 31, 2012, the Company had 615
employees, compared to 574 as at December 30,
2011. The 7% increase in headcount is largely to
meet the administrative demands associated with the
increased MUA, which increased by 13% year over
year. Management salaries were paid to the two
senior executives (Co-founders), who indirectly each
own about 40% of FNFC’s common shares. The
current period’s expense is a result of the compen-
sation arrangement executed on the closing of
the initial public offering (“IPO”).
Interest expense
Interest expense increased 24% to $19.8 million
from $16.0 million. As discussed in the Liquidity
and Capital Resources section of this analysis, the
Company warehouses a portion of the mortgages
it originates prior to settlement with the ultimate
investor or funding with a securitization vehicle.
The Company uses the debenture, together with a
credit facility with a syndicate of banks and 30-day
repurchase facilities, to fund the mortgages during this
period. The Company refinanced the credit facility
in 2012 for a four-year term and a total commitment
of $545 million. The overall interest expense has
increased from the prior period due to the increased
use of repurchase facilities to warehouse the larger
amounts of mortgages originated for the CMB. As at
December 31, 2012, the Company had borrowed
$547 million using these facilities, compared to
$513 million as at December 31, 2011. Generally,
interest expense would have been greater but for
the increased use of 30-day repurchase agreements
instead of bank debt, which has saved the Company
approximately 0.70% in marginal interest rates.
Other operating and amortization
of intangibles expenses
Other operating and amortization of intangibles
expenses increased 6% to $38.9 million from
$36.7 million. A portion of the intangible assets
recognized on the IPO were fully amortized in 2011,
such that this expense was $1.5 million lower in
2012 than in 2011. Other operating expenses
increased by $3.7 million. The largest component
of the increase relates to registration, custodial and
other mortgage servicing expenses related primarily
to the Company’s NHA MBS and CMB programs,
which increased almost $1.2 million year over year.
The remaining increase of $2.5 million represents
the cost of additional overhead required for growing
operations and a larger portfolio of mortgages
under administration.
2012 ANNUAL REPORT 25
Management’s Discussion and Analysis
Income before income taxes
and Pre-FMV EBITDA
Income before income taxes increased 56% to
$150.8 million from $96.8 million. The increase in
earnings was due to the successful execution of the
business model, which featured record mortgage
origination, significant placement fees and ongoing
income from mortgage servicing and net interest
spread on securitized mortgages. The Company
also profited from a turnaround in mark-to-market
adjustments on the Company’s financial instruments.
Because of poor conditions in the capital markets in
2011, the Company incurred losses of $18.5 million.
In 2012, the Company recorded gains of $6.2 million
as capital markets improved. The net change in these
adjustments accounted for $24.7 million of the
increase in net income between the years. Pre-FMV
EBITDA, which eliminates the impact of the gains
and losses on financial instruments, increased 22%
to $153.2 million from $125.1 million. The increase
was largely due to higher net interest on securitized
mortgages together with increased placement fees
net of broker fees. The former showed an increase
of $20.4 million and the latter provided the Com-
pany with $7.4 million of additional profit margin.
Provision for income taxes
The provision for taxes increased 54% to $40.5 mil-
lion from $26.3 million. Generally, the provision is
higher due to the increased earnings recorded in
2012 compared to those in 2011.
Operating Segment Review
The Company aggregates its business from two segments for financial reporting purposes: (i) residential
(which includes single-family residential mortgages) and (ii) commercial (which includes multi-unit residential
and commercial mortgages), as summarized below:
Operating business segments
($000s except percent amounts)
Quarter ended
Originations
Percentage change
Revenue
Percentage change
Income before income taxes
Percentage change
Period ended
Identifiable assets
Residential
Commercial
December 31
2012
December 31
2011
December 31
2012
December 31
2011
$ 11,280,166
$
9,083,331
$
2,709,213
$
2,719,100
$
$
24.2%
465,593
32.5%
107,650
29.9%
$
$
351,497
82,896
$
$
(0.4%)
163,020
44.9%
43,175
210.9%
$
$
112,523
13,887
December 31
2012
December 31
2011
December 31
2012
December 31
2011
$ 11,426,562
$
9,010,099
$
3,552,214
$
2,887,395
Mortgages under administration
$ 49,636,195
$ 42,251,220
$ 17,623,891
$ 17,347,376
26 First NatioNal FiNaNcial corporatioN
Residential Segment
Liquidity and Capital Resources
Residential revenues increased by about 32%,
although origination only increased by 24% between
2012 and 2011. Revenues are also a function of MUA
and the securitized mortgage portfolio. Origination
for institutional investors increased 46% year over
year and drove higher placement revenue. Gains on
financial instruments also bolstered revenue growth
and net income before income taxes. Without the
impact of such gains in each year, net income before
income taxes would have grown by 17% year over
year, in line with MUA growth of 17%. Identifiable
assets have increased from those at December 31,
2011, as the Company added more than $2.5 billion
of net single-family mortgages to mortgages pledged
under securitization.
Commercial Segment
Commercial revenues increased by almost 45%
from the prior year, despite a small decrease in
origination volume. Because of the growth of the
commercial component of securitized mortgages,
revenues are more affected by securitized interest
than by origination volume. Revenues from securi-
tized commercial mortgages grew by more than
35% as the Company increased its multi-residential
securitized portfolio by almost $750 million from
December 31, 2011 to December 31, 2012. The
turnaround in gains/losses on financial instruments
of $15.1 million increased revenue by a further 13%.
This increase, in particular, directly increased income
before income taxes. Without these revenues, net
income before tax increased by about $14.2 million
year over year, or an increase of 52%, consistent
with revenue growth. Identifiable assets have
increased from those at December 31, 2011, as
the Company securitized almost net $750 million
of multi-unit residential mortgages through the
NHA MBS and ABCP markets in 2012.
The Company’s fundamental liquidity strategy has
been to invest primarily in prime Canadian mort-
gages. Management’s belief has always been that
these mortgages are considered “AAA” by investors
and will always be well bid and highly liquid. This
strategy proved effective during the turmoil experi-
enced in 2007 through 2009, when capital markets
retreated and only the highest-quality assets were
traded. As the Company’s results in those years have
shown, First National had little, if any, trouble finding
investors to purchase its mortgage origination at
profitable margins. Originating prime mortgages also
allows the Company to securitize in the capital
markets; however, this activity requires significant
cash resources to purchase and hold mortgages prior
to arranging for term debt through the securitization
markets. For this purpose, the Company uses the
combination of the $175 million debenture financing
and the Company’s revolving bank credit facility.
This aggregate indebtedness is typically used to fund:
(1) mortgages accumulated for sale or securitization,
(2) deferred placement fees receivable, (3) the
origination costs associated with securitization, and
(4) mortgage and loan investments. The Company
has a credit facility with a syndicate of seven financial
institutions for a total credit of $545 million. This
facility was closed in December 2012 for a four-
year term. Bank indebtedness may also include
borrowings obtained through overdraft facilities.
At December 31, 2012, the Company has entered
into repurchase transactions with financial institu-
tions to borrow $500.6 million related to $511.3 mil-
lion of mortgages held in mortgages accumulated
for sale or securitization on the balance sheet.
At December 31, 2012, outstanding bank
indebtedness was $185.0 million (December 31,
2011 – $80.6 million). Together with the debenture
financing of $175 million (December 31, 2011 –
$175 million), this “combined debt” was used to
fund $297.2 million (December 31, 2011 –
2012 ANNUAL REPORT 27
Management’s Discussion and Analysis
$162.6 million) of mortgages accumulated for sale
or securitization. At December 31, 2012, the
Company’s other interest-yielding assets included:
(1) deferred placement fees receivable of $41.9 mil-
lion (December 31, 2011 – $58.5 million); and
(2) mortgage and loan investments of $159.4 million
(December 31, 2011 – $180.9 million). The differ-
ence between combined debt and the mortgages
accumulated for sale or securitization funded by it,
which the Company considers a proxy for true
leverage, has decreased between December 2011
and December 2012, and now stands at $62.8 mil-
lion (December 31, 2011 – $93.0 million). This
represents a debt-to-equity ratio of approximately
0.19 to 1, which the Company believes is at a very
conservative level. This ratio has decreased from
0.31 to 1 as at December 31, 2011, as the Company
has repaid bank debt fully with the proceeds from
the repayment of approximately $21.5 million of
mortgage and loan investments, receipts from the
deferred placement fees receivable and cash flow
from operations.
The Company funds a large portion of its
mortgage originations for institutional placement on
the same day as the advance of the related mort-
gage. The remaining originations are funded by the
Company on behalf of institutional investors or
pending securitization on the day of the advance of
the mortgage. On specified days, sometimes daily,
the Company aggregates all mortgages warehoused
to date for an institutional investor and transacts a
settlement with that institutional investor. A similar
process occurs prior to arranging for term funding
through securitization. The Company uses a portion
of the committed credit facility with the banking
syndicate to fund the mortgages during this ware-
house period. The credit facility is designed to be
able to fund the highest balance of warehoused
mortgages in a month and is normally only
partially drawn.
The Company also invests in short-term mort-
gages, usually for six- to 18-month terms, to bridge
existing borrowers in the interim period between
long-term financing solutions. The banking syndicate
has provided credit facilities to partially fund these
investments. As these investments return cash, it
will be used to pay down this bank indebtedness.
The syndicate has also provided credit to finance a
portion of the Company’s deferred placement fees
receivable and the origination costs associated with
securitization as well as other miscellaneous longer-
term financing needs.
A portion of the Company’s capital has been
employed to support its ABCP and NHA MBS
programs, primarily to provide credit enhancements
as required by rating agencies. In June 2011, CMHC
issued new regulations regarding the timing of
mortgage title transfer to its custodian. The notice
requires that cash collateral be posted immediately
on pool settlement with the custodian for all
mortgages not registered with the custodian on
a dollar-for-dollar basis. Due to the difficulty in
obtaining evidence from land registry offices on a
timely basis, the Company has posted collateral for
the pending title transfers. At December 31, 2012,
$37.7 million (December 31, 2011 – $9.3 million)
of this collateral was held by the custodian. The
collateral will be repaid to the Company as registra-
tion is subsequently evidenced to the custodian on
these mortgages. On January 14, 2013, $30.3 million
was returned to the Company as title transfers
were evidenced. The other significant portion of
cash collateral is the investment made on behalf of
the Company’s ABCP programs. As at Decem-
ber 31, 2012, the investment in cash collateral was
$28.0 million (December 31, 2011 – $39.8 million).
In the fourth quarter of 2012, the Company’s small
commercial loan program had amortized to such
an extent that the mortgage portfolio was approxi-
mately the same size as the underlying cash collateral.
28 First NatioNal FiNaNcial corporatioN
Accordingly, the Company terminated the program
by repaying the outstanding securitization debt
loans and receiving a repayment of cash collateral
of $18.2 million. Although this has had very little
impact on 2012 cash flow, as the remaining mort-
gages pay out in subsequent years, free cash flow
will be generated. It is expected that the Company’s
Alt-A program will terminate under similar circum-
stances in 2013 as most of the remaining mortgages
mature within 2013. As the Alt-A program has paid
down, the ratio of defaulted mortgages to the total
mortgages in the program has become skewed.
To keep these ratios at an acceptable level for rating
agencies, the Company repaid face value debt from
the Trust in 2012 of approximately $7.3 million
related to defaulted mortgages. The Company
received $7.3 million (face value) on the liquidation
of previously repurchased mortgages during the
same period, experiencing credit losses at expected
levels. At December 31, 2012, the Company
employs an assumption for the fair value of credit
losses in the Alt-A program. To date, this assumption
has been more than enough to absorb all actual
losses experienced in the program. The Company
believes that prudent management of this program
will continue to require some level of liquidity from
the Company throughout its remaining term.
As demonstrated previously, the Company
continues to see strong demand for its mortgage
products from institutional investors and liquidity
from bank-sponsored commercial paper conduits.
The Company’s strategy of using diverse funding
sources has allowed the Company to thrive,
producing record profitability in 2009 and 2010.
By focusing on the prime mortgage market, the
Company believes it will continue to attract bids
for mortgages as its institutional customers seek
government-insured assets for investment purposes.
The Company also believes it can manage any
liquidity issues that would arise from a year-long
slowdown in origination volumes. Based on cash flow
received in the fourth quarter of 2012, the Company
will receive approximately $70 million of cash, on an
annualized basis, from its servicing operations and
$113 million of annualized cash flow from securi-
tization transaction spread and deferred placement
fees receivables. Together, on an after-tax basis,
this $135 million of annual cash flow would be more
than sufficient to support the newly-increased annual
dividends of $84 million on the common shares
and the $4.65 million on the preferred shares.
Although this is a simplified analysis, it does highlight
the sustainability of the Company’s business
model and dividend policy through periods of
economic weakness.
As described earlier, the Company issued
4,000,000 Class A Series 1 Preferred Shares at a
price of $25.00 per share for gross proceeds of
$100 million, before issue expenses. The net proceeds
of $96.7 million were invested in FNFLP as partners’
capital. The issuance gives the Company additional
capital, which will allow it to undertake greater
volumes of securitization trans-actions directly and
reduce reliance on institutional investors as a
funding source.
The Company’s Board of Directors has elected
to pay dividends, when declared, on a monthly basis
for the outstanding common shares and on a
quarterly basis for the outstanding preferred shares.
For purposes of the enhanced dividend tax credit
rules contained in the Income Tax Act (Canada)
and any corresponding provincial and territorial tax
legislation, all dividends (and deemed dividends) paid
by the Company to Canadian residents on both com-
mon and preferred shares after December 31, 2010,
are designated as “eligible dividends”. Unless stated
otherwise, all dividends (and deemed dividends) paid
by the Company hereafter are designated as “eligible
dividends” for the purposes of such rules. For the
preferred shares, the Company has elected to pay
any tax under Part VI.1 of the Income Tax Act, such
that corporate holders of the shares will not be
required to pay tax under Part VI.1 of the Income
Tax Act on dividends received on such shares.
2012 ANNUAL REPORT 29
Management’s Discussion and Analysis
Financial Instruments
and Risk Management
The Company has elected to treat deferred place-
ment fees receivable, a portion of mortgages
pledged under securitization that have been funded
with ABCP and NHA MBS debt, and several
mortgages within mortgage and loan investments
as financial assets at “fair value through profit or loss”
such that changes in market value are recorded in
the statement of income. Effectively, these assets
are treated much like bonds earning the Company a
coupon at the discount rates used by the Company.
The discount rates used represent the interest rate
associated with a risk-free bond of the same duration
plus a premium for the risk/uncertainty of the asset’s
residual cash flows. As rates in the bond market
change, the carrying values of these assets will
change. These changes may be significant (favour-
able and unfavourable) from quarter to quarter.
