Delivering Service
Creating Solutions
Building Success
2 0 1 3 A N N U A L R E P O R T
Management’s
Discussion and
Analysis
2013
At a Glance
$197.6
Million
50%
7
77%
Earnings before income taxes, depreciation and
amortization, and losses and gains on fi nancial instruments
(“Pre-FMV EBITDA”) reached a new record, 29% above
2012. Management uses this non-IFRS measure as an
indicator of operational performance.
Pre-FMV return on shareholders’ equity in 2013
of 50% was well in line with First National’s three-year
average of 46% and shows the Company’s effi cient use
of capital.
First National increased its common share dividend
for the seventh time since its initial public off ering, eff ective
for the dividend payable on April 15, 2014. This raises the
annualized rate per common share to $1.50.
First National paid 77% of its adjusted cash fl ow
in common share dividends in 2013, even though
it also increased the dividend rate in April of 2013
and invested in more securitization transactions.
B FIRST NATIONAL FINANCIAL CORPORATION
Letter from
the President
Fellow Shareholders:
First National celebrated the 25th anniversary of its founding and its seventh
anniversary as a public company on the S&P/TSX in 2013 with excellent results.
Mortgages under administration (MUA) grew 12 percent to a record
$75.6 billion as a result of record origination volumes and strong renewals.
Single-family segment MUA at year end was $57.7 billion, up $8.1 billion
from 2012, while commercial segment MUA was $18 billion, up $400 million
year over year.
At $14.1 billion, originations exceeded 2012 by one
percent or about $100 million in spite of government
measures designed to moderate consumer debt,
primarily related to mortgages. We were particularly
pleased by the steady quarter-to-quarter recovery in
single-family origination volumes throughout the year,
culminating in a 32 percent year-over-year growth
in the fourth quarter of 2013. Commercial segment
originations were 16 percent or $424 million higher
than in 2012 – an excellent outcome.
Revenue grew 24 percent to $776.5 million from
$628.6 million in 2012 due to growth in the business
and gains on fi nancial instruments, which accounted
for six percent of the increase. Net income before
taxes increased 55 percent to $233.5 million from
$150.8 million a year ago, while Pre-FMV EBITDA
reached a record level of $197.6 million, 29 percent
above 2012.
Stephen Smith,
Chairman,
President and Chief
Executive Offi cer
Strong cash fl ow supported an increase in the
common share dividend in 2013, to an annualized
rate of $1.40 per share. Even so, the payout ratio,
calculated on the basis of adjusted cash fl ow
available for common shares, was 77 percent in
2013, providing more than enough surplus cash to
fuel growth initiatives and to give our Board the
confi dence to raise the common share dividend once
again, commencing with the dividend payment in
April 2014. This latest increase brings the annualized
common share dividend rate to $1.50 per common
share or $0.1250 per month. Since our initial public
off ering, our Board has approved seven increases to
the common share dividend.
These results reinforce First National’s standing as
Canada’s largest non-bank originator and under-
writer of residential mortgages, and one of Canada’s
largest commercial lenders. They also refl ect First
National’s greatest strengths: a sustainable business
model, which continues to be as relevant and
resilient today as it was a quarter century ago;
industry-leading technology systems; and, most
fundamentally, the diligent eff orts of our employees.
Their commitment to delivering service, creating
solutions and building success has made First
National a fi rst choice for mortgage brokers and
borrowers across Canada.
Corporate profi le
First National Financial Corporation (TSX: FN, FN.PR.A) 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 $75 billion in mortgages
under administration, 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.fi rstnational.ca.
2013 ANNUAL REPORT 1
2013 at a glance
Management’s
Discussion and
Analysis
MORTGAGES UNDER
ADMINISTRATION
(in $ billions)
12%
YEAR-OVER-YEAR
GROWTH
2012 TO 2013
MORTGAGE
ORIGINATIONS
(in $ billions)
1%
YEAR-OVER-YEAR
GROWTH
2012 TO 2013
REVENUE
(in $ millions)
24%
YEAR-OVER-YEAR
GROWTH
2012 TO 2013
PRE-FMV EBITDA
(in $ millions)
29%
YEAR-OVER-YEAR
GROWTH
2012 TO 2013
80
70
60
50
40
30
20
10
0
15
12
9
6
3
0
800
700
600
500
400
300
200
100
0
200
150
100
50
0
.
8
7
4
.
3
3
5
.
6
9
5
.
3
7
6
.
6
5
7
2009
2010
2011
2012 2013
.
8
1
1
.
5
0
1
.
8
1
1
.
0
4
1
.
1
4
1
2009
2010
2011
2012 2013
.
7
1
4
3
.
3
4
9
3
.
0
4
6
4
.
6
8
2
6
.
5
6
7
7
2009
2010
2011
2012 2013
.
3
5
6
1
.
8
9
2
1
.
1
5
2
1
.
2
3
5
1
.
6
7
9
1
2009
2010
2011
2012 2013
2 FIRST NATIONAL FINANCIAL CORPORATION
2 FIRST NATIONAL FINANCIAL CORPORATION
Strength to strength
Ensuring that First National is successful for the
next 25 years and beyond is of paramount impor-
tance. One of the ways to build success for the
future is to do what we have done in the past:
vigorously support the mortgage broker channel.
In 2013, First National continued to advocate for the
channel because we believe in the expertise, service
and value provided by mortgage brokers. We will
do so again in 2014, and for the long term.
More than this, the Company will strive, as it has
in the past, to meet mortgage broker expectations
for service. First National sets rigorous national
standards for application turnaround time and
funding execution, tracks the performance of each
of our offi ces against these measures and publishes
the results internally. This creates friendly competition
and helps First National consistently achieve its
service objectives, as it did once again in 2013.
First National would not be where it is today
without the mortgage broker channel. In 2013,
we recognized this fact with our 25 Years of Shared
Success campaign, which fi nished in early 2014.
Going forward, we will continue to empower
mortgage brokers, who now account for about
30 percent of all mortgage originations in Canada,
with the tools they need to grow their businesses
and fulfi ll customer needs. By doing so, First
National should continue to fi nd success in the
years ahead.
Technology at First National has always been a
complement to personal service and will remain an
important tool for growth and service diff erentiation
for the Company. The desire to support mortgage
brokers with best-in-class service was the driving
force behind MERLIN, the industry’s fi rst online
mortgage approval and tracking system. Introduced
in 2001, MERLIN increases transparency in lender
underwriting for mortgage brokers as they deliver
rapid-response service to borrowers. We continue
to refi ne this proprietary technology as it provides
First National with a clear and meaningful competitive
advantage in the Canadian mortgage market.
For borrowers, we provide My Mortgage, our
online mortgage management tool. It allows bor-
rowers to view their current mortgage balances,
change payment dates, and calculate interest
savings from increasing payment frequencies or
doubling up on payments. It was used more than
440,000 times by over 72,000 borrowers in 2013,
and in early 2014 we added new functionality
so borrowers can chat live over the Internet with
our customer service representatives. My Mortgage
will feature prominently in our customer service
eff orts in the years ahead.
Securitization has also contributed materially to
the growth of our business since our founding
and will continue to play an important role going
forward. About $4.1 billion of originations in
2013 were securitized directly by the Company
into National Housing Act Mortgage-Backed
Securities (“NHA MBS”), Canada Mortgage Bonds
and Asset-backed Commercial Paper programs as
First National took advantage of the demand for
government-insured securities and profi table interest
rate spreads. Securitizing mortgages effi ciently
uses the Company’s capital, leading to enhanced
future cash fl ows and creating independence
from institutional customers.
2013 at a glance
C
C
E
D
D
B
B
D
C
B
FUNDING SOURCES
(for the year ended December 31, 2013)
A
Institutional placements
9% CMB dealers
A 47%
B
C 35% NHA MBS
D 3% ABCP
E
6%
Internal resources
REVENUE SOURCES PRIOR
TO FAIR VALUE GAINS/LOSSES
(for the year ended December 31, 2013)
A
A 38%
Institutional placements
B 26% Net interest – securitized mortgages
C 23% Mortgage servicing
D 13%
Investment income
MORTGAGES UNDER
ADMINISTRATION
(for the year ended December 31, 2013)
Insured
A 79%
B
8% Multi-unit residential and commercial
C 13% Conventional single-family residential
D <1% Bridge loans / Alt-A
A
92%
Insured or conventional
single-family residential
2013 ANNUAL REPORT 3
2013 ANNUAL REPORT 3
Looking forward
We anticipate that the low interest rate envir-
onment in Canada will continue with moderated,
but still healthy, mortgage spreads. We expect
to fund almost $20 billion of mortgages in 2014
by realizing signifi cant renewal opportunities
and focusing on partnerships with our institutional
customers. Although origination volumes are
expected to be similar to the record set in 2013,
we intend to capitalize on expected volumes of
mortgage renewals and generate cash fl ow from
First National’s almost $18 billion portfolio of
mortgages pledged under securitization in order
to maximize fi nancial performance.
Experience counts
In closing, we are proud of First National’s place in
the residential and commercial mortgage industry,
proud of our employees and proud to partner with
so many dedicated professionals in the Canadian
mortgage market.
In an industry where experience counts, the knowledge
and insight we have gained and the relationships
we have forged over the past quarter century
make First National a vibrant business that is well
prepared to meet the challenges and capitalize
on the opportunities that lie ahead in Canada’s real
estate and mortgage markets.
I sincerely thank our customers and shareholders
for your loyalty, and our Board of Directors,
senior leaders and all employees for your hard
work and dedication during this year of progress
and performance.
Yours sincerely,
Stephen Smith
Chairman, President and Chief Executive Offi cer
Our Management Team
From left to right:
Lisa White, Vice President, Mortgage Administration
Scott McKenzie, Senior Vice President, Residential Mortgages
Stephen Smith, Chairman, President and Chief Executive Offi cer
Moray Tawse, Executive Vice President
Jeremy Wedgbury, Senior Vice President, Commercial Mortgages
Robert Inglis, Chief Financial Offi cer
Jason Ellis, Managing Director, Capital Markets
Hilda Wong, General Counsel
4 FIRST NATIONAL FINANCIAL CORPORATION
Our Philosophy Our philosophy is unique in its simplicity: we deliver service, create solutions
and build success.
By combining innovative mortgage solutions with 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 fi nancing recommendation.
Residential mortgage brokers have access to a
wide range of mortgage solutions, fl exible 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 effi cient use of their own time.
Building Success
Many Canadians dream of buying their fi rst 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 diff erentiate
themselves from the competition. First National
responds to 90% of mortgage broker submissions
in under four hours.