The Company enters into fixed-for-float swaps to
manage the interest rate exposure of fixed mort-
gages sold to ABCP conduits. These instruments
will also be treated as fair value through profit or
loss. While the Company has attempted to exactly
match the principal balances of the fixed mortgages
over the next five-year period to the notional
swap values for the same period, there will be
differences in these amounts. Any favourable or
unfavourable amounts will be recorded in the
statement of earnings each quarter.
The Company believes its hedging policies
are suitably disciplined such that the interest rate
risk of holding mortgages prior to securitization
is mitigated. From an accounting perspective, any
gains or losses on these instruments are recorded
in the current period as the Company’s economic
hedging strategy does not qualify as “hedging” for
accounting purposes. The Company uses bond
forwards (consisting of bonds sold short and bonds
purchased under resale agreements) to manage
interest rate exposure between the time a mortgage
rate is committed to the borrower and the time the
mortgage is transferred to the securitization vehicle
and the matched term debt is arranged. As interest
rates change, the value of these short bonds will vary
inversely with the value of the related mortgages.
As interest rates increase, a gain will be recorded on
the bonds, which should be offset by a tighter interest
rate spread between the interest rates on mortgages
and the securitization debt. This spread will be earned
over the term of the related mortgages. For single-
family mortgages, primarily mortgages for the
Company’s own securitization programs, only a
portion of the mortgage commitments issued by the
Company eventually fund. The Company must assign
a probability of funding to each mortgage in the
pipeline and estimate how that probability changes
as mortgages move through the various stages of the
pipeline. The amount that is actually hedged is the
expected value of mortgages funding within the next
120 days (120 days being the standard maximum
rate hold period available for the mortgages). As at
December 31, 2012, the Company has $225.0 million
of notional forward bond positions related to its
single-family programs. For multi-unit residential and
commercial mortgages, the Company assumes all
mortgages committed will fund and hedges each
mortgage individually. This includes mortgages
committed for the CMB program as well as mort-
gages for transfer to the Company’s other securiti-
zation vehicles. As at December 31, 2012, the
Company had entered into $109.3 million in notional
value forward bond sales for this segment. The total
net value of realized and unrealized gains and losses,
on account of all notional hedges pertaining to the
period January 1, 2012 to December 31, 2012, was
a $1.6 million loss. This amount has been included in
revenue in the statement of comprehensive income.
Upon the settlement of the debenture issuance,
the Company entered into a float-for-fix swap. The
swap requires the Company to pay CDOR+2.134%
on a notional amount of $175 million and to receive
the debenture interest coupon (5.07%) semi-annually.
30 First NatioNal FiNaNcial corporatioN
This effectively converts the fixed rate semi-annual
debenture-based loan payable into a floating rate
monthly resetting note payable. Since the date when
this swap was entered into, five-year interest rates
have decreased pursuant to global economic issues
and the value of this swap has increased to $6.3 mil-
lion as at December 31, 2012. The Company has
documented this swap as a hedge for accounting
purposes, as the fixed leg of the swap exactly
matches the cash flow obligations under the deben-
ture. Effectively, the unrealized gain of $6.3 million
on the swap has been excluded from earnings and
been applied to increase the carrying value of the
debenture note payable. The Company is also a
party to four amortizing fix-for-float rate swaps that
economically hedge the interest rate exposure related
to certain mortgages held on the balance sheet that
the Company has originated as replacement assets
for its CMB activities. As at December 31, 2012,
the aggregate notional value of these swaps was
$48.6 million. Market swap rates increased during the
year such that the value of these swaps increased
by about $0.2 million. The amortizing swaps mature
between September 2013 and December 2021.
As described above, the Company employs
various strategies to reduce interest rate risk. In the
normal course of business, the Company takes some
credit spread risk. This is the risk that the credit
spread at which a mortgage is originated changes
between the date of commitment of that mortgage
and the date of sale or securitization. This can be
illustrated by the Company’s experience with
commercial mortgages originated for the commercial
mortgage-backed security (“CMBS”) market in the
spring of 2007. These mortgages were originated at
credit spreads designed to be profitable to the
Company when sold to a bank-sponsored CMBS
conduit. Unfortunately for the Company, when these
mortgages funded, the CMBS market had shut down.
The alternative to this channel was more expensive,
as credit spreads elsewhere in the marketplace
for this type of mortgage had moved wider. The
Company adjusted for market-suggested increases
in credit spreads in 2007 and 2008, adjusting the
value of the mortgages downward. In 2009, the
economic environment remained weak but did
not worsen from what it was at the end of 2008.
Overall credit spreads stopped widening such that
the Company applied the same spreads to these
mortgages and the Company did not record any
additional unrealized loss or gains related to credit
spread movement. Despite entering into effective
economic interest rate hedges, the Company’s
exposure to credit spreads remained. This risk is
inherent in the Company’s business model and
cannot be economically hedged.
The same exposure to risk is inherent in the
Company’s securitization through ABCP. The
Company is exposed to the risk that 30-day ABCP
rates are greater than 30-day bankers’ acceptance
(“BA”) rates. Prior to the financial crisis, the Com-
pany considered this a low risk given the quality of
the assets securitized, the amount of credit enhance-
ments provided by the Company and the strong
covenant of the bank-sponsored conduits with which
the Company transacted. In 2008, 30-day ABCP
traded at approximately 1.10 percentage points over
BAs; but by the end of March 2011, it was priced
at a discount to BAs. At the same time the Company
has leveraged on changing credit spreads. This has
been demonstrated through the increase in volume
and profitability of the NHA MBS program and
significant increases in gains on deferred placement
fees from the sale of prime insured mortgages.
As at December 31, 2012, the Company has
various exposures to changing credit spreads. In
particular, in mortgages accumulated for sale or
securitization, there are $806 million of mortgages
that are susceptible to some degree of changing
credit spreads.
2012 ANNUAL REPORT 31
Management’s Discussion and Analysis
Capital Expenditures
A significant portion of First National’s business
model consists of the origination and placement or
securitization of financial assets. Generally, placement
activities do not require much capital investment,
as the Company acts primarily in the capacity of a
broker. On the other hand, the undertaking of
securitization transactions may require significant
amounts of the Company’s own capital. This capital
is provided in the form of cash collateral, credit
enhancements, and the upfront funding of broker
fees and other origination costs. These are described
more fully in the Liquidity and Capital Resources
section above. For fixed assets, the business requires
capital expenditures on technology (both software
and hardware), leasehold improvements and office
furniture. During the year ended December 31,
2012, the Company purchased new computers
and office and communication equipment, to
support primarily its single-family residential business.
Going forward, the Company expects capital
expenditures on fixed assets will be approximately
$2.0 million annually.
Summary of Contractual Obligations
The Company’s long-term obligations include five-
to 10-year premises leases for its four offices across
Canada, and its obligations for the ongoing servicing
of mortgages sold to securitization conduits and
mortgages related to purchased servicing rights.
The Company sells its mortgages to securitization
conduits on a fully-serviced basis, and is responsible
for the collection of the principal and interest
payments on behalf of the conduits, including the
management and collection of mortgages in arrears.
($000s)
Payments due by period
Lease obligations
Total contractual obligations
Total
18,529
18,529
$
$
$
$
0–1 year
2–3 years
4–5 years After 5 years
4,050
4,050
$
$
8,005
8,005
$
$
4,477
4,477
$
$
1,997
1,997
Critical Accounting Policies and Estimates
The Company prepares its financial statements in
accordance with IFRS, which requires management
to make estimates, judgments and assumptions that
management believes are reasonable based upon
the information available. These estimates, judgments
and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenue
and expenses during the reporting period. Manage-
ment bases its estimates on historical experience and
other assumptions which it believes to be reasonable
under the circumstances. Management also evaluates
its estimates on an ongoing basis. The significant
accounting policies of First National are described
in Note 2 to the Company’s audited financial
statements as at December 31, 2012. The policies
which First National believes are the most critical to
aid in fully understanding and evaluating its reported
financial results include the determination of the
gains on deferred placement fees and the impact
of fair value accounting on financial instruments.
The Company uses estimates in valuing its gain
or loss on the sale of its mortgages placed with
institutions earning a deferred placement fee. Under
IFRS, valuing a gain on deferred placement requires
the use of estimates to determine the fair value of
the retained interest (derived from the present value
of expected future cash flows) in the mortgages.
These retained interests are reflected on the
32 First NatioNal FiNaNcial corporatioN
Company’s balance sheet as deferred placement
fees receivable. The key assumptions used in the
valuation of gains on deferred placement fees are
prepayment rates and the discount rate used to
present value future expected cash flows. The annual
rate of unscheduled principal payments is deter-
mined by reviewing portfolio prepayment experience
on a monthly basis. The Company uses different
rates for its various programs that average approxi-
mately 15% for single-family mortgages. The
Company assumes there is virtually no prepayment
on multi-residential fixed rate mortgages.
On a quarterly basis, the Company reviews the
estimates used to ensure their appropriateness and
monitors the performance statistics of the relevant
mortgage portfolios to adjust and improve these
estimates. The estimates used reflect the expected
performance of the mortgage portfolio over the lives
of the mortgages. The assumptions underlying the
estimates used for the year ended December 31,
2012 continue to be consistent with those used for
the year ended December 31, 2011 and the quarters
ended September 30, 2011, March 31, 2012 and
June 30, 2012.
The Company has elected to treat its financial
assets and liabilities, including deferred placement
fees receivable, a portion of its ABCP-funded mort-
gages, a portion of its NHA MBS funded mortgages,
some specific mortgage and loan investments and
bonds sold short, at fair value through profit or loss.
Essentially, this policy requires the Company to
record changes in the fair value of these instruments
in the current period’s earnings. The Company’s
assets and liabilities are such that the Company must
use valuation techniques based on assumptions that
are not fully supported by observable market prices
or rates in most cases. Much like the valuation
of deferred placement fees receivable described
above, the Company’s method of determining the
fair value of its mortgages funded by ABCP has a
significant impact on earnings. The Company uses
different prepayment rates for its various programs
that average approximately 10% for single-family
mortgages. The Company assumes there is virtually
no prepayment on multi-residential fixed rate
mortgages. Actual prepayment experience has been
consistent with these assumptions. It has also
assumed discount rates based on Government of
Canada bond yields plus a spread that the Company
believes would enable a third party to purchase the
mortgages and make a normal profit margin for
the risk involved.
Future Accounting Changes
The Company has adopted IFRS as at January 1,
2010. The following new IFRS pronouncements
have been issued and although not yet effective,
may have a future impact on the Company.
IFRS 9 – Financial Instruments
As of January 1, 2015, the Company will be required
to adopt this standard, which is the first phase of the
International Accounting Standards Board’s (“IASB”)
project to replace IAS 39 – Financial Instruments:
Recognition and Measurement. IFRS 9 provides new
requirements for how an entity should classify and
measure financial assets and liabilities that are in the
scope of IAS 39. Management is currently evaluating
the potential impact that the adoption of IFRS 9
will have on the Company’s consolidated financial
statements. Of potential relevance to the Company
is a revised section on hedge accounting designed to
make the reporting of hedging activity more
straightforward. Among other changes, the hedging
standard will permit the use of a financial asset or
liability as a hedging instrument. The current standard
requires that only a derivative can be identified as a
hedging instrument. As the Company has historically
used short bonds (a financial liability) as a hedging
instrument, the change could affect the nature of the
Company’s reporting in this respect.
2012 ANNUAL REPORT 33
Management’s Discussion and Analysis
IFRS 10 – Consolidated Financial Statements
As of January 1, 2013, the IASB introduced a single
model for consolidating subsidiaries using a control
model. This standard addresses particularly the
control of special purpose entities. There will be little
impact to the Company as it currently fully consoli-
dates its special purpose entities.
IFRS 11 – Joint Arrangements
As of January 1, 2013, the IASB has expanded the
definition of a joint venture. The Company will be
required to account for joint ventures by the equity
method as opposed to proportionate consolidation.
IFRS 12 – Disclosure of Interests
in Other Entities
As of January 1, 2013, the Company will be
required to make new disclosures on its off-balance
sheet activities, including those with special
purpose entities.
IFRS 13 – Fair Value Measurement
As of January 1, 2013, the Company will be required
to adopt this standard, which provides a framework
for the application of fair value to those assets and
liabilities qualifying or permitted to be carried at fair
value. The Company believes its current measure-
ment of fair value is appropriate and there will be
little impact.
IAS 27 – Separate Financial Statements
As of January 1, 2013, this standard will now
only prescribe the accounting and disclosure
requirements for investments in subsidiaries, joint
ventures and associates when an entity prepares
separate financial statements, which has limited
impact for the Company.
IAS 28 – Investments in Associates
As of January 1, 2013, this standard has been
amended to correspond to changes in IFRS 10, 11
and 12, listed above, providing guidance for invest-
ments in associates. As described above, there
should be little effect on the Company.
Disclosure Controls and Internal Controls
over Financial Reporting
The Company’s disclosure controls and procedures
are designed to provide reasonable assurance that
information required to be disclosed by the Com-
pany in reports filed under Canadian securities laws
is recorded, processed, summarized and reported
within the time periods specified under those
laws, and includes controls and procedures that
are designed to ensure that such information is
accumulated and communicated to management,
including the Chairman and President and Chief
Financial Officer, to allow timely decisions regarding
required disclosure.
As of December 31, 2012, management evaluated,
under the supervision of and with the participation
of the Chairman and President and Chief Financial
Officer, the effectiveness of the Company’s disclo-
sure controls and procedures. Based on this
evaluation, management concluded that the Com-
pany’s disclosure controls and procedures, as
defined by National Instrument 52-109 – Certificate
of Disclosure in Issuers’ Annual and Interim Filings,
were effective as of December 31, 2012.
Management is responsible for establishing and
maintaining adequate internal control over financial
reporting. Internal control over financial reporting is
designed to provide reasonable assurance regarding
the reliability of financial reporting and the prepara-
tion of financial statements for external purposes in
accordance with reporting standards; however,
because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements on a timely basis.
Management evaluated, under the supervision
of and with the participation of the Chairman
and President and Chief Financial Officer, the
effectiveness of the Company’s internal control
over financial reporting based on the criteria set
forth in the Internal Control over Financial Reporting –
Guidance for Smaller Public Companies issued by
34 First NatioNal FiNaNcial corporatioN
the Committee of Sponsoring Organizations of
the Treadway Commission and, based on that
evaluation, concluded that the Company’s internal
control over financial reporting was effective as
of December 31, 2012 and that there were no
material weaknesses that have been identified in the
Company’s internal control over financial reporting
as of December 31, 2012. No changes were made
in the Company’s internal control over financial
reporting during the year ended December 31, 2012
that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control
over financial reporting.