2013 ANNUAL REPORT 5
Financial
Reporting
Table of Contents
Management’s Discussion and Ana lysis
Financial Statements
8 General Description of the Company
9
2013 Results Summary
Outstanding Securities of the Corporation
10 Selected Quarterly Information
11 Selected Annual Financial Information
31 Management’s Responsibility
for Financial Reporting
Independent Auditors’ Report
32
33 Consolidated Statements of Financial Position
34 Consolidated Statements of Comprehensive
for the Company’s Fiscal Year
Income
35 Consolidated Statements of Changes
in Equity
36 Consolidated Statements of Cash Flows
37 Notes to Consolidated Financial Statements
Vision and Strategy
12 Key Performance Drivers
Growth in Portfolio of Mortgages
under Administration
Growth in Origination of Mortgages
13 Lowering Costs of Operations
Employing Innovative Securitization
Transactions to Minimize Funding Costs
14 Key Performance Indicators
15 Determination of Adjusted Cash Flow
and Payout Ratio
16 Revenues and Funding Sources
17 Results of Operations
21 Operating Segment Review
22 Residential Segment
Commercial Segment
Liquidity and Capital Resources
24 Financial Instruments and Risk Management
26 Capital Expenditu res
Summary of Contractual Obligations
27 Critical A ccounting Policies and Estimates
28 Future Accounting Changes
Disclosure Controls and Inte rnal Controls
over Financial Reporting
ecting the Business
Forward-Looking Information
30 Outlook
6 FIRST NATIONAL FINANCIAL CORPORATION
2013 Financial
Statements
2013 ANNUAL REPORT 7
Management’s
Discussion and
Analysis
The following management’s discussion and analysis
(“MD&A”) of fi nancial condition and results of
operations is prepared as of February 25, 2014.
This discussion should be read in conjunction with
the audited consolidated fi nancial statements of
First National Financial Corporation (the “Company”
or “Corporation” or “First National”) as at and for
the year ended December 31, 2013 and the notes
thereto. This discussion should also be read in con-
junction with the audited consolidated fi nancial
statements and notes thereto of the Company for the
year ended December 31, 2012. The audited consoli-
dated fi nancial 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 such information. The selected fi nancial
information and discussion below also refer to certain
measures to assist in assessing fi nancial performance.
These 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 measures of liquidity and cash fl ow. 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
profi le 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 $75 billion in mortgages under admin-
istration (“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.
Commencing in 2013, First National has also
consolidated its interest in First National Mortgage
Investment Fund (the “Fund”), which it launched
in late 2012. Although the Company owns about
16% of the units issued by the Fund, because of its
status as sole seller to the Fund and its rights as
promoter, IFRS deems that First National exercises
control over the Fund. The Fund was created to
obtain economic exposure to a diversifi ed portfolio
of primarily commercial mezzanine mortgages.
Through the Fund’s consolidation, the Company
has eff ectively taken on a portfolio of about $69 mil-
lion (2012 – $23 million) of mortgages. Because of
the Company’s small proportionate interest in the
Fund’s units, it has also recorded a $45 million
(2012 – $42 million) non-controlling interest in
equity which off sets these assets. The December 31,
2012 fi nancial results of the Company have been
retroactively restated to include the Fund’s assets
and liabilities together with the non-controlling
interest at that date.
8 FIRST NATIONAL FINANCIAL CORPORATION
2013 Results Summary
The Company was very pleased with its results
for 2013. The Canadian real estate market remained
solid despite a cyclical slowdown in housing sales and
the federal government’s initiatives announced in
2012 to reduce consumer debt. This was par-
ticularly true for the single-family segment where
First National’s origination was off by only 3% when
compared to 2012. This is a marked improvement
from the fi rst quarter of 2013 when single-family
origination was down 20% from the prior year’s
quarter. With a strong contribution from origination
in its commercial segment business, the Company
set a new record for origination with over $14 billion
of mortgages originated in the year. These volumes
enabled the Company to grow its MUA and build
the value of its portfolio of securitized mortgages.
• MUA grew to $75.6 billion at December 31, 2013
from $67.3 billion at December 31, 2012, an
increase of 12%; the growth from September 30,
2013, when MUA was $74.0 billion, was approxi-
mately 2%, an annualized increase of 9%;
• The Canadian single-family real estate market,
which slowed markedly in the fi rst quarter of
2013, turned more favourable for the rest of the
year. Single-family mortgage originations for the
Company decreased by 3% to $10.9 billion in
2013 from $11.3 billion in 2012. The commercial
segment had a strong year as this market remained
strong; volumes increased by 16%, from $2.7 bil-
lion in 2012 to $3.1 billion in 2013. Together,
overall origination increased by just under 1%
year over year;
• During 2013, the Company used the Canada
Mortgage Bonds (“CMB”) program to successfully
securitize about $750 million of multi-unit
mortgages in the 10-year program and $1.2 billion
of single-family mortgages in the fi ve-year
term program. First National also securitized
$174 million of mortgages for CMB replacement
purposes in the year;
• Revenue for 2013 increased to $776.5 million
from $628.6 million in 2012. The growth of 24%
is refl ective of a growing business, augmented
by the change on account of fi nancial instruments,
which increased revenue by about 6%. Interest
revenue from securitized mortgages increased
revenue by $92.2 million or 15% year over year;
• Income before income taxes in the year
increased by 55%, from $150.8 million in 2012
to $233.5 million in 2013. The increase was
due in part to rising interest yields in the bond
market, which favourably aff ected the Company’s
interest rate hedges. Income before income taxes
was comparatively higher in 2013 than 2012 by
$37.7 million because of the favourable change
in gains on fi nancial instruments; and
• Without the impact of gains and losses on
fi nancial instruments, which have been volatile,
the Company’s earnings before income taxes,
depreciation and amortization (“Pre-FMV
EBITDA”) for the year increased by 29.0%, from
$153.2 million in 2012 to $197.6 million in 2013.
This increase is due to the steady growth of
the Company’s core business, including increased
net margin on securitized mortgages and mortgage
investment income.
The Company was pleased with its results
and, in particular, the amount of cash fl ow the
business generated. With a strong fi nish to 2013,
First National is pleased to announce that the
Board of Directors has approved an increase in
the dividend payable on the outstanding common
shares. Eff ective with the dividend payable on
April 15, 2014, the annual dividend rate will be
increased from $1.40 per share to $1.50 per
share, an increase of 7.1%.
Outstanding Securities
of the Corporation
At December 31, 2013 and February 25, 2014,
the Corporation had 59,967,429 common shares,
4,000,000 Class A preference shares, Series 1
and 175,000 debentures outstanding.
2013 ANNUAL REPORT 9
Management’s
Discussion and
Analysis
Selected Quarterly Information
Quarterly results of First National Financial Corporation
($000s, except per share amounts)
2013
Fourth quarter
Third quarter
Second quarter
First quarter
2012
Fourth quarter
Third quarter
Second quarter
First quarter
Net income
for the
period
Pre-FMV
EBITDA for
the period(1)
Net income
per common
share
Revenue
Total assets
$
$
$
$
$
$
$
$
200,928
200,522
229,830
145,228
156,092
181,573
156,983
133,965
$
$
$
$
$
$
$
$
41,821
39,399
67,845
23,036
33,491
32,047
18,099
26,688
$
$
$
$
$
$
$
$
53,401
56,124
51,193
36,864
41,765
40,597
39,610
31,227
$
$
$
$
$
$
$
$
0.66
0.63
1.10
0.36
0.54
0.51
0.28
0.43
$ 20,569,217
$ 19,930,780
$ 18,793,683
$ 17,163,697
$ 15,022,236
$ 14,311,584
$ 13,682,980
$ 13,224,456
(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 fi nancial instruments and deducting gains on the valuation of fi nancial instruments.
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. All of
these factors have increased over the last 24 months
as the Company has steadily increased MUA and
its portfolio of securitized mortgages. Net income
is also dependent on conditions in the debt markets,
which aff ect the value of gains and losses on fi nancial
instruments arising from the Company’s interest
rate hedging program. Accordingly, the movement
of this measurement between quarters is related
to factors external to the business of the Company
(primarily conditions in the bond markets). By
removing this volatility and analyzing Pre-FMV
EBITDA, a clearer view of the Company’s perfor-
mance can be assessed.
Generally, in the last eight quarters the Company
has endeavoured to grow its origination volumes
in order to build its servicing portfolio and to enable
it to securitize larger amounts of mortgages in the
NHA MBS market. This longer-term strategy has
been successful and Pre-FMV EBITDA has grown
steadily to over $197 million for 2013. The table
above shows a trend of growing income refl ecting
typical Canadian seasonality: slower fi rst quarters
and stronger subsequent quarters.
10 FIRST NATIONAL FINANCIAL CORPORATION
Selected Annual Financial Information for the Company’s Fiscal Year
($000s, except per share amounts)
For the year then ended
Income statement highlights
Revenue
Interest expense – securitized mortgages
Brokerage fees
Salaries, interest and other operating expenses
Add (deduct): realized and unrealized (gains) losses
on fi nancial instruments
Pre-FMV EBITDA(1)
Amortization of capital assets
Amortization of intangible assets
Add (deduct): realized and unrealized gains (losses)
on fi nancial instruments
Provision for income taxes
Net income
Dividends declared
Per share highlights
Net income per common share
Dividends per common share
At year end
Balance sheet highlights
Total assets
Total long-term fi nancial liabilities
December 31
2013
December 31
2012
December 31
2011
$
776,508
$
628,613
$
464,020
(323,236)
(84,420)
(127,404)
(43,866)
197,582
(2,374)
(5,563)
43,866
(61,410)
172,101
90,294
(246,736)
(115,978)
(106,547)
(6,153)
153,199
(2,059)
(6,468)
6,153
(40,500)
110,325
80,859
(184,291)
(81,480)
(91,642)
18,485
125,092
(1,856)
(7,968)
(18,485)
(26,292)
70,491
109,022
2.75
1.38
1.76
1.27
1.10
1.25
20,569,217
15,022,236
11,927,270
$
179,195
$
181,275
$
184,689
(1) Pre-FMV EBITDA is not a recognized earnings measure under IFRS and does not have a standardized meaning prescribed by
IFRS. Therefore, Pre-FMV EBITDA may not be comparable to similar measures presented by other issuers. Investors are cautioned
that Pre-FMV 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 fl ows from operating, investing and fi nancing activities
as a measure of liquidity and cash fl ows.
Vision and Strategy
The Company provides mortgage fi nancing solutions
to virtually the entire mortgage market in Canada.