Risk and Uncertainties Affecting
the Business
The business, financial condition and results of
operations of the Company are subject to a number
of risks and uncertainties, and are affected by a
number of factors outside the control of manage-
ment of the Company, including: ability to sustain
performance and growth, reliance on sources of
funding, concentration of institutional investors,
reliance on independent mortgage brokers, changes
in interest rates, repurchase obligations and breach
of representations and warranties on mortgage sales,
risk of servicer termination events and trigger events
on cash collateral and retained interests, reliance on
multi-unit residential and commercial mortgages,
general economic conditions, government regulation,
competition, reliance on mortgage insurers, reliance
on key personnel, conduct and compensation of
independent mortgage brokers, failure or unavailabil-
ity of computer and data processing systems and
software, insufficient insurance coverage, change in
or loss of ratings, impact of natural disasters and
other events, environmental liability, and risk related
to Alt-A mortgages, which experience higher arrears
rates and credit losses than prime mortgages. In
addition, risks associated with the structure of FNFC
include those related to the dependence on FNFLP,
leverage and restrictive covenants, dividends which
are not guaranteed and could fluctuate with FNFLP’s
performance, restrictions on potential growth, the
market price of FNFC shares, statutory remedies,
control of the Company and contractual restrictions,
and income tax matters. Risk and risk exposure are
managed through a combination of insurance, a
system of internal controls and sound operating
practices. The Company’s key business model is to
originate primarily prime mortgages and find funding
through various channels to earn ongoing servicing
or spread income. For the single-family residential
segment, the Company relies on independent
mortgage brokers for origination and several large
institutional investors for sources of funding. These
relationships are critical to the Company’s success.
For a more complete discussion of the risks affecting
the Company, reference should be made to the
Company’s Annual Information Form.
Forward-Looking Information
Forward-looking information is included in this
MD&A. 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’’, ‘‘poten-
tial’’, ‘‘continue’’ or other similar expressions
concerning matters that are not historical facts.
Forward-looking information may relate to manage-
ment’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 increase in mortgages under
2012 ANNUAL REPORT 35
Management’s Discussion and Analysis
Outlook
Management considers 2012 to have been a very
successful year. The record level of mortgages
originated in the year will provide enduring future
value to the Company through higher mortgage
servicing revenue, increased net interest from
securitized mortgages and greater renewal opportu-
nities. In the fourth quarter of 2012, the Company
experienced a slowdown in mortgage origination
from the levels recorded earlier in 2012. Manage-
ment believes this is primarily a result of the cyclical
slowdown in the housing market along with mea-
sures introduced by the federal government in June
2012 to reduce the amount homeowners can
borrow under government-backed mortgage
insurance programs.
Overall, management foresees reduced residential
origination in 2013, but similar commercial segment
origination to 2012 as the low rate environment
encourages real estate transactions. The Company
also looks forward to increased renewal opportuni-
ties for its securitization program as the five-year
mortgages originated in 2008 now mature. For 2013,
the Company anticipates the low interest rate
environment continuing and moderated but healthy
mortgage spreads. Despite lower origination targets,
the Company expects continued profitability and
cash flow as it earns the returns from the investment
in its business made in 2012.
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 institu-
tionally 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
to it, they may prove to be incorrect. Forward-look-
ing information is subject to certain factors, including
risks and uncertainties, which 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 independent mortgage
brokers and changes in interest rates outlined under
‘‘Risk and Uncertainties Affecting the Business’’.
In evaluating this information, the reader should
specifically consider various factors, including the
risks outlined under ‘‘Risk and Uncertainties Affecting
the Business’’, which may cause actual events or
results to differ materially from any forward-looking
information. The forward-looking information
contained in this discussion represents management’s
expectations as of February 26, 2013, and is subject
to change after such date. However, management
and the Company 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.
36 First NatioNal FiNaNcial corporatioN
Management’s Responsibility for Financial Reporting
The management of First National Financial Corporation (the “Company”) is responsible for the preparation
and fair presentation of the accompanying annual consolidated financial statements and Management’s
Discussion and Analysis (“MD&A”). The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (“IFRS”).
The consolidated financial statements and information in the MD&A necessarily include amounts based
on the best estimates and judgments by management of the expected effects of current events and transac-
tions with the appropriate consideration to materiality. In addition, in preparing this financial information
the Company must make determinations about the relevancy of information to be included, and estimates
and assumptions that affect the reported information. The MD&A also includes information regarding the
impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks
and uncertainties. Actual results in the future may differ materially from our present assessment of this
information because future events and circumstances may not occur as expected.
In meeting our responsibility for the integrity and fairness of the annual consolidated financial statements
and MD&A and for the accounting systems from which they are derived, management has established the
necessary internal controls designed to ensure that the Company’s financial records are reliable for preparing
financial statements and other financial information, transactions are properly authorized and recorded,
and assets are safeguarded against unauthorized use or disposition.
As at December 31, 2012, the Chairman and President and Chief Financial Officer evaluated, or caused
an evaluation under their direct supervision, of the design and operation of our internal controls over
financial reporting (as defined in National Instrument 52-109 – Certificate of Disclosure in Issuers’ Annual and
Interim Filings) and, based on that assessment, determined that the Company’s internal controls over
financial reporting were appropriately designed and operating effectively.
The Board of Directors oversees management’s responsibility for financial reporting through an Audit Com-
mittee, which is composed entirely of independent directors. This committee reviews the Company’s annual
consolidated financial statements and MD&A with both management and the independent auditors before such
statements are approved by the Board of Directors. Other key responsibilities of the Audit Committee include
selecting the Company’s auditors, approving the Company’s interim unaudited condensed consolidated
financial statements and MD&A, and monitoring the Company’s existing systems of internal controls.
Ernst & Young LLP, independent auditors appointed by the shareholders of First National Financial Corpo-
ration upon the recommendation of the Board of Directors, have examined the Company’s 2012 and 2011
annual consolidated financial statements and have expressed their opinion upon the completion of such
examination in the following report to the shareholders. The auditors have full and free access to, and meet
at least quarterly with, the Audit Committee to discuss their audit and related matters.
Stephen J.R. Smith
Chairman and President
Toronto, Canada
February 26, 2013
Robert A. Inglis
Chief Financial Officer
2012 ANNUAL REPORT 37
Independent Auditors’ Report
To the shareholders of First National Financial Corporation
We have audited the accompanying consolidated financial statements of First National Financial Corporation,
which comprise the consolidated statements of financial position as at December 31, 2012 and 2011, the
consolidated statements of comprehensive income and retained earnings, changes in shareholders’ equity and
cash flows for the years ended December 31, 2012 and 2011, and a summary of significant accounting policies
and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effective-
ness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of First National Financial Corporation as at December 31, 2012 and 2011, and its financial perfor-
mance and its cash flows for the years ended December 31, 2012 and 2011, in accordance with International
Financial Reporting Standards.
Toronto, Canada
February 26, 2013
Chartered Accountants
Licensed Public Accountants
38 First NatioNal FiNaNcial corporatioN
Consolidated Statements of Financial Position
($000s)
As at December 31
ASSETS
Restricted cash
Accounts receivable and sundry
Securities purchased under resale agreements and owned
Mortgages accumulated for sale or securitization
Mortgages pledged under securitization
Deferred placement fees receivable
Cash held as collateral for securitization
Purchased mortgage servicing rights
Mortgage and loan investments
Income taxes recoverable
Other assets
Total assets
LIABILITIES AND EquITy
Liabilities
Bank indebtedness
Obligations related to securities and mortgages
sold under repurchase agreements
Accounts payable and accrued liabilities
Securities sold under repurchase agreements and sold short
Debt related to securitized and participation mortgages
Debenture loan payable
Income taxes payable
Deferred tax liabilities
Total liabilities
Equity
Common shares
Preferred shares
Retained earnings
Total equity
Total liabilities and equity
See accompanying notes
On behalf of the Board:
Notes
2012
2011
3
15
5
3
4
3
8
6
18
7
10
16
15
11
13
18
18
17
17
$
334,962
$
243,684
51,256
452,534
808,522
43,581
657,626
850,938
13,032,043
9,761,921
41,919
69,493
3,881
58,509
56,882
4,771
159,396
180,872
–
54,546
3,556
60,118
$ 15,008,552
$ 11,922,458
$
185,044
$
80,608
500,608
59,745
451,875
664,424
52,880
659,299
13,272,810
9,957,219
181,275
184,689
1,790
32,900
–
30,300
$ 14,686,047
$ 11,629,419
$
122,671
$
122,671
97,394
102,440
322,505
97,394
72,974
293,039
$ 15,008,552
$ 11,922,458
John Brough
Robert Mitchell
2012 ANNUAL REPORT 39
Consolidated Statements of
Comprehensive Income and Retained Earnings
Notes
2012
2011
3
4
$
336,987
$
254,118
(246,736)
(184,291)
90,251
69,827
151,919
110,041
7,705
35,934
89,915
6,153
381,877
115,978
56,299
19,829
32,478
6,468
6,663
29,311
82,372
(18,485)
279,729
81,480
48,808
15,998
28,692
7,968
231,052
182,946
18
150,825
40,500
110,325
96,783
26,292
70,491
72,974
(80,859)
111,505
(109,022)
$
102,440
$
72,974
17
$ 1.76
$ 1.10
($000s, except earnings per unit)
Years ended December 31
REVENuE
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement fees
Gains on deferred placement fees
Mortgage investment income
Mortgage servicing income
Realized and unrealized gains (losses) on financial instruments
EXPENSES
Brokerage fees
Salaries and benefits
Interest
Other operating
Amortization of intangible assets
Income before income taxes
Income tax expense
Net income and comprehensive income for the year
Retained earnings, beginning of year
Less: dividends/distributions declared
Retained earnings, end of year
Earnings per share
Basic
See accompanying notes
40 First NatioNal FiNaNcial corporatioN
Consolidated Statements of Changes in Shareholders’ Equity
($000s)
Balance at January 1, 2012
Comprehensive income
Issuance of preferred shares
Dividends paid or declared
Balance at December 31, 2012
Balance at January 1, 2011
Comprehensive income
Issuance of preferred shares
Dividends paid or declared
Balance at December 31, 2011
See accompanying notes
Common
shares
Preferred
shares
Retained
earnings
Total
shareholders’
equity
$
122,671
$
97,394
$
72,974
$
293,039
$
$
–
–
–
–
–
–
122,671
$
97,394
122,671
$
–
–
–
–
–
97,394
110,325
110,325
–
(80,859)
102,440
111,505
70,491
–
$
$
–
(80,859)
322,505
234,176
70,491
97,394
$
$
–
(109,022)
(109,022)
$
122,671
$
97,394
$
72,974
$
293,039
2012 ANNUAL REPORT 41
Consolidated Statements of Cash Flows
($000s)
Years ended December 31
OPERATING ACTIVITIES
Net income for the year
Add (deduct) items not affecting cash:
Deferred income tax expense
Non-cash portion of gains on deferred placement fees
Increase in restricted cash
Net investment in mortgages pledged under securitization
Net increase in debt related to securitized mortgages
Amortization of deferred placement fees receivable
Amortization of purchased mortgage servicing rights
Amortization of property, plant and equipment
Amortization of intangible assets
Unrealized gains on financial instruments
Net change in non-cash working capital balances related to operations
Cash provided by (used in) operating activities
INVESTING ACTIVITIES
Additions to property, plant and equipment
Investment in cash held as collateral for securitization
Investment in mortgage and loan investments
Repayment of mortgage and loan investments
Cash provided by (used in) investing activities
FINANCING ACTIVITIES
Dividends/distributions paid
Issuance of preferred shares
Obligations related to securities and mortgages sold under repurchase agreements
Debt related to participation mortgages
Securities purchased under resale agreements and owned, net
Securities sold under repurchase agreements and sold short, net
Cash provided by (used in) financing activities
Net increase in bank indebtedness during the year
Bank indebtedness, beginning of year
Bank indebtedness, end of year
Supplemental cash flow information
Interest received
Interest paid
Income taxes paid
See accompanying notes
42 First NatioNal FiNaNcial corporatioN
2012
2011
$
110,325
$
70,491
2,600
(5,976)
(3,508)
(4,720)
(91,279)
(87,486)
(3,260,336)
(2,569,632)
3,353,695
2,613,535
22,363
24,771
890
2,059
6,468
(16,755)
124,054
995
1,856
7,968
(3,846)
50,424
41,953
(506,782)
$
166,007
$
(456,358)
(2,955)
(12,611)
(3,184)
(19,152)
(176,064)
(238,476)
197,090
129,580
$
5,460
$
(131,232)
$
(80,609)
$
(133,600)
–
(163,816)
(38,104)
205,092
(198,466)
96,481
490,166
69,202
(231,290)
225,919
$
(275,903)
$
516,878
(104,436)
(80,608)
(70,712)
(9,896)
$
(185,044)
$
(80,608)
$
398,094
$
261,027
260,246
32,554
187,933
33,356
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
($000s, except per unit amounts or unless otherwise noted)
Note 1
General Organization and Business
of First National Financial Corporation
Note 2
Significant Accounting Policies
First National Financial Corporation (the “Corpora-
tion” or “Company”) is the parent company of First
National Financial LP (“FNFLP”), a Canadian-based
originator, underwriter and servicer of predomi-
nantly prime residential (single-family and multi-unit)
and commercial mortgages. With over $67 billion
in mortgages under administration, FNFLP is
an originator and underwriter of mortgages and
a significant participant in the mortgage broker
distribution channel. Pursuant to a Plan of Arrange-
ment (the “Arrangement”) and an amalgamation
(the “Amalgamation”) effective January 1, 2011,
the Corporation succeeded First National Financial
Income Fund (the “Fund”) as the public holding
company invested in FNFLP. The Arrangement and
Amalgamation (together, the “Conversion”) were
used to convert the Fund into a corporate structure.
Effectively, the Conversion reorganized the owner-
ship interests in FNFLP such that all such interests are
now consolidated and held through the Corporation
in the same ratio as previously held by the Fund
and the Co-founders.
The Corporation is incorporated under the laws
of the Province of Ontario, Canada, and has its
registered office and principal place of business
located at 100 University Avenue, Toronto, Ontario.
The Corporation’s common and preferred shares
are listed on the Toronto Stock Exchange (“TSX”)
under the symbols FN and FN.PR.A, respectively.
2.1 Basis of preparation
The consolidated financial statements have been
prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the
International Accounting Standards Board (“IASB”).
The consolidated financial statements have been
prepared on a historical cost basis, except for
derivative financial instruments and financial assets
and financial liabilities that are recorded at fair value
through profit or loss and measured at fair value.
The carrying values of recognized assets and liabilities
that are hedged items in fair value hedges, and
otherwise carried at amortized cost, are adjusted to
record changes in fair value attributable to the risks
that are being hedged. The consolidated financial
statements are presented in Canadian dollars and all
values are rounded to the nearest thousand except
when otherwise indicated. The consolidated financial
statements were authorized for issue by the Board
of Directors on February 26, 2013.