By off ering 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 profi le. The Company intends to continue
leveraging these strengths to lead the “non-bank”
mortgage lending industry in Canada, while appro-
priately 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 conserva-
tive risk profi le. 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 most of its borrowers as the mort-
gage lender. This is a critical distinction. It allows
the Company to communicate with each borrower
directly throughout the term of the related mortgage.
2013 ANNUAL REPORT 11
Management’s
Discussion and
Analysis
Through this relationship, the Company can
negotiate new transactions and pursue marketing
initiatives. Management believes this strategy will
provide long-term profi tability 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 third-party
mortgage servicing contracts. 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 opportu-
nities and the growth of the customer base for
marketing initiatives. As at December 31, 2013,
MUA totalled $75.6 billion, up from $67.3 billion
at December 31, 2012, an increase of 12%. This
compares to $74.0 billion at September 30, 2013,
representing a quarter-over-quarter increase of
2% and an annualized increase of about 9%.
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 fi xed 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 signifi cant 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 chal-
lenges 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 had
returned to modest premiums over pre-crisis levels.
This is most evident for fi ve-year fi xed rate 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
fi nancial 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, reaching as high as 1.85% until
tightening to about 1.61% by year end. Rates rose
in 2013 as interest rates began to rise and spreads
approached 1.85%. With competitive pressures
toward year end, spreads tightened to about 1.50%.
In 2013, the Company chose to continue its securiti-
zation strategy but use a larger portion of its renewal
volume to achieve its annual targets. However,
a still signifi cant portion of its new origination, in
both the single-family and multi-family segments,
will be used for securitization to take advantage of
these still profi table spreads. In 2013, the Company
originated for securitization approximately $3.6 bil-
lion of single-family mortgages and $809 million
of multi-unit residential mortgages in order to take
advantage of these spreads. In 2013, the Company
securitized through NHA MBS approximately
$420 million of fl oating rate single-family mortgages,
$4.7 billion of fi xed rate single-family mortgages
and $795 million of fi xed rate multi-unit residen-
tial mortgages.
12 FIRST NATIONAL FINANCIAL CORPORATION
Lowering Costs of Operations
Innovations in systems and technology
The Company has always used technology to
provide for effi cient and eff ective 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
The Company uses a revolving line of credit with
a syndicate of banks. At December 31, 2013, the
commitment under the facility totalled $570 million.
This facility enables the Company to fund the
increasing amount of mortgages accumulated for
securitization. The entire facility is fl oating 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 originated for
securitization purposes; (2) the debt is revolving
and can be used and repaid as the Company requires,
providing more fl exibility 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 refl ects the Company’s BBB
issuer rating. Subsequent to December 31, 2013,
the Company increased the bank syndicate credit
facility to $1 billion.
Preferred share issuance
On January 25, 2011, the Company issued 4,000,000
Class A preference shares, Series 1, for gross
proceeds of $100 million. The Company received
net proceeds 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 value of $25 per share. The rate
reset feature is at the discretion of the Company
such that after the initial fi ve-year term, the Com-
pany can choose to extend the shares for another
fi ve-year term at a fi xed 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 fi ve-year anniversary to convert
their Series 1 holdings into Series 2 preference shares
(which pay fl oating rate dividends), there are no
redemption options for these shareholders. As such,
the Company considers these shares to represent
a permanent source of capital and classifi es 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 $10 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
into 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
fi xed and fl oating rate investments increased
signifi cantly with the turmoil in 2009. This demand
has continued into 2013 and allowed the Company
to fund over $5.9 billion of mortgages through the
NHA MBS and CMB programs during the year. In
August 2013, CMHC announced that it would be
limiting the amount of guarantees it would issue on
NHA MBS pools created for sale to the “market”.
CMHC indicated that the amount of guarantees it
was providing for such market pools (primarily any
pool not sold to the Canada Housing Trust (“CHT”)
for the CMB) was growing signifi cantly. In order
to better control the absolute amount of risk that
it takes on in this respect, CMHC will implement
policies to allocate the amount of guarantees it
2013 ANNUAL REPORT 13
Management’s
Discussion and
Analysis
provides in future. The current amount being
allocated to each issuer is approximately the amount
that First National is using each month, but the
new policies could restrict the amount of growth
the Company can plan for in the MBS market.
These rules are similar to the CMB allocation
rules described below, which have been in
place since 2008.
Canada Mortgage Bonds program
The CMB program is an initiative sponsored by
CMHC whereby the CHT issues securities to
investors in the form of semi-annual interest-yielding
fi ve- and 10-year bonds. Pursuant to the Company’s
approval as a seller into the CMB, the Company is
able to make direct sales into the program. Because
of the similarities to a traditional Government of
Canada bond (both have fi ve- and 10-year unamor-
tizing terms and a federal government 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 costs of funds on both
single-family and multi-family mortgage securitiza-
tions. 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
demand for mortgages from investment dealers
who sell directly into the CMB. Because of the
eff ectiveness 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 subject to these limitations.
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 fi nancial
instruments (“Pre-FMV EBITDA”(1)); and
• Adjusted cash fl ow 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 fl uctuations 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 fl ows from operating, investing
and fi nancing activities. The Company’s method of
calculating Pre-FMV EBITDA may diff er 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
2013
December 31
2012
December 31
2013
December 31
2012
$
200,928
$
156,092
$
776,508
$
628,613
57,531
53,401
45,091
41,765
233,511
197,582
150,825
153,199
20,569,217
15,022,236
20,569,217
15,022,236
Mortgages under administration
75,619,003
67,260,086
75,619,003
67,260,086
(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 fi nancial instruments and deducting gains on the valuation of fi nancial instruments.
14 FIRST NATIONAL FINANCIAL CORPORATION
Adjusted Cash Flow is not a defi ned term under
IFRS. Management believes that net cash generated
by the Company prior to investing and fi nancing
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 signifi cant 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 fi nancing for
the majority of these mortgage loans. Accordingly,
management believes the measure of Adjusted Cash
Flow is meaningful only if the change in mortgages
accumulated for sale between reporting periods is
adjusted. The calculation also adjusts for the cash
needed for investment in capital assets.
Determination of Adjusted Cash Flow and Payout Ratio
($000s)
Quarter ended
Year ended
December 31
2013
December 31
2012
December 31
2013
December 31
2012
For the period
Cash provided by (used in) operating activities
$
299,833
$
86,207
$
(150,672) $
166,597
Add (deduct):
Change in mortgages accumulated for
sale or securitization between periods
Additions to property, plant and equipment
Adjusted Cash Flow(1)
Less: cash dividends on preference shares
Adjusted Cash Flow available for
common shareholders
Adjusted Cash Flow per common share
($/share)(1)
Dividends declared on common shares
Dividends declared per common share ($/share)
Payout ratio
(278,470)
(1,085)
20,278
(1,162)
(53,378)
(612)
32,217
(1,162)
266,303
(3,428)
112,203
(4,650)
(42,416)
(2,955)
121,226
(4,650)
$
19,116
$
31,055
$
107,553
$
116,576
0.32
20,987
0.35
109%
0.52
19,490
0.33
63%
1.79
82,955
1.38
77%
1.94
76,209
1.27
65%
(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, 2013, the payout
ratio was 77%, higher than the 65% ratio reported
in 2012. Although the Company recorded $172 mil-
lion of net income in 2013, the Company invested
$65 million in new securitizations, which reduced
cash provided from operations. These costs include
$21 million of net capitalized broker fees to origi-
nate the securitized mortgages and $39 million for
MBS-related costs required to raise the securi-
tization-related debt. Cash fl ow was also lower
than income due to gains on fi nancial instruments,
as approximately $19 million of these gains were
unrealized at year end. This was particularly apparent
in the fourth quarter of 2013 when, despite net fair
value gains, $4 million of realized losses off set cash
fl ow. The Company also used cash resources
2013 ANNUAL REPORT 15
Management’s
Discussion and
Analysis
in the termination of the Alt-A program. Approxi-
mately $5 million of defaulted mortgages in the
program, previously funded with securitization debt,
were funded with internal Company resources in
October 2013. Together, these two items reduced
fourth quarter cash fl ow per share by about $0.23.
Without these two items, the payout ratio for the
fourth quarter would have been approximately 63%.
Overall, given the degree of investment in securiti-
zation, the Company is comfortable with 2013’s
payout ratio of 77%.
Revenues and Funding Sources
Mortgage origination
The Company derives a signifi cant amount of
its revenue from mortgage origination activities.
Most mortgages originated are funded either by
placement with institutional investors or through
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-eff ective 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 diversifi ed 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 originations. For the year
ended December 31, 2013, origination volume
increased from $14.0 billion to $14.1 billion, or
less than 1%, compared to fi scal 2012.
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 fi nancings.
These mortgages remain as mortgage assets of
the Company for the full term and are funded with
securitization-related debt. Of the Company’s
$14.1 billion of originations for the year ended
December 31, 2013, $4.4 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 $14.1 billion of
originations for the year ended December 31, 2013,
$7.9 billion was placed with institutional investors
and $1.3 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 signifi cant source of continuing income
and cash fl ow. 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.
16 FIRST NATIONAL FINANCIAL CORPORATION
As acknowledged in the Company’s agreements,
any interest earned on these funds accrues to
the Company as partial compensation for admini-
stration 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 signifi cant 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.
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
2013
December 31
2012
December 31
2013
December 31
2012
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
$
$
$
$
$
$
2,496
887
3,383
$
$
1,919
832
2,751
$
$
10,925
3,133
14,058
$
$
11,280
2,709
13,989
1,704
$
1,246
$
7,131
$
8,926
205
470
911
93
192
339
856
118
802
1,333
4,373
419
838
737
3,135
353
3,383
$
2,751
$
14,058
$
13,989
57,652
17,967
75,619
$
$
49,636
17,624
67,260
$
$
57,652
17,967
75,619
$
$
49,636
17,624
67,260
Total mortgage origination volumes increased in
2013 by less than 1% as the single-family housing
market bounced back from a slow start in the
fi rst quarter of 2013. Management believes this
is partially a result of the cyclical slowdown in the
housing market along with measures introduced
by the federal government in June 2012 to reduce
the amount homeowners can borrow under
government-backed mortgage insurance programs.
Single-family volumes decreased by 3% year over
year as demand for housing continued despite
the government intervention. Commercial segment
originations remained strong, particularly in the
fourth quarter, rising by 16% compared to 2012.
The low interest rate environment which existed
for most of 2012 continued for much of 2013 such
that increased commercial real estate transactions,
together with the Company’s expertise in under-
writing CMHC mortgages, drove strong origination
volumes. Origination for direct securitization into
NHA MBS, CMB and ABCP programs increased
signifi cantly from $3.1 billion to almost $4.4 billion
as the Company took advantage of demand for
government-insured securities.