2.2 Basis of consolidation
The consolidated financial statements comprise
the financial statements of the Company and its
subsidiaries, including FNFLP, First National Financial
GP Corporation (the general partner of FNFLP)
and FNFC Trust, a special purpose entity (“SPE”),
which is used to manage undivided co-ownership
interests in mortgage assets funded with Asset-Backed
Commercial Paper (“ABCP”). The consolidated
financial statements have been prepared using
consistent accounting policies for like transactions
and other events in similar circumstances.
All intercompany balances and revenues and
expenses have been eliminated on consolidation.
2.3 Use of estimates
The preparation of financial statements in conformity
with IFRS requires management to make estimates
and assumptions that affect the reported amounts
2012 ANNUAL REPORT 43
Notes to Consolidated Financial Statements
Where (i) or (ii) above applies to a fully proportion-
ate share of all or specifically identified cash flows,
the relevant accounting treatment is applied to that
proportion of the mortgage.
For securitized mortgages that do not meet
the criteria for derecognition, no gain or loss is
recognized at the time of the transaction. Instead,
net interest revenue is recognized over the term
of the mortgages. Interest revenue – securitized
mortgages represents interest received and accrued
on mortgage payments by borrowers and is net
of the amortization of capitalized origination fees.
Interest expense – securitized mortgages represents
financing costs to fund these mortgages, net of the
amortization of debt discounts or premiums.
Capitalized origination fees and debt discounts
or premiums are respectively amortized on an
effective yield basis over the term of the related
mortgages or debt.
Derecognition
A financial asset is derecognized when:
• The right to receive cash flows from the asset
has expired; and
• The Company has transferred its rights to receive
cash flows from the assets or has assumed an
obligation to pay the cash flows, received in full
without material delay to a third party under a
“pass-through” arrangement; and either (a) the
Company has transferred substantially all the risks
and rewards of the asset or (b) the Company
has neither transferred nor retained substantially
all of the risks and rewards of the asset, but has
transferred control of the asset.
of assets and liabilities, including contingencies,
at the date of the consolidated financial statements
and the reported amounts of revenue and expenses
during the reporting period. Actual results may differ
from those estimates. Major areas requiring use
of estimates by management are those that require
reporting of financial assets and liabilities at fair value.
2.4 Significant accounting policies
Revenue recognition
The Company earns revenue from placement,
securitization and servicing activities related to
its mortgage business. The majority of originated
mortgages are sold to institutional investors
through the placement of mortgages or funded
through securitization conduits. The Company
retains servicing rights on substantially all of the
mortgages it originates, providing the Company
with servicing fees.
intereSt revenue anD expenSe from mortgageS
pleDgeD unDer Securitization
The Company enters into securitization transactions
to fund a portion of its originated mortgages.
Upon transfer of these mortgages to securitization
vehicles, the Company receives cash proceeds from
the transaction. These proceeds are accounted
for as debt related to securitized mortgages and the
Company continues to hold the mortgages on its
consolidated statement of financial position, unless:
Substantially all of the risks and rewards
(i)
associated with the financial instruments have
been transferred, in which case the assets
are derecognized in full; or
A significant portion, but not all, of the risks
and rewards have been transferred. The asset
is derecognized entirely if the transferee has
the ability to sell the financial asset; otherwise,
the asset continues to be recognized to the
extent of the Company’s continuing involvement.
(ii)
44 First NatioNal FiNaNcial corporatioN
When the Company has transferred its rights
to receive cash flows from an asset or has entered
into a pass-through arrangement, and has neither
transferred nor retained substantially all of the risks
and rewards of the asset nor transferred control
of the asset, the asset is recognized to the extent of
the Company’s continuing involvement in the asset.
In that case, the Company also recognizes an
associated liability.
placement feeS anD DeferreD placement
feeS receivable
The Company enters into placement agreements
with institutional investors to purchase the mort-
gages that it originates. When mortgages are placed
with institutional investors, the Company transfers
the contractual right to receive mortgage cash flows
to the investors. Because it has transferred substan-
tially all the risks and rewards of these mortgages,
it has derecognized these assets. The Company
retains a residual interest representing the rights and
obligations associated with servicing the mortgages.
Placement fees are earned by the Company for its
origination and underwriting activities on a com-
pleted transaction basis when the mortgage is
funded. Amounts immediately collected or collectible
in excess of the mortgage principal are recognized as
placement fees. When placement fees and associated
servicing fees are earned over the term of the
related mortgages, the Company determines the
present value of the future stream of placement
fees and records a gain on deferred placement fees
and a deferred placement fees receivable. Since
quoted prices are generally not available for retained
interests, the Company estimates its value based on
the net present value of future expected cash flows,
calculated using management’s best estimates of
key assumptions related to expected prepayment
rates and discount rates commensurate with the
risks involved.
mortgage Servicing income
The Company services substantially all of the
mortgages that it originates, whether the mortgage
is placed with an institutional investor or transferred
to a securitization vehicle. In addition, mortgages
are serviced on behalf of third-party institutional
investors and securitization structures. For all
mortgages administered for investors or third
parties, the Company recognizes servicing income
when services are rendered. For mortgages placed
under deferred placement arrangements, the
Company retains the rights and obligations to service
the mortgages. The deferred placement fees
receivable is the present value of the excess retained
cash flows over normal servicing fee rates and is
reported as deferred placement revenue at the time
of placement. Servicing income related to mortgages
placed with institutional investors is recognized in
income over the life of the servicing obligation as
payments are received from mortgagors. Interest
income earned by the Company from holding cash
in trust related to servicing activities is classified
as mortgage servicing income.
mortgage inveStment income
The Company earns interest income from its
interest-bearing assets including deferred placement
fees receivable, mortgage and loan investments and
mortgages accumulated for sale or securitization.
Mortgage investment income is recognized on an
accrual basis.
Brokerage fees
Brokerage fees relating to the mortgages recorded
at fair value are expensed as incurred. Brokerage
fees relating to mortgages recorded at amortized
cost are deferred and amortized over the term
of the mortgages.
2012 ANNUAL REPORT 45
Notes to Consolidated Financial Statements
Mortgages pledged under securitization
Mortgages pledged under securitization are mort-
gages that the Company has originated and funded
with debt raised through the securitization markets.
The Company has a continuous involvement in
these mortgages, including the right to receive future
cash flows arising from these mortgages. Mortgages
pledged under securitization (except for mortgages
designated as held for trading, primarily mortgages
funded with bank-sponsored ABCP programs)
have been classified as loans and receivables and are
measured at their amortized cost using the effective
yield method. Certain mortgages (primarily those
funded under bank-sponsored ABCP programs)
are classified as fair value through profit or loss and
recorded at fair value. Origination costs, such as
brokerage fees and timely payment guarantee fees
that are directly attributable to the acquisition of
such assets, are deferred and amortized over the
term of the mortgages on an effective yield basis.
Debt related to securitized
and participation mortgages
Debt related to securitized mortgages represents
obligations related to the financing of mortgages
pledged under securitization. This debt is measured
at its amortized cost using the effective yield method.
Any discount/premium on the raising of these debts
that is directly attributable to the acquisition of such
liabilities is deferred and amortized over the term
of the debt obligations.
Debt related to participation mortgages repre-
sents obligations related to the financing of a portion
of commercial mortgages included in mortgage
and loan investments. These mortgages are subject
to participation agreements with other financial
institutions such that the Company’s investment
is subordinate to the other institution’s investment.
The Company has retained various rights to the
mortgages and a proportionately larger share of the
interest earned on these mortgages, such that the
full mortgage has been recorded on the Company’s
consolidated statement of financial position with an
offsetting debt. This debt is recorded at face value
and measured at its amortized cost.
Mortgages accumulated for sale
or securitization
Mortgages accumulated for sale are mortgages
funded for the purpose of placing with investors
and are classified as fair value through profit or
loss and are recorded at fair value. These mortgages
are held for terms usually not exceeding 90 days.
Mortgages accumulated for securitization are
mortgages funded pending securitization in the
Company’s various programs and are classified
as loans and receivables. These mortgages are
recorded at amortized cost.
Securities sold short and securities
purchased under resale agreements
Securities sold short consist of the short sale of
a bond. Bonds purchased under resale agreements
consist of the purchase of a bond with the commit-
ment by the Company to resell the bond to the
original seller at a specified price. The Company
uses the combination of bonds sold short and bonds
purchased under resale agreements to economically
hedge its mortgage commitments and the portion
of funded mortgages that it intends to securitize
in subsequent periods.
Bonds sold short are classified as fair value
through profit or loss and are recorded at fair value.
The accrued coupon on bonds sold short is recorded
as hedge expense. Bonds purchased under resale
agreements are carried at cost plus accrued interest,
which approximates their market value. The differ-
ence between the cost of the purchase and the
predetermined proceeds to be received on a resale
agreement is recorded over the term of the hedged
mortgages as an offset to hedge expense. Transac-
tions are recorded on a settlement date basis.
46 First NatioNal FiNaNcial corporatioN
Securities owned and securities sold
under repurchase agreements
The Company purchases bonds and enters into
bond repurchase agreements to close out economic
hedging positions when mortgages are sold to
securitization vehicles or institutional investors.
These transactions are accounted for in a
similar manner as the transactions described for
securities sold short and securities purchased
under resale agreements.
Mortgage and loan investments
Mortgage and loan investments are carried at their
outstanding principal balances adjusted for unamor-
tized premiums or discounts and are net of specific
provisions for credit losses, if any.
Mortgage and loan investments are recognized
as being impaired when the Company is no longer
reasonably assured of the timely collection of the
full amount of principal and interest. An allowance
for loan losses is established for mortgages and
loans that are known to be uncollectible. When
management considers there to be no probability
of collection, the investments are written off.
Mortgage and loan investments are classified
as loans and receivables, and certain commercial
mortgages that the Company has designated as fair
value through profit or loss, and are recorded at
fair value.
Intangible assets
Intangible assets are comprised of broker relation-
ships and customer service contracts and arose
in connection with the initial public offering (“IPO”)
in 2006. Intangible assets are subject to annual
impairment review if there are events or changes in
circumstances that indicate the carrying amount
may not be recoverable.
Intangible assets with finite useful lives are
amortized on a straight-line basis over their esti-
mated useful lives as follows:
Broker relationships
Straight-line over 10 years
Investor servicing contracts
Straight-line over 5 years
Goodwill
Goodwill represents the price paid for the Corpo-
ration’s business in excess of the fair value of the
net tangible assets and identifiable intangible assets
acquired in connection with the IPO. Goodwill is
reviewed annually for impairment or more frequently
when an event or change in circumstances indicates
that the asset might be impaired.
Property, plant and equipment
Property, plant and equipment are recorded at cost,
less accumulated amortization, at the following
annual rates and bases:
Computer equipment
30% declining balance
Office equipment
20% declining balance
Leasehold improvements
Computer software
Straight-line over the
term of the lease
30% declining balance
except for a computer
licence, which is straight-
line over 10 years
Property, plant and equipment are subject to an
impairment review if there are events or changes in
circumstances that indicate the carrying amount
may not be recoverable.
2012 ANNUAL REPORT 47
Notes to Consolidated Financial Statements
Purchased mortgage servicing rights
The Company purchases the rights to service
mortgages from third parties. Purchased mortgage
servicing rights are initially recorded at cost and
charged to income over the life of the underlying
mortgage servicing obligation. The fair value of such
rights is determined on a periodic basis to assess
the continued recoverability of the unamortized cost
in relation to estimated future cash flows associated
with the underlying serviced assets. Any loss arising
from an excess of the unamortized cost over the fair
value is immediately recorded as a charge to income.
Restricted cash
Restricted cash represents principal and interest
collected on mortgages pledged under securitization
that is held in trust until the repayment of debt
related to these mortgages can be made in a
subsequent period.
Bank indebtedness
Bank indebtedness consists of bank indebtedness
net of cash balances with banks.
The income tax provision consists of current income
taxes and deferred income taxes. Current and
deferred taxes relating to items in the Company’s
equity are recorded directly against equity.
Current income taxes are amounts expected to
be payable or recoverable as the result of operations
in the current year and any adjustment to tax
payable/recoverable recorded in previous years.
Deferred income taxes arise on temporary
differences between the carrying amounts of assets
and liabilities on the consolidated statements of
financial position and their tax bases. Deferred tax
liabilities are generally recognized for all taxable
temporary differences and deferred tax assets are
recognized to the extent that future realization
of the tax benefit is probable. Deferred tax is
calculated using the tax rates expected to apply in
the periods in which the assets will be realized or the
liabilities settled. Deferred tax assets and liabilities
are offset when they arise in the same tax reporting
group and relate to income taxes levied by the same
taxation authority, and when a legal right to offset
exists in the entity.
Cash held as collateral under securitization
Cash held as collateral under securitization repre-
sents cash-based credit enhancements held by
various securitization vehicles, including FNFC Trust
and Computershare Trust Company of Canada
as custodian for National Housing Act Mortgage-
Backed Securities (“NHA MBS”) programs.
Earnings per common share
The Company presents earnings per share (“EPS”)
amounts for its common shares. EPS is calculated
by dividing the net earnings attributable to common
shareholders of the Company by the weighted
average number of common shares outstanding
during the year.
Income taxes
The Company accounts for income taxes in accor-
dance with the liability method of tax allocation.
Under this method, the provision for income taxes
is calculated based on income tax laws and income
tax rates substantively enacted as at the dates of
the consolidated statements of financial position.
Financial assets and liabilities
The Company classifies its financial assets as either
financial instruments at fair value through profit or
loss or loans and receivables. Financial liabilities are
classified as either held at fair value through profit or
loss or at amortized cost. Management determines
the classification of financial assets and liabilities at
initial recognition.
48 First NatioNal FiNaNcial corporatioN
financial aSSetS anD financial liabilitieS helD
at fair value through profit or loSS
Financial instruments are classified in this category
if they are held for trading or if they are designated
by management at fair value through profit or loss
at inception.
Financial instruments are classified as held for
trading if they are acquired principally for the
purpose of selling in the short term. Financial assets
and financial liabilities may be designated at fair value
through profit or loss when:
(i)
the designation eliminates or significantly reduces
a measurement or recognition inconsistency that
would otherwise arise from measuring assets
or liabilities or recognizing the gains and losses
on them on a different basis; or
a group of financial assets and/or financial
liabilities is managed and its performance
evaluated on a fair value basis.
(ii)
The Company has elected to measure certain of its
assets at fair value through profit or loss. The most
significant of these assets include: a large portion of
mortgages pledged under securitization and funded
with ABCP-related debt, deferred placement fees
receivable, certain commercial mortgages within
mortgage and loan investments, and certain mort-
gages funded with mortgage-backed securities
(“MBS”) debt. The mortgages funded with MBS
debt were previously funded by ABCP debt and
as such have retained their classification as held for
trading (together with other ABCP-funded mort-
gages, “HFT mortgages”). For the HFT mortgages,
the Company has entered into swaps to convert the
mortgages from fixed rate to floating rate in order
to match the mortgages with the 30-day floating rate
funding provided by the ABCP notes. The swaps are
derivatives and are required by IFRS to be accounted
for at fair value. This value can change significantly
with the passage of time as the interest rate environ-
ment changes. In order to avoid a significant
accounting mismatch, the Company has measured
the swapped mortgages at fair value as well, so that
the asset and related liability values will move
inversely as interest rates change. The cash flows
related to deferred placement fees receivable are
typically received over five- to 10-year terms. These
cash flows are subject to prepayment volatility, as the
mortgages underlying the deferred placement fees
receivable can experience unscheduled prepayments.
As well, the Company pledges these assets under the
bank credit facility. Accordingly, the Company
manages these assets on a fair value basis.
Financial assets and financial liabilities held at fair
value through profit or loss are initially recognized
at fair value. Subsequent gains and losses arising from
changes in fair value are recognized directly in the
consolidated statements of comprehensive income
and retained earnings.
Held for trading non-derivative financial assets
can only be transferred out of the held at fair value
through profit or loss category in the following
circumstances: to the available-for-sale category,
where, in rare circumstances, they are no longer
held for the purpose of selling or repurchasing in the
near term; or to the loans and receivables category,
where they are no longer held for the purpose of
selling or repurchasing in the near term and they
would have met the definition of a loan and receiv-
able at the date of reclassification and the Company
has the intent and ability to hold the assets for the
foreseeable future or until maturity.
loanS anD receivableS
Loans and receivables are non-derivative financial
assets with fixed or determinable payments that are
not quoted in an active market and it is expected
that substantially all of the initial investment will be
recovered, other than because of credit deterioration.
Loans and receivables are initially recognized at cost,
including direct and incremental transaction costs.
They are subsequently valued at amortized cost.
2012 ANNUAL REPORT 49
Notes to Consolidated Financial Statements
helD-to-maturity
Held-to-maturity assets are non-derivative financial
assets with fixed or determinable payments and fixed
maturities that the Company’s management has the
positive intention and ability to hold to maturity.
These assets are initially recognized at cost, including
direct and incremental transaction costs. They are
subsequently valued at amortized cost using the
effective interest method.
Held-to-maturity assets can be reclassified to the
available-for-sale category if the portfolio becomes
tainted following the sale of other than an insignifi-
cant amount of held-to-maturity assets prior to
their maturity.
Derivative financial instruments
Derivatives are categorized as trading unless they
are designated as hedging instruments. Derivative
contracts are initially recognized at fair value on the
date on which a derivative contract is entered into
and are subsequently remeasured at their fair value,
with the changes in fair value recognized in income
as they occur. Positive values are recorded as assets
and negative values are recorded as liabilities.
The Company enters into interest rate swaps to
manage its interest rate exposures associated with
funding fixed-rate receivables with floating-rate
debt and to convert the fixed-rate debentures into
floating-rate debt. These contracts are negotiated
over-the-counter. Interest rate swaps require the
periodic exchange of payments without the exchange
of the notional principal amount on which the
payments are based. The Company’s policy is not
to utilize derivative financial instruments for trading
or speculative purposes.
Hedge accounting
At the inception of a hedging relationship, the
Company documents the relationship between the
hedging instruments and the hedged items, its risk
management objective, its strategy for undertaking
the hedge and its assessment of whether or not the
hedging instruments are highly effective in offsetting
the changes attributable to the hedged risks in the
hedged items.
For fair value hedges, changes in the fair value
of derivatives that are designated and qualify as fair
value hedging instruments are recorded in the
consolidated statement of comprehensive income
and retained earnings, together with any changes
in the fair value of the hedged asset or liability that
are attributable to the hedged risk. The changes
in fair value attributable to the hedged risk are
accounted for as basis adjustment to the hedged
item. If the hedge no longer meets the criteria for
hedge accounting, the adjustment to the carrying
amount of a hedged item for which the effective
interest method is used is amortized to the consoli-
dated statements of comprehensive income and
retained earnings over the period to maturity
or derecognition.
Note 3
Mortgages Pledged under Securitization
The Company securitizes residential and commercial
mortgages in order to raise debt to fund these
mortgages. Most of these securitizations consist of
the transfer of fixed and floating rate mortgages into
securitization programs, such as ABCP, NHA MBS
and the Canada Mortgage Bonds (“CMB”) program.
In these securitizations, the Company transfers the
assets to SPEs for cash, and incurs interest-bearing
obligations typically matched to the term of the
mortgages. These securitizations do not qualify for
derecognition, although the SPEs and other securiti-
zation vehicles have no recourse to the Company’s
other assets for failure of the mortgages to make
payments when due.
50 First NatioNal FiNaNcial corporatioN
As part of the ABCP transactions, the Company
provides cash collateral for credit enhancement
purposes as required by the rating agencies. Credit
exposure to securitized mortgages is generally
limited to this cash collateral. The principal and
interest payments on the securitized mortgages are
paid to the Company by the SPEs monthly over the
term of the mortgages. The full amount of the cash
collateral is recorded as an asset and the Company
anticipates full recovery of these amounts. NHA
MBS securitizations may also require cash collateral
in some circumstances. As at December 31, 2012,
the cash held as collateral for securitization was
$69,493 (2011 – $56,882).
The following table compares the carrying amount of mortgages pledged under securitization and the
associated debt:
Securitized mortgages at carrying cost
Mark to market
Capitalized origination costs
Debt discounts
Add:
Principal portion of payments held in restricted cash
Participation debt
Securitized mortgages at carrying cost
Mark to market
Capitalized origination costs
Debt discounts
Add:
Principal portion of payments held in restricted cash
Participation debt
2012
Carrying amount
of securitized
mortgages
Carrying amount
of associated
liabilities
$ 12,947,870
$ 13,249,779
29,043
55,130
–
–
–
(8,067)
13,032,043
13,241,712
311,979
–
–
31,098
$ 13,344,022
$ 13,272,810
2011
Carrying amount
of securitized
mortgages
Carrying amount
of associated
liabilities
$ 9,679,750
$ 9,892,541
32,389
49,782
–
9,761,921
225,707
–
–
–
(4,524)
9,888,017
–
69,202
$ 9,987,628
$ 9,957,219
The principal portion of payments held in restricted
cash represents payments on account of mortgages
pledged under securitization which has been received
at year end but has not yet been applied to reduce
the associated debt. This cash is applied to pay down
the debt in the month subsequent to year end. In
order to compare the components of mortgages
pledged under securitization to securitization debt,
this amount is added to the carrying value of
mortgages in the above table.
2012 ANNUAL REPORT 51
Notes to Consolidated Financial Statements
The changes in capitalized origination costs for the year ended December 31 are summarized as follows:
2012
49,782
$
28,809
(23,461)
2011
47,190
25,152
(22,560)
55,130
$
49,782
$
$
The following table summarizes the mortgages
pledged under securitization that are past due:
Arrears (days)
31 to 60
61 to 90
Greater than 90
December 31
2012
December 31
2011
$
$
42,185
$
45,801
13,716
30,263
86,164
$
6,465
38,306
90,572
Interest revenue – securitized mortgages consists
of $82,324 (2011 – $43,728) of interest revenue
related to ABCP-funded mortgages, which are
mostly measured at fair value, and $254,663 (2011 –
$210,390) of interest revenue related to mortgages
pledged under securitization and securitized mort-
gages included in HFT mortgages.
The Company uses various assumptions to value
the HFT mortgages, which are set out in the tables
below, including the rate of unscheduled prepay-
ment. Accordingly, HFT mortgages are subject to
measurement uncertainty. The effect of variations
between actual experience and assumptions will
be recorded in future statements of comprehensive
income. Key economic weighted average assump-
tions and the sensitivities of the current carrying
values to immediate 10% and 20% adverse changes
in those assumptions are as follows:
Opening balance, January 1
Add: new origination costs capitalized in the year
Less: costs amortized in the year
Ending balance, December 31
During the year ended December 31, 2012, the
Company advanced funds and transferred into the
securitization vehicles $4,718,680 (2011 – $4,004,716)
of new mortgages.
As at December 31, 2012, mortgages pledged
under securitization include $12,691,496 (2011 –
$9,220,847) of insured mortgages and $256,374
(2011 – $496,584) of uninsured mortgages.
The contractual maturity profile of the mortgages
pledged under securitization programs is summarized
as follows:
2013
2014
2015
2016
2017 and thereafter
Add:
Capitalized origination costs
Fair value premium – HFT mortgages
$ 1,389,485
1,420,999
2,389,793
3,160,208
4,587,385
12,947,870
55,130
29,043
$ 13,032,043
Except for approximately $1.0 billion (2011 –
$521 million) of securitized mortgages included in
HFT mortgages, the mortgages securitized through
NHA MBS and CMB programs have been classified
as loans and receivables. These mortgages are
carried at par plus adjustment for unamortized
origination costs. Most mortgages in bank-sponsored
ABCP programs have been classified as fair value
through profit or loss.
52 First NatioNal FiNaNcial corporatioN
HFT mortgages
Average life (in months)(1)
Prepayment speed assumption (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
HFT mortgages
Average life (in months)(1)
Prepayment speed assumption (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
December 31, 2012
Commercial
mortgages
Residential
mortgages
$
418,303
$ 2,367,744
18
11.7%
21
42
2.2%
1,352
2,682
$
$
$
$
35
10.9%
451
895
2.3%
12,312
24,518
$
$
$
$
December 31, 2011
Commercial
mortgages
Residential
mortgages
$
487,959
$ 2,161,550
14
12.7%
74
145
2.3%
2,011
4,005
$
$
$
$
44
15.0%
649
1,280
2.4%
10,867
21,629
$
$
$
$
(1) The weighted average life of prepayable assets in periods (for example, months or years) can be calculated by multiplying
the principal collections expected in each future period by the number of periods until that future period, summing those products
and dividing the sum by the initial principal balance.
These sensitivities are hypothetical and should be
used with caution. As the figures indicate, changes
in carrying value based on a 10% or 20% variation
in assumptions generally cannot be extrapolated
because the relationship of the change in assumption
to the change in fair value may not be linear. Also, in
these tables, the effect of a variation in a particular
assumption on the fair value is calculated without
changing any other assumption; in reality, changes
in one factor may result in changes in another (for
example, increases in market interest rates may
result in lower prepayments), which might magnify
or counteract the sensitivities.
Note 4
Deferred Placement Fees Receivable
The Company enters into transactions with institu-
tional investors to sell primarily fixed-rate mortgages
in which placement fees are received over time
as well as at the time of the mortgage placement.
These mortgages are derecognized when substan-
tially all of the risks and rewards of ownership are
transferred and the Company has minimal exposure
to the variability of future cash flows from these
mortgages. The investors have no recourse to the
Company’s other assets for failure of mortgagors
to pay when due.
2012 ANNUAL REPORT 53
Notes to Consolidated Financial Statements
During the year ended December 31, 2012,
$1,153,863 (2011 – $1,012,743) of mortgages were
placed with institutional investors, which created
gains on deferred placement fees of $7,705 (2011 –
$6,663). Cash receipts on deferred placement fees
receivable for the year ended December 31, 2012
were $23,695 (2011 – $28,261).
The Company uses various assumptions to
value the deferred placement fees receivable, which
are set out in the table below, including the rate of
unscheduled prepayments. Accordingly, the deferred
placement fees receivable are subject to measure-
ment uncertainty. An assumption of no credit losses
was used, commensurate with the credit quality of
the investors. The effect of variations between actual
experience and assumptions will be recorded in
future statements of comprehensive income and
retained earnings. Key economic weighted average
assumptions and the sensitivity of the current
carrying value of residual cash flows to immediate
10% and 20% adverse changes in those assumptions
are summarized as follows:
Fair value of deferred placement fees receivable
Average life (in months) (1)
Prepayment speed assumption (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Residual cash flows discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Fair value of deferred placement fees receivable
Average life (in months) (1)
Prepayment speed assumption (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Residual cash flows discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
December 31, 2012
Commercial
mortgages
Residential
mortgages
$
$
$
$
$
37,075
$
45
0.4%
10
19
4.4%
359
710
$
$
$
$
4,844
14
15.0%
45
90
4.1%
10
20
December 31, 2011
Commercial
mortgages
Residential
mortgages
$
$
$
$
$
44,124
$
14,385
50
0.6%
26
51
4.4%
427
845
$
$
$
$
20
15.0%
172
340
4.1%
48
95
(1) The weighted average life of prepayable assets in periods (for example, months or years) can be calculated by multiplying
the principal collections expected in each future period by the number of periods until that future period, summing those products,
and dividing the sum by the initial principal balance.
54 First NatioNal FiNaNcial corporatioN
These sensitivities are hypothetical and should be
used with caution. As the figures indicate, changes
in carrying value based on a 10% or 20% variation
in assumptions generally cannot be extrapolated
because the relationship of the change in assumption
to the change in fair value may not be linear. Also,
in these tables, the effect of a variation in a particular
assumption on the fair value of the retained interest
is calculated without changing any other assumption;
in reality, changes in one factor may result in changes
in another (for example, increases in market interest
rates may result in lower prepayments), which
might magnify or counteract the sensitivities.
The Company estimates that the expected cash
flows from the receipt of payments on the deferred
placement fees receivable will be as follows:
held for trading approximate their carrying values
due to their short-term nature. The following
table summarizes the components of mortgages
according to their classification:
2012
2011
Mortgages
accumulated
for securitization
$
800,768
$
846,694
Mortgages
accumulated
for sale
7,754
4,244
$
808,522
$
850,938
Note 6
Mortgage and Loan Investments
2013
2014
2015
2016
2017 and thereafter
$
18,421
8,646
5,226
4,507
9,268
As at December 31, 2012, mortgage and loan
investments consist primarily of commercial first
and second mortgages held for various terms,
the majority of which mature within one year.
Mortgage and loan investments consist of
$
46,068
the following:
Note 5
Mortgages Accumulated for Sale
or Securitization
Mortgages accumulated for sale or securitization
consist of mortgages the Company has originated
for its own securitization programs or mortgages
funded for placement with institutional investors.
Mortgages originated for the Company’s own
securitization programs are classified as loans and
receivables and are recorded at amortized cost.
Mortgages funded for placement with institutional
investors are designated as held for trading and
recorded at fair value. The fair values of mortgages
Mortgage loans,
classified as loans
and receivables
Mortgage loans,
designated as fair
value through
profit or loss
2012
2011
$
138,811
$
175,071
20,585
5,801
$
159,396
$
180,872
Mortgage and loan investments classified as loans
and receivables are carried at outstanding principal
balances adjusted for unamortized premiums or
discounts and are net of specific provisions for credit
losses, if any.