For most of 2013, Canadian capital markets
were relatively upbeat. The impact of an improving
global economy and recovery in Canada meant a
movement of capital from the bond markets, such
2013 ANNUAL REPORT 17
Management’s
Discussion and
Analysis
that bond prices fell and yields increased. For the
Company, this meant the value of holding short bond
positions as a hedge against its mortgages pending
securitization increased and the Company recorded
large gains on fi nancial instruments. Despite some
negative sentiment in the third quarter of 2013,
economic indicators turned favourable in the
fourth quarter and bond yields rose. Accordingly,
the impact in the fourth quarter on First National
was positive and it realized net gains on its short
bond position.
Total revenues for the year ended December 31,
2013 increased by about 24% compared to the year
ended December 31, 2012, from $628.6 million
to $776.5 million. This measure increased because
of the favourable change in gains and losses on fi nan-
cial instruments between the years as well as higher
interest revenue on the larger portfolio of mort-
gages pledged under securitization and mortgage
investment income.
Net interest – securitized mortgages
Comparing the year ended December 31, 2013
to the year ended December 31, 2012, “net inter-
est – securitized mortgages” increased by 17% to
$106.0 million from $90.3 million. The increase was
due to a larger portfolio of securitized mortgages
off set by tighter weighted-average spreads on the
portfolio year over year. The portfolio of mortgages
funded through securitization increased from
$13.0 billion as at December 31, 2012 to $17.7 billion
as at December 31, 2013; however, the market for
prime mortgages became more competitive as the
Company grew this portfolio. At December 31,
2012, the Company’s securitized mortgage portfolio
earned gross spreads of approximately 1.04%. By
December 31, 2013, as higher-spread securitizations
amortized down and new securitizations were
entered into at tighter spreads (particularly given
the large gain on fi nancial instruments recorded
in the second quarter of 2013), the weighted-average
gross spread decreased to 0.94%. Net interest is
also aff ected 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 program wound up.
Placement fees
Placement fee revenue decreased 4% to
$145.4 million from $151.9 million. This decrease
is due to lower volumes originated for institutional
investors off set by higher per unit pricing on a
portion of the Company’s residential origination.
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, decreased by 12% from 2012 to 2013.
The Company also earned higher placement fees
from mortgage renewals as it negotiated higher
placement fees on renewal with its institutional
investors and placed more renewal origination in
2013 as opposed to 2012.
Gains on deferred placement fees
Gains on deferred placement fees revenue increased
43% to $11.0 million from $7.7 million. The gains
relate to multi-unit residential mortgages originated
and sold to institutional MBS issuers. Volumes
increased by 81% from $737 million in 2012 to
$1.3 billion in 2013. Generally, spreads on these
transactions tightened in 2013 so that the Company
realized lower per unit gains.
Mortgage servicing income
Mortgage servicing income increased 3% to
$92.8 million from $89.9 million. This increase was
primarily due to the growth in the amount of MUA,
which grew by 12% year over year. This growth rate
refl ects the growth of MUA for the Company’s
securitization programs of 36% and third-party MUA
growth of 7% between 2012 and 2013. At Decem-
ber 31, 2013, there were approximately $18.8 billion
of mortgages in MUA on which the Company earned
net interest spread as opposed to servicing revenue.
This has grown from $13.9 billion in 2012. As the
securitized portfolio has grown and become a larger
part of MUA, mortgage servicing has been sacrifi ced
for wider spreads as recorded in “net interest –
securitized mortgages” revenue. The Company’s
average rate of servicing has also dropped as volume
discount thresholds for some residential investors
have been reached.
18 FIRST NATIONAL FINANCIAL CORPORATION
Mortgage investment income
Mortgage investment income increased 51% to
$54.2 million from $35.9 million. The change is
largely due to the Company’s larger securitization
program. As the Company elects to securitize
more of its origination, mortgages accumulated for
securitization increase and earn the Company higher
interest income in the warehousing period prior to
securitization. This is particularly true for the CMB
program, for which the warehousing period is as long
as four months. The remaining change is a combina-
tion of off setting factors, including about $4.8 million
of mortgage interest earned on consolidation of
$69 million of mortgages held through the Fund.
Realized and unrealized gains (losses)
on fi nancial instruments
For First National, this fi nancial 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 fl ow methodology. Much like the short bonds
that the Company uses for hedging, the term
assets are aff ected by changes in credit markets and
Government of Canada bond yields (which form the
risk-free benchmarks used to price the Company’s
deferred placement fees receivable, and mortgages
designated as held for trading). The following table
summarizes these gains and losses by category
in the periods indicated:
Summary of realized and unrealized gains (losses) on fi nancial instruments
($000s)
Gains (losses) on short bonds used for
the economic hedging program
Gains related to the mortgages designated
at fair value net of interest rate swaps
Gains (losses) on deferred placement
fees receivable
Losses on mortgage and loan investments
Other gains
Quarter ended
Year ended
December 31
2013
December 31
2012
December 31
2013
December 31
2012
$
3,945
$
915
$
28,668
$
(1,644)
1,618
4,871
15,141
8,277
65
–
110
32
(457)
71
(297)
–
354
(131)
(521)
172
Total gains on fi nancial instruments
$
5,738
$
5,432
$
43,866
$
6,153
The Company uses short Government of Canada
bonds (including CHT-issued bonds) together with
repurchase agreements to create forward interest
rate contracts to hedge the interest rate risk
associated with fi xed rate mortgages originated for
its own securitization programs. For accounting
purposes, these do not qualify as valid interest rate
hedges as the bonds used are not derivatives but
simple cash-based fi nancial instruments. Under IFRS,
these gains or losses are recorded in the period in
which the bond yields change; however, the off set-
ting economic gains or losses are not recorded in
the same period. Instead, the resulting economic
gain (or loss) will be refl ected 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 2013, the Company recorded gains on these
hedges of $28.7 million (2012 – losses of $1.6 mil-
lion). The 2013 gains are the result of an environ-
ment of generally rising bond yields experienced
during the year. While these gains increased the
current year’s net income, the gross spread on the
related portfolio of securitized mortgages going
forward will be proportionally tighter as the
Company has issued securitization-related debt at
higher interest rates than it would have prior to
the movement in bond yields.