2012 ANNUAL REPORT 55
Notes to Consolidated Financial Statements
The following table discloses the composition of the
Company’s portfolio of mortgage and loan invest-
ments by geographic region as at December 31, 2012:
Province/territory
Portfolio
balance
Percentage
of portfolio
Alberta
$
1,636 %
British Columbia
Manitoba
New Brunswick
Newfoundland
and Labrador
Nova Scotia
Ontario
Quebec
Yukon
1,381
25,742
5,504
98
4,712
109,383
9,982
958
1.03
0.87
16.15
3.45
0.06
2.96
68.62
6.26
0.60
$
159,396 %
100.00
These balances include gains from mark to market
of $125 (2011 – $520) and are net of provisions
for credit losses of $5,679 (2011 – $4,831). The
portfolio contains $543 (2011 – $1,001) of insured
mortgages and $155,744 (2011 – $184,298) of
uninsured mortgage and loan investments as at
December 31, 2012.
The following table discloses the mortgages
that are past due as at December 31:
Arrears (days)
31 to 60
61 to 90
Greater than 90
2012
12,699
$
181
7,366
2011
7,470
221
7,266
20,246
$
14,957
$
$
Of the above total amount, the Company considers
$6,938 (2011 – $6,121) as impaired, for which it has
provided an allowance for potential loss of $5,679
(2011 – $4,831) as at December 31, 2012.
The maturity profile in the table below is based on the earlier of contractual renewal or maturity dates.
2012
Residential
Commercial
2013
$
6,067
$
2014
32
93,742
47,007
$ 99,809
$ 47,039
2015
2016
332
–
332
$
$
98
802
900
$
$
2017 and
thereafter
Book
value
2011
Book
value
$
427
$
6,956
$
5,182
10,889
152,440
175,690
$ 11,316
$ 159,396
$ 180,872
Interest income for the year was $8,848 (2011 – $8,643) and is included in mortgage investment income on
the consolidated statements of comprehensive income and retained earnings.
56 First NatioNal FiNaNcial corporatioN
Note 7
Other Assets
The components of other assets are as follows as
at December 31:
Property, plant and
equipment, net
Intangible assets, net
Goodwill
2012
2011
$
$
6,706
$
18,064
29,776
54,546
$
5,811
24,531
29,776
60,118
The intangible assets have a remaining amortization
period of less than five years.
For the purpose of testing goodwill for impair-
ment, the cash-generating unit is considered to be
the Corporation as a whole, since the goodwill
relates to the excess purchase price paid for the
Corporation’s business in connection with the IPO.
The recoverable amount of the Corporation is
calculated by reference to the Corporation’s market
capitalization, mortgages under administration,
origination volume and profitability. These factors
indicate that the Corporation’s recoverable amount
exceeds the carrying value of its net assets and,
accordingly, goodwill is not impaired.
Note 8
Purchased Mortgage Servicing Rights
Purchased mortgage servicing rights consist of the following components:
2012
2011
Cost
Accumulated
amortization
Net book
value
Cost
Accumulated
amortization
Net book
value
Third-party commercial
mortgage
servicing rights
$
3,614
$
3,061
$
553
$
3,614
$
2,913
$
701
Commercial mortgage-
backed securities
primary and master
servicing rights
8,705
$
12,319
$
5,377
8,438
$
3,328
3,881
8,705
$
12,319
$
4,635
7,548
$
4,070
4,771
The Company did not purchase any new servicing rights during the years ended December 31, 2012 and 2011.
Amortization charged to income for the year ended December 31, 2012 was $890 (2011 – $995).
2012 ANNUAL REPORT 57
Notes to Consolidated Financial Statements
Note 9
Mortgages under Administration
As at December 31, 2012, the Company had
mortgages under administration of $67,260,086
(2011 – $59,598,596), including mortgages held
on the Company’s consolidated statements of
financial position. Mortgages under administration
are serviced for financial institutions such as banks,
insurance companies, pension funds, mutual funds,
trust companies, credit unions and securitization
vehicles. As at December 31, 2012, the Company
administered 218,267 mortgages (2011 – 193,250)
for 90 institutional investors (2011 – 92), with an
average remaining term to maturity of 42 months
(2011 – 41 months).
Mortgages under administration are serviced as follows:
Institutional investors
Mortgages accumulated for sale or securitization and mortgage and loan investments
Securitization vehicles, deferred placement investors
Mortgages pledged under securitization
CMBS conduits
2012
2011
$ 44,620,651
$ 39,562,777
967,918
4,844,380
12,947,869
3,879,268
1,031,810
4,920,105
9,761,921
4,321,983
$ 67,260,086
$ 59,598,596
The Company’s exposure to credit loss is limited
to mortgages under administration totalling
$406,589 (2011 – $619,165), of which $22,415
of mortgages have principal and interest payments
outstanding as at December 31, 2012 (2011 –
$25,378). The Company incurred actual credit
losses, net of recoveries, of $3,234 during the year
ended December 31, 2012 (2011 – $1,854). As
at December 31, 2012, the Company has $2,556
(2011 – $3,995) of uninsured non-performing
mortgages (net of provisions for credit losses)
included in accounts receivable and sundry.
The Company maintains trust accounts on behalf
of the investors it represents. The Company also
holds municipal tax funds in escrow for mortgagors.
Since the Company does not hold a beneficial
interest in these funds, they are not presented on
the consolidated statements of financial position.
The aggregate of these accounts as at December 31,
2012 was $419,368 (2011 – $424,990).
Note 10
Bank Indebtedness
Bank indebtedness includes a revolving line of credit
of $545,000 (2011 – $125,000) maturing in Decem-
ber 2016, of which $197,717 (2011 – $66,403) was
drawn as at December 31, 2012 and against which
the following have been pledged as collateral:
(a)
a general security agreement over all assets,
other than real property, of the Company; and
(b) a general assignment of all mortgages owned
by the Company.
The revolving line of credit bears a variable rate
of interest based on prime and bankers’
acceptance rates.
58 First NatioNal FiNaNcial corporatioN
Note 11
Debt Related to Securitized and
Participation Mortgages
Note 12
Swap Contracts
Debt related to securitized mortgages represents
the funding for mortgages pledged under NHA MBS,
CMB and ABCP programs. As at December 31,
2012, debt related to securitized mortgages
was $13,241,712 (2011 – $9,888,017), net of
unamortized discounts of $8,067 (2011 – $4,524).
A comparison of the carrying amounts of the
pledged mortgages and the related debt is sum-
marized in Note 3.
As at December 31, 2012, debt related to partici-
pation mortgages was $31,098 (2011 – $69,202).
Debt related to securitized and participation
mortgages is reduced on a monthly basis when
the principal payments received from the mortgages
are applied. Debt discounts and premiums are
amortized over the term of each debt on an
effective yield basis.
Swaps are over-the-counter contracts in which
two counterparties exchange a series of cash
flows based on agreed-upon rates to a notional
amount. The Company used an interest rate
swap to manage interest rate exposure relating
to variability of interest earned on a portion
of mortgages accumulated for sale held on the
consolidated statement of financial position.
The swap agreement that the Company entered
into was an interest rate swap where two counter-
parties exchange a series of payments based on
different interest rates applied to a notional
amount in a single currency.
The following tables present, by remaining term
to maturity, the notional amounts and fair values
of the swap contract that do not qualify for hedge
accounting as at December 31, 2012 and 2011:
Less than
3 years
3 to 5 years
6 to 10 years
Total notional
amount
Fair value
2012
Interest rate swap contract
$
224,261
$ 1,408,997
$
457,816
$ 2,091,075
$
3,224
Less than
3 years
3 to 5 years
6 to 10 years
Total notional
amount
Fair value
2011
Interest rate swap contract
$
369,852
$
915,712
$
16,112
$ 1,301,676
$
(1,009)
Positive fair values of the interest rate swap contracts
are included in accounts receivable, and sundry and
negative fair values are included in accounts payable
and accrued liabilities on the consolidated statements
of financial position.
Note 13
Debenture Loan Payable
On May 7, 2010, the Fund issued $175 million of
five-year term senior secured debentures with an
interest rate of 5.07%, maturing on May 7, 2015.
Pursuant to the Conversion, the Corporation
assumed all liabilities related to the debentures.
2012 ANNUAL REPORT 59
Notes to Consolidated Financial Statements
The debentures are secured on a pari-passu basis
with the security under the one-year revolving line
of credit described in bank indebtedness on advance.
The net proceeds of the issuance were loaned to
FNFLP at an interest rate of 5.1025% per annum.
The Company used the proceeds of the debenture
loan to repay a portion of its bank indebtedness
under its existing bank credit facility. On the same
date, the Company entered into a swap agreement
to receive a 5.07% fixed coupon and pay monthly
CDOR+2.134%, effectively protecting the Company
against changes in fair value due to changes in interest
rates. The swap agreement has been designated as a
fair value hedge and matures on the due date of the
debenture loan. The Company has a full guarantee
on the debentures and the costs relating to the
debenture issue have been borne by the Company.
been sold to institutional investors while others will
expire before being drawn down. Accordingly, these
amounts do not necessarily represent future cash
requirements of the Company.
In the normal course of business, the Company
enters into a variety of guarantees. Guarantees
include contracts where the Company may be
required to make payments to a third party, based
on changes in the value of an asset or liability that
the third party holds. In addition, contracts under
which the Company may be required to make
payments if a third party fails to perform under the
terms of the contract (such as mortgage servicing
contracts) are considered guarantees. The Company
has determined that the estimated potential loss
from these guarantees is insignificant.
Note 14
Commitments, Guarantees
and Contingencies
As at December 31, 2012, the Company has the
following operating lease commitments for its
office premises:
Note 15
Securities Transactions under Repurchase
and Resale Transactions
The Company’s outstanding securities purchased
under resale agreements and securities sold under
repurchase agreements have a remaining term to
maturity of less than one month.
2013
2014
2015
2016
2017 and thereafter
$
4,050
4,052
3,953
3,519
2,955
$
18,529
Outstanding commitments for future advances on
mortgages with terms of one to 10 years amounted
to $641,060 as at December 31, 2012 (2011 –
$1,814,084). The commitments generally remain
open for a period of up to 90 days. These commit-
ments have credit and interest rate risk profiles
similar to those mortgages that are currently under
administration. Certain of these commitments have
Note 16
Obligations Related to Securities and
Mortgages Sold under
Repurchase Agreements
The Company uses repurchase agreements to fund
specific mortgages included in mortgages accumu-
lated for sale or securitization. The current contracts
are with financial institutions, are based on bankers’
acceptance rates and mature on or before Febru-
ary 28, 2013. Such agreements are entered into
concurrently with a total return swap which, with
the mortgage sale, is the economic equivalent
of a repurchase agreement.
60 First NatioNal FiNaNcial corporatioN
Note 17
Shareholders’ Equity
(a) Authorized
Unlimited number of common shares
Unlimited number of cumulative five-year rate reset preferred shares, Class A Series 1
Unlimited number of cumulative five-year rate reset preferred shares, Class A Series 2
(b) Capital stock activities
Balance, December 31, 2011 and 2012
59,967,429
$
122,671
4,000,000
$
97,394
Common shares
Preferred shares
(c) Preferred shares
On January 25, 2011, the Company issued
4 million Class A Series 1 Preferred Shares at
a price of $25.00 per share for gross proceeds
of $100,000 before issue expenses.
Holders of the Class A Series 1 Preferred
Shares are entitled to receive a cumulative
quarterly fixed dividend yielding 4.65% annually
for the initial period ending March 31, 2016.
Thereafter, the dividend rate may be reset every
five years at a rate equal to the five-year Govern-
ment of Canada bond yield plus 2.07%, as and
when approved by the Board of Directors.
Holders of Class A Series 1 Preferred Shares
have the right, at their option, to convert their
shares into cumulative, floating-rate Class A
Preferred Shares, Series 2 (“Series 2 Preferred
Shares”), subject to certain conditions, on
March 31, 2016 and on March 31 every five
years thereafter. Holders of the Series 2
Preferred Shares will be entitled to receive
cumulative quarterly floating dividends at a rate
equal to the three-month Government of
Canada treasury bill yield plus 2.07% as and
when declared by the Board of Directors.
Preferred shares do not have voting rights.
The par value per preferred share is $25.
(d) Earnings per share
Net income
Less: dividends declared on preferred shares
Net earnings attributable to common shareholders
Number of common shares outstanding
Basic earnings per common share
2012
110,325
(4,650)
105,675
$
$
$
$
2011
70,491
(4,316)
66,175
59,967,429
59,967,429
$ 1.76
$ 1.10
2012 ANNUAL REPORT 61
Notes to Consolidated Financial Statements
Note 18
Income Taxes
The major components of deferred tax expense (recovery) for the year ended December 31 consists
of the following:
Income taxes relating to prior year
Changes to tax legislation
Relates to origination and reversal of timing differences
2012
187
689
1,724
2,600
$
$
2011
–
–
(3,508)
(3,508)
$
$
The major components of current income tax expense for the year ended December 31 consists of
the following:
Income taxes relating to prior year
Income taxes relating to the year
Changes to tax legislation
2012
(262)
$
38,500
(338)
2011
–
29,800
–
37,900
$
29,800
$
$
The effective income tax rate reported in the consolidated statements of comprehensive income and retained
earnings varies from the Canadian tax rate of 26.3% for the year ended December 31, 2012 (2011 – 28%)
for the following reasons:
Company’s statutory tax rate
Income before income taxes
Income tax at statutory tax rate
Increase (decrease) resulting from:
True-up from prior year
Permanent differences
Differences in current and future tax rates
Change in tax legislation
Other
Income tax expense
2012
26.30%
$
150,825
$
39,682
(75)
397
776
(338)
58
2011
28.00%
96,783
27,099
–
585
(1,320)
–
(72)
$
40,500
$
26,292
62 First NatioNal FiNaNcial corporatioN
Significant components of the Company’s deferred tax liabilities for the year ended December 31 are
as follows:
Deferred placement fees receivable
Capitalized broker fees
Carrying values of mortgages pledged under securitization in excess of tax values
Intangible assets
Unamortized discount on debt related to securitized mortgages
Cumulative eligible capital property
Losses on interest rate swaps
Loan loss reserves not deducted for tax purposes
Debenture issuance costs
Share issuance costs
Other
Deferred tax liabilities
2012
$
11,025
$
14,499
8,168
4,751
2,122
(6,502)
(1,051)
(1,583)
(117)
(644)
2,232
2011
15,008
12,704
8,391
6,257
1,156
(6,711)
(4,988)
(2,543)
(162)
(840)
2,028
$
32,900
$
30,300
The movement in significant components of the Company’s deferred tax liabilities and assets for the year
ended December 31, 2012 is as follows:
Deferred income tax liabilities
Deferred placement fees receivable
Capitalized broker fees
Carrying values of mortgages pledged under securitization
in excess of tax values
Intangible assets
Unamortized discount on debt related to securitized mortgages
Other
As at
January 1
2012
Recognized
in income
As at
December 31
2012
$
15,008
$
(3,983)
$
12,704
1,795
8,391
6,257
1,156
2,028
(223)
(1,506)
966
204
11,025
14,499
8,168
4,751
2,122
2,232
Total deferred income tax liabilities
$
45,544
$
(2,747)
$
42,797
Deferred income tax assets
Cumulative eligible capital property
Losses on interest rate swaps
Loan loss reserves not deducted for tax purposes
Debenture issuance costs
Share issuance costs
Total deferred income tax assets
Net deferred income tax liabilities
(6,711)
(4,988)
(2,543)
(162)
(840)
(15,244)
30,300
$
$
$
$
209
3,937
960
45
196
5,347
2,600
$
$
(6,502)
(1,051)
(1,583)
(117)
(644)
(9,897)
32,900
The calculation of taxable income of the Company is based on estimates and the interpretation of
complex tax legislation. In the event that the tax authorities take a different view from management, the
Company may be required to change its provision for income taxes or deferred tax balances and the
change could be significant.
2012 ANNUAL REPORT 63
Notes to Consolidated Financial Statements
Note 19
Financial Instruments
and Risk Management
Risk management
The various risks to which the Company is
exposed and the Company’s policies and processes
to measure and manage them individually are set
out below.
Interest rate risk
Interest rate risk arises when changes in interest
rates will affect the fair value of financial instruments.
The Company uses various strategies to reduce
interest rate risk. The Company’s risk management
objective is to maintain interest rate spreads from
the point that a mortgage commitment is issued to
the transfer of the mortgage to the related securiti-
zation vehicle or sale to an institutional investor.
Primary among these strategies is the Company’s
decision to sell mortgages at the time of commit-
ment, passing on interest rate risk that exists prior
to funding to institutional investors. The Company
uses bond forwards (consisting of bonds sold short
and bonds purchased under resale agreements) to
manage interest rate exposure between the time
a mortgage rate is committed to the borrower and
the time the mortgage is sold to a securitization
vehicle and the underlying cost of funding is fixed.
As interest rates change, the values of these interest
rate-dependent financial instruments vary inversely
with the values of the mortgage contracts. As
interest rates increase, a gain will be recorded on
the economic hedge, which will be offset by the
reduced future spread on mortgages pledged under
securitization as the mortgage rate committed to
the borrower is fixed at the point of commitment.
For single-family mortgages, only a portion of
the commitments issued by the Company eventually
fund. The Company must assign a probability of
funding to each mortgage in the pipeline and estimate
how that probability changes as mortgages move
through the various stages of the pipeline. The
amount that is actually economically hedged is the
expected value of the mortgages funding within the
future commitment period. The Company also
hedges against interest rate fluctuations by offsetting
the exposure of the Company’s bank indebtedness
and funds held in trust. Bank indebtedness, obliga-
tions related to debt and the debenture loan payable
(after the effect of the interest rate swap) are all
floating rate obligations indexed to 30-day CDOR;
the funds held in trust earn the Company interest
based on the same floating rate basis. Because both
the indebtedness and funds held in trust have
comparable values, with the liabilities at $685,652
(2011 – $745,032) as at December 31, 2012 and the
funds held in trust at $561,204 (2011 – $503,294) on
the same date, the Company considers the arrange-
ment to be a natural hedge against short-term
interest rate fluctuations.
64 First NatioNal FiNaNcial corporatioN
The table below provides the financial impact that an immediate and sustained 100 basis point and 200 basis
point increase and decrease in short-term interest rates would have had on the net income of the Company
in 2012 and 2011.
100 basis point shift
Impact on net income and shareholders’ equity
200 basis point shift
Impact on net income and shareholders’ equity
(1) Interest rate is not to be decreased to below 0%.
$
$
Increase in interest rate
Decrease in interest rate(1)
2012
2011
2012
2011
234
$
450
$
(234)
$
(449)
468
$
901
$
3,676
$
2,751
The Company has exposure to the risk that short-
term interest rates increase, and credit losses as
the Company has a first loss position. Accordingly,
these mortgages are much more sensitive to changes
in interest rates and credit loss than the Company’s
typical mortgage and loan investments.
The Company’s accounts receivable and sundry,
accounts payable and accrued liabilities, and pur-
chased mortgage servicing rights are not exposed
to interest rate risk.
Credit risk
Credit risk is the risk of loss associated with a
counterparty’s inability or unwillingness to fulfill its
payment obligations. The Company’s credit risk is
mainly lending-related in the form of mortgage
default. The Company uses stringent underwriting
criteria and experienced adjudicators to mitigate
this risk. The Company’s approach to managing
credit risk is based on the consistent application of
a detailed set of credit policies and prudent arrears
management. As at December 31, 2012, 92%
(2011 – 94%) of the pledged mortgages were insured
mortgages. See details in Note 3. The Company’s
exposure is further mitigated by the relatively short
period over which a mortgage is held by the
Company prior to securitization.
The maximum credit exposures of the financial
assets are their carrying values as reflected on the
consolidated statement of financial position. The
Company does not have significant concentration of
credit risk within any particular geographic region
or group of customers.
The Company is at risk that the underlying
mortgages default and the servicing cash flows
cease. The large portfolio of individual mortgages
that underlies these assets is diverse in terms of
geographical location, borrower exposure and the
underlying type of real estate. This diversity and
the priority ranking of the Company’s rights mitigate
the potential size of any single credit loss. Securities
purchased under resale agreements are transacted
with large, regulated Canadian institutions such
that the risk of credit loss is very remote. Securities
transacted are all Government of Canada bonds
and, as such, have virtually no risk of credit loss.
Liquidity risk and capital resources
Liquidity risk is the risk that the Company will
be unable to meet its financial obligations as they
come due.
The Company’s liquidity strategy has been to
use bank credit to fund working capital requirements
and to use cash flow from operations to fund
longer-term assets. The Company’s credit facilities
2012 ANNUAL REPORT 65
Notes to Consolidated Financial Statements
are typically drawn to fund: (i) mortgages accumu-
lated for sale or securitization, (ii) origination costs
associated with mortgages pledged under securitiza-
tion, (iii) cash held as collateral for securitization,
(iv) costs associated with deferred placement fees
receivable, and (v) mortgage and loan investments.
The Company has a credit facility with a syndicate
of seven financial institutions, which provides for
a total of $545,000 in financing. Bank indebtedness
also includes borrowings obtained through outstand-
ing cheques and overdraft facilities.
The Company finances the majority of its
mortgages with debt derived from the securitization
markets, primarily NHA MBS, ABCP and CMB.
These obligations reset monthly such that the
receipts of principal on the mortgages are used to
pay down the related debt within a 30-day period.
Accordingly, these sources of financing amortize at
the same rate as the mortgages pledged thereunder,
providing an almost perfectly matched asset and
liability relationship.
Market risk
Market risk is the risk of loss that may arise from
changes in market factors such as interest rates and
credit spreads. The level of market risk to which the
Company is exposed varies depending on market
conditions, expectations of future interest rates and
credit spreads.
Customer concentration risk
Placement fees, mortgage servicing income and
gains on deferred placement fees revenue from two
(2011 – three) Canadian financial institutions that
represent approximately 36% (2011 – 47%) of the
Company’s total revenue. During the year ended
December 31, 2012, the Company placed 62%
(2011 – 51%) of all mortgages it originated with the
same two (2011 – three) institutional investors.
Fair value measurement
The Company uses the following hierarchy for
determining and disclosing the fair value of financial
instruments recorded at fair value in the consolidated
statement of financial position:
Level 1 – Quoted market price observed in active
markets for identical instruments;
Level 2 – Quoted market price observed in active
markets for similar instruments or other
valuation techniques for which all significant
inputs are based on observable market
data; and
Level 3 – Valuation techniques in which one or
more significant inputs are unobservable.
Valuation methods and assumptions
The Company uses valuation techniques to estimate
fair values, including reference to third-party valuation
service providers using proprietary pricing models
and internal valuation models such as discounted
cash flow analysis. The valuation methods and key
assumptions used in determining fair values for the
financial assets and financial liabilities are as follows:
(a) HFT mortgages in mortgages under
securitization and certain mortgage
and loan investments
The fair value of these mortgages is determined
by discounting projected cash flows using
market industry pricing practices. Discount rates
used are determined by comparison to similar
term loans made to borrowers with similar
credit. This methodology will reflect changes
in interest rates which have occurred since
the mortgages were originated. Impaired
mortgages are recorded at net realizable value.
66 First NatioNal FiNaNcial corporatioN
(b) Deferred placement fees receivable
(c) Securities owned and sold short
The fair value of deferred placement fees
receivable is determined by internal valuation
models consistent with industry practice using
market data inputs, where possible. The fair
value is determined by discounting the expected
future cash flows related to the placed mort-
gages at market interest rates. The expected
future cash flows are estimated based on certain
assumptions which are not supported by
observable market data. Refer to Note 4,
Deferred placement fees receivable, for the key
assumptions used and sensitivity analysis.
The fair values of securities owned and sold
short used by the Company to hedge its interest
rate exposure are determined by quoted prices.
(d) Other financial assets and
financial liabilities
The fair value of mortgage and loan investments
classified as loans and receivables, mortgages
accumulated for sale or securitization, cash held
as collateral for securitization, restricted cash
and bank indebtedness correspond to the
respective outstanding amounts due to their
short-term maturity profiles.
The following table represents the Company’s financial instruments measured at fair value on a
recurring basis:
Financial assets
Mortgages accumulated for sale
HFT mortgages
Deferred placement fees receivable
Mortgage and loan investments
Interest rate swaps
Total financial assets
Financial liabilities
Securities sold under repurchase agreements
and sold short
Interest rate swaps
Total financial liabilities
$
$
$
$
December 31, 2012
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
$
7,754
$
–
$
7,754
–
–
–
6,275
2,776,551
2,776,551
41,919
11,385
–
41,919
11,385
6,275
$
14,029
$ 2,829,855
$ 2,843,884
451,875
–
451,875
$
$
–
6,818
6,818
$
$
–
–
–
$
$
451,875
6,818
458,693
2012 ANNUAL REPORT 67
Notes to Consolidated Financial Statements
Financial assets
Mortgages accumulated for sale
HFT mortgages
Deferred placement fees receivable
Mortgage and loan investments
Interest rate swaps
Total financial assets
Financial liabilities
Securities sold under repurchase agreements
and sold short
Interest rate swaps
Total financial liabilities
$
$
$
$
In estimating the fair value of financial assets
and financial liabilities using valuation techniques
or pricing models, certain assumptions are used,
including those that are not fully supported by
observable market prices or rates (Level 3). The
amount of the change in fair value recognized by
the Company in net income for the year ended
December 31, 2012 that was estimated using a
valuation technique based on assumptions that are
not fully supported by observable market prices or
rates was approximately a gain of $16,755 (2011 –
$3,846). Although the Company’s management
believes that the estimated fair values are appropri-
ate as at the date of the consolidated statement
of financial position, those fair values may differ if
other reasonably possible alternative assumptions
are used.
December 31, 2011
Level 1
Level 2
Level 3
Total
–
–
–
–
–
–
$
4,244
$
–
$
4,244
–
–
–
9,689
2,672,163
2,672,163
58,509
5,801
–
58,509
5,801
9,689
$
13,933
$ 2,736,473
$ 2,750,406
659,299
–
659,299
$
$
–
10,698
10,698
$
$
–
–
–
$
$
659,299
10,698
669,997
The following table presents changes in the fair
values (including realized losses of $10,602 [2011 –
$16,824]) of the Company’s financial assets and
financial liabilities for the years ended December 31,
2012 and 2011, all of which have been classified as
fair value through profit or loss:
HFT mortgages
$
2,787
$
(5,694)
2012
2011
Deferred placement
fees receivable
Mortgage and loan
investments
Securities owned
and sold short
Interest rate swaps
(203)
(374)
(1,934)
5,877
6,153
1,150
1,066
(14,215)
(792)
$
(18,485)
$
68 First NatioNal FiNaNcial corporatioN
Movement in Level 3 financial instruments measured at fair value
The following tables show the movement in Level 3 financial instruments in the fair value hierarchy for the
years ended December 31, 2012 and 2011. The Company classifies financial instruments to Level 3 when
there is reliance on at least one significant unobservable input in the valuation models.
Fair value
as at
January 1
2012
Investments
Unrealized
gain (loss)
recorded in
income
Payment and
amortization
Fair value
as at
December 31
2012
Financial assets
HFT mortgages
Deferred placement fees
receivable
Mortgage and loan investments
$ 2,672,163
$ 3,257,342
$
9,786
$ (3,162,740)
$ 2,776,551
58,509
5,801
5,976
–
(203)
(450)
(22,363)
6,034
41,919
11,385
Total financial assets
$ 2,736,473
$ 3,263,318
$
9,133
$ (3,179,069)
$ 2,829,855
Fair value
as at
January 1
2011
Investments
Unrealized
gain recorded
in income
Payment and
amortization
Fair value
as at
December 31
2011
$ 1,261,522
$ 1,863,838
$
1,738
$
(454,935)
$ 2,672,163
Financial assets
HFT mortgages
Deferred placement fees
receivable
Mortgage and loan investments
Total financial assets
$ 1,349,288
$ 1,868,558
$
77,410
10,356
4,720
–
1,150
1,066
3,954
(24,771)
(5,621)
58,509
5,801
$
(485,327)
$ 2,736,473
Derivative financial instrument
and hedge accounting
The Company entered into a swap agreement to
hedge the debenture loan payable against changes
in fair value by converting the fixed-rate debt into
a variable-rate debt. The swap agreement has been
designated as a fair value hedge and the hedging
relationship is formally documented, including the
risk management objective and measurement of
effectiveness. The swap agreement is recorded at
fair value with the changes in fair value recognized
in income. Changes in fair value attributed to the
hedged risk are accounted for as basis adjustments
to the debenture loan payable and are recognized
in income. Accordingly, as at December 31, 2012,
accounts receivable and sundry have been increased
by $6,275 (2011 – $9,689) to account for the swap
derivative, and the debenture loan payable has
been increased by the same amount.
Note 20
Capital Management
The Company’s objective is to maintain a strong
capital base so as to maintain investor, creditor
and market confidence and sustain future develop-
ment of the business. Management defines capital
as the Company’s equity, long-term debt and
retained earnings. The Company has a minimum
capital requirement as stipulated by its bank credit
facility. The agreement limits the debt under bank
indebtedness together with the debentures to four
times FNFLP’s equity. As at December 31, 2012,
the ratio was 1.2:1 (2011 – 1.0:1). The Company
was in compliance with the bank covenant
throughout the year.
2012 ANNUAL REPORT 69
Notes to Consolidated Financial Statements
Note 21
Earnings by Business Segment
The Company operates principally in two business segments, Residential and Commercial. These segments
are organized by mortgage type and contain revenue and expenses related to origination, underwriting,
securitization and servicing activities. Identifiable assets are those used in the operations of the segments.
REVENuE
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income
EXPENSES
Amortization
Interest
Other operating
2012
Residential
Commercial
Total
$
226,607
$
110,380
$
336,987
(160,068)
66,539
(86,668)
23,712
(246,736)
90,251
218,728
20,258
305,525
5,507
17,682
174,686
197,875
36,964
15,676
76,352
3,019
2,147
28,011
33,177
255,692
35,934
381,877
8,526
19,829
202,697
231,052
Income before income taxes
$
107,650
$
43,175
$
150,825
Identifiable assets
Goodwill
Total assets
11,426,562
3,552,214
14,978,776
–
–
29,776
$ 11,426,562
$ 3,552,214
$ 15,008,552
Capital expenditures
$
2,069
$
886
$
2,955
70 First NatioNal FiNaNcial corporatioN
REVENuE
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income
EXPENSES
Amortization
Interest
Other operating
2011
Residential
Commercial
Total
$
172,511
$
81,607
$
254,118
(119,199)
53,312
(65,092)
16,515
(184,291)
69,827
165,566
13,421
232,299
6,203
12,989
130,210
149,402
15,025
15,890
47,430
3,621
3,009
26,914
33,544
180,591
29,311
279,729
9,824
15,998
157,124
182,946
Income before income taxes
$
82,897
$
13,886
$
96,783
Identifiable assets
Goodwill
Total assets
9,010,099
2,887,395
11,897,494
–
–
29,776
$ 9,010,099
$ 2,887,395
$ 11,927,270
Capital expenditures
$
2,228
$
956
$
3,184
Note 22
Related Party Transactions
For the past three years, several of the Company’s
commercial borrowers applied to the Company for
mezzanine mortgage financing. The amounts of the
mortgages requested were in excess of the Com-
pany’s internal investment policies for investments
of that nature; however, a business controlled by
a senior executive and shareholder of the Company
entered into agreements with the borrowers
to fund the mortgages. The Company serviced these
mortgages during their terms at market commercial
servicing rates. The mortgages which are adminis-
tered by the Company have a balance of $29,685
as at December 31, 2012 (2011 – $33,781).
A senior executive and shareholder of the
Company has a significant investment in a mortgage
default insurance company. In the ordinary course of
business, the insurance company provides insurance
policies to the Company’s borrowers at market
rates. Beginning in the third quarter of 2012, the
insurance company also provides the Company with
portfolio insurance at market premiums. The total
bulk insurance purchased during 2012 was $913.
In 2011, the Company was engaged by the insurance
company to service a portfolio of $13.6 million
of mortgages at market commercial servicing rates.
As at December 31, 2012, the portfolio had an
outstanding balance of $11.0 million.
A senior executive and shareholder of the
Company is a director on the board of a real estate
2012 ANNUAL REPORT 71
Notes to Consolidated Financial Statements
company. In 2012, the Company directly loaned
$21.5 million and placed $84.6 million of mortgages
to the real estate company. As at December 31,
2012, the portfolio was administered by the Com-
pany at market rates and totalled $59.3 million.
A senior executive and shareholder of the
Company is a shareholder as well as a director
on the board of a retirement home company.
During the year, the Company placed a mortgage
of $10.0 million for the retirement company and
earned a total of $118 for origination and interest
revenue. The mortgage was fully repaid before
December 31, 2012.
During the year ended December 31, 2012,
the Company paid total compensation of $3,008
(2011 – $2,927) to senior management and $200
(2011 – $207) to independent directors.
Note 23
Future Accounting Changes
The following accounting pronouncements issued
by the IASB, although not yet effective, may have
a future impact on the Company:
IFRS 9 – Financial Instruments
As of January 1, 2015, the Company will be required
to adopt this standard, which replaces IAS 39 –
Financial Instruments: Recognition and Measurement.
IFRS 9 provides new requirements for how an entity
should classify and measure financial assets and
financial liabilities that are in the scope of IAS 39.
Management is currently evaluating the potential
impact that the adoption of IFRS 9 will have on the
Company’s consolidated financial statements.
IAS 32 – Financial Instruments: Presentation
As of January 1, 2014, the Company will be required
to adopt this standard, which clarifies the existing
requirements for offsetting financial assets and
financial liabilities. The amendment is not expected
to have a material impact on the Company’s
consolidated financial statements.
IFRS 10 – Consolidated Financial Statements
As of January 1, 2013, IFRS 10 – Consolidated
Financial Statements will replace portions of IAS 27 –
Consolidated and Separate Financial Statements and
interpretation SIC-12 – Consolidation – Special Purpose
Entities. The IASB introduced a single model for
consolidating subsidiaries using a control model. This
standard addresses particularly the control of SPEs.
Management is currently evaluating the potential
impact that the adoption of IFRS 10 will have on the
Company’s consolidated financial statements.
IFRS 11 – Joint Arrangements
As of January 1, 2013, the IASB has expanded its
definition of a joint venture. The Company would be
required to account for joint ventures on the equity
method as opposed to proportionate consolidation.
IFRS 12 – Disclosure of Interests in
Other Entities
As of January 1, 2013, the Company will be required
to make new disclosures on its off-balance sheet
activities, including those with SPEs.
IFRS 13 – Fair Value Measurement
As of January 1, 2013, the Company will be required
to adopt this standard, which provides a framework
for the application of fair value to those assets and
liabilities qualifying or permitted to be carried at fair
value. The Company believes its current measure-
ment of fair value is appropriate and there will be
little impact.
Note 24
Comparative Consolidated
Financial Statements
The comparative audited consolidated financial
statements have been reclassified from statements
previously presented to conform to the presentation
of the 2012 audited consolidated financial statements.
72 First NatioNal FiNaNcial corporatioN
Corporate Governance
First National’s Board of Directors and management team fully
acknowledge the importance of their duty to serve the long-term
interests of shareholders.
Sound corporate governance is fundamental
for maintaining the confidence of investors and
increasing shareholder value. As such, First National
is committed to the highest standards of integrity,
transparency, compliance and discipline. These
standards define the relationships among all of
our stakeholders – Board, management and share-
holders – and are the basis for building these
values and nurturing a culture of accountability
and responsibility across the organization.
Policies
The Board super vises and evaluates the management
of the Company and oversees matters related to our
strategic direction and assesses results relative to our
goals and objectives. As such, the Board has adopted
several policies that reflect best practices in gover-
nance and disclosure. These include a Disclosure
Policy, a Code of Business Conduct, a Whistleblower
Policy and an Insider Trading Policy. These policies are
compliant with the corporate governance guidelines
of the Canadian Securities Administrators. As a
public company, First National’s Board continues
to update, develop and implement appropriate
governance policies and practices as it sees fit.
Committees
The Board of Directors has established an Audit
Committee and a Compensation, Governance
and Nominating Committee to assist in the
efficient functioning of the Company’s corporate
governance strategy.
Audit Committee
The Audit Committee’s responsibilities include:
• Management of the relationship with the external
auditor including the oversight and supervision of
the audit of the Company’s financial statements;
• Oversight and super vision of the quality and
integrity of the Company’s financial statements;
and
• Oversight and super vision of the adequacy
of the Company’s internal accounting
controls and procedures, as well as its
financial reporting practices.
The Audit Committee consists of three independent
directors, all of whom are considered financially
literate for the purposes of the Canadian Securities
Administrators’ Multilateral Instrument 52-110 –
Audit Committees.
committee memberS
John Brough (Chair), Peter Copestake and
Robert Mitchell
Compensation, Governance and
Nominating Committee
The Compensation, Governance and Nominating
Committee’s responsibilities include:
• Making recommendations concerning the compen-
sation of the Company’s senior executive officers
and the remuneration of the Board of Directors;
• Developing the Company’s approach to corporate
governance issues and compliance with applicable
laws, regulations, rules, policies and orders with
respect to such issues;
• Advising the Board of Directors on filling
director vacancies;
• Periodically reviewing the composition and
effectiveness of the directors and the contribu-
tions of individual directors, and
• Adopting and periodically reviewing and updating
the Company’s written Disclosure Policy.
The Compensation, Governance and Nominating
Committee consists of two independent directors
for the purposes of the Canadian Securities Adminis-
trators’ Multilateral Instrument 58-101 – Disclosure
of Corporate Governance Practices.
committee memberS
Peter Copestake (Interim Chair) and Duncan Jackman
2012 ANNUAL REPORT 73
Board Members
Collectively, the Board of Directors has extensive experience in mortgage
lending, real estate, strategic planning, law and finance. The Board consists
of six members, four of whom are independent.
Stephen Smith is President of the Corporation,
President of First National and co-founder of
First National. Mr. Smith, one of Canada’s leading
financial services entrepreneurs, has been an
innovator in the development and utilization of
various securitization techniques to finance mortgage
assets and has been a regular speaker at securitiza-
tion conferences. He is Chairman of the Canada
Guaranty Mortgage Insurance Company as well as
a director of The Dominion of Canada General
Insurance Company and The Empire Life Insurance
Company. He is also Vice Chair of Metrolinx Inc.
(GO Transit) and a member of the Board of the
C.D. Howe Institute. In addition, Mr. Smith is on
the Advisory Council of the Royal Conservatory
of Music and the Chair of The Historica-Dominion
Institute. Mr. Smith has a Master of Science (Eco-
nomics) from the London School of Economics and
Political Science, a Bachelor of Science (Honours)
in Electrical Engineering, Queen’s University, and is a
member of the Association of Professional Engineers
of Ontario and the Canadian Council of Chief
Executives. Mr. Smith is a graduate of the Directors
Education Program at the University of Toronto,
Rotman School of Management. In 2012, Mr. Smith
was awarded the Queen Elizabeth II Diamond
Jubilee Medal for contributions to Canada.
Moray Tawse is Vice President and Secretary
of the Corporation, Vice President, Mortgage
Investments of First National and co-founder of
First National. Mr. Tawse directs the operations
of all of First National’s commercial mortgage
origination activities. With over 30 years of experi-
ence in the real estate finance industry, Mr. Tawse
is one of Canada’s leading experts on commercial
real estate and is often called upon to deliver
keynote addresses at national real estate sympo-
siums. In addition, Mr. Tawse is also an independent
director of C2C Industrial Properties Inc., a TSX
Venture listed company that owns and operates
industrial properties across Canada.
John Brough served as President of both Witting-
ton Properties Limited (Canada) and Torwest, Inc.
(United States) real estate development companies
from 1998 to 2007. From 1974 until 1996 he was
with Markborough Properties, Inc., where he was
Senior Vice President and Chief Financial Officer
from 1986 until 1996. Mr. Brough is a Director of
Kinross Gold Corporation, Silver Wheaton Corp. and
Canadian Real Estate Investment Trust. Mr Brough
has a Bachelor of Arts (Economics) degree from the
University of Toronto, as well as a Chartered Accoun-
tant degree. Mr. Brough is a graduate of the Directors
Education Program at the University of Toronto,
Rotman School of Management, and a member of
the Institute of Corporate Directors as well as the
Canadian Institute of Chartered Accountants.
Peter Copestake currently serves as the Executive
in Residence at the Queen’s University School of
Business and as a corporate director and business
consultant. Over the past 30 years he has held
senior financial and management positions at
federally regulated financial institutions and in the
federal government. From 1999 to 2007 he was
Senior Vice President and Treasurer of Manulife
Financial Corporation. He currently also serves as a
member of the Investment and Pension committees
of Queen’s University and as a Director of Royal
and Sun Alliance Insurance Company of Canada and
Canadian Derivatives Clearing Corporation. He also
serves on the Independent Review Committees at
First Trust Portfolios Canada and at PIMCO Canada
and as Chair of the South East Ontario Medical
and Academic Organization.
Duncan Jackman is the Chairman, President and
Chief Executive Officer of E-L Financial Corporation
Limited, an investment holding company and has
held similar positions with E-L Financial since 2003.
Mr. Jackman is also the Chairman and President
of Economic Investment Trust Limited and United
74 First NatioNal FiNaNcial corporatioN
Shareholder Information
Senior Executives of First National Financial LP
Stephen Smith
Co-founder, Chairman and President
Moray Tawse
Co-founder and Vice President, Mortgage Investments
Robert Inglis
Chief Financial Officer
Scott McKenzie
Vice President, Residential Mortgages
Jason Ellis
Managing Director, Capital Markets
Jeremy Wedgbury
Managing Director, Commercial Mortgage Origination
Lisa White
Vice President, Mortgage Administration
Hilda Wong
General Counsel
Legal Counsel
Stikeman Elliott LLP, Toronto, Ontario
Auditors
Ernst & Young LLP, Toronto, Ontario
Investor Relations Contacts
Robert Inglis
Chief Financial Officer
rob.inglis@firstnational.ca
Ernie Stapleton
President, Fundamental Creative Inc.
ernie@fundamental.ca
Investor Relations Website
www.firstnational.ca
Registrar and Transfer Agent
Computershare Investor Services Inc., Toronto, Ontario
1.800.564.6253
Exchange Listing and Symbol
TSX: FN
Corporations Limited, both closed-end investment
corporations, and has acted in a similar capacity with
these corporations since 2001. Mr. Jackman sits on
a number of public and private company boards.
Prior to 2001, Mr. Jackman held a variety of positions
including portfolio manager at Cassels Blaikie and
investment analyst at RBC Dominion Securities Inc.
Mr. Jackman holds a Bachelor of Arts in Literature
from McGill University.
Robert Mitchell has been President of Dixon
Mitchell Investment Counsel Inc., a Vancouver-
based investment management company since
2000. Prior to that, Mr. Mitchell was Vice President,
Investments at Seaboard Life Insurance Company.
Mr. Mitchell is a director and chairs the audit
committee for Discovery Parks Holdings Ltd.,
trustee for Discovery Parks Trust. Discovery Parks
Trust was established to support the high technol-
ogy and research industries in British Columbia
through the development of its real estate assets.
Mr. Mitchell has a MBA from University of Western
Ontario, a Bachelor of Commerce (Finance) from
University of Calgary, and is a CFA charterholder.
Corporate Address
First National Financial Corporation
100 University Avenue
North Tower, Suite 700
Toronto, Ontario M5J 1V6
Phone: 416.593.1100
Fax: 416.593.1900
Annual Meeting
May 13, 2013, 10 a.m. EDT
TMX Broadcast Centre
The Gallery
The Exchange Tower
130 King Street West
Toronto, Ontario
Looking Forward to Another
25 Years of Shared Success
VANCOUVER | CALGARY | TORONTO | MONTREAL | HALIFAX