2013 ANNUAL REPORT 19
Management’s
Discussion and
Analysis
Economic sentiment about the global economy
fl uctuated during the year but generally opening
optimism prevailed and led to quickly rising bond
yields peaking in the third quarter. The fourth quarter
was more sedate as defl ationary issues led to some
of the previous increases being given back, but bond
yields crept up late in the quarter to favourably impact
the Company’s short bond positions. Overall, fi ve-
year Government of Canada bond yields increased
from approximately 1.45% at the beginning of the
year to 1.95% at year end. Because of this signifi cant
movement, the Company’s gain was large. The large
gain was also a function of the size of its warehouse
of mortgages awaiting securitization and the timing
of hedging transactions within each quarter. In order
to adequately hedge its interest rate exposure, the
Company had more than $800 million of bonds
sold short at the end of the year. The portion of
the Company’s mortgages which is held at fair value
(primarily those funded through ABCP), was aff ected
negatively by the change in yields; however, these
losses were more than off set by gains on the value
of the interest rate swaps, which were used to
hedge all fi xed rate mortgages in this portfolio.
The mortgages were favourably aff ected by lower
rates of prepayment and the tightening of mortgage
funding spreads experienced within the year, which
made existing mortgages comparatively more
valuable. The Company also leveraged on mort-
gages, which it renewed for additional fi ve-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 a $15.1 million gain for the year.
Brokerage fees expense
Brokerage fees expense decreased 27% to
$84.4 million from $116.0 million. This decrease
is largely explained by lower origination of
single-family mortgages for institutional investors,
which fell by 20%. The decrease of broker fees
in excess of the change in origination is largely
explained by lower per unit fees, volume discounts
for electronic delivery services associated with
brokerage, and lower commercial brokerage fees
than recorded in 2012.
Salaries and benefi ts expense
Salaries and benefi ts expense increased 10% to
$62.0 million from $56.3 million. The increase
is due primarily to an increase in headcount and
higher employee costs associated with commercial
segment origination. The Company compensates
its commercial sales staff with commissions based
on the profi tability of originated mortgages. Com-
mercial origination increased by 16% from 2012
to 2013, and sales compensation increased by
$1.6 million year over year. As at December 31,
2013, the Company had 663 employees, compared
to 615 as at December 31, 2012. The 8% increase
in headcount is largely to meet the administrative
demand associated with the increased MUA, which
increased by 12% year over year. Management
salaries were paid to the two senior executives
(Co-founders) who indirectly each own about 40%
of the Company’s common shares. The current
period expense is a result of the compensation
arrangement executed on the closing of the
initial public off ering (“IPO”).
Interest expense
Interest expense increased 47% to $29.2 million
from $19.8 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
$570 million credit facility with a syndicate of banks
and 30-day repurchase facilities to fund the mort-
gages during this period. The overall interest expense
has increased from the prior period due to increased
use of the credit facility and repurchase facilities
to warehouse the larger amounts of mortgages
originated for the Company’s securitization pro-
grams. As at December 31, 2013, the Company had
borrowed $884 million using these facilities, com-
pared to $656 million as at December 31, 2012.
Generally, interest expense would have been higher
but for the increased use of 30-day repurchase
facilities instead of bank debt.
20 FIRST NATIONAL FINANCIAL CORPORATION
Other operating and amortization
of intangibles expenses
Other operating and amortization of intangibles
expenses increased 13% to $44.1 million from
$38.9 million. The amortization of intangible assets
recognized on the IPO was $5.6 million in 2013
compared to $6.5 million in 2012, as some of these
assets became fully amortized in 2013. Other
operating expenses increased by $3.8 million as
the Company incurred higher costs related to its
increased securitization program, including costs for
hedging, which increased $1.5 million year over year.
The increase also includes $1.4 million of operating
expenses related to the Fund (which the Company
now consolidates into its earnings).
Non-controlling interests
This amount relates to the amount of the net
income earned from the Fund that pertains to
interests other than the Company. The fi rst quarter
of 2013 was the fi rst period in which the Company
consolidated the operations of the Fund. The amount
has increased during 2013 as the Fund’s operations
became more profi table as it levered up its opera-
tions to maximize capital effi ciency.
Operating Segment Review
Income before income taxes
and Pre-FMV EBITDA
Income before income taxes increased 55% to
$233.5 million from $150.8 million. The increase
was partially the result of a rising interest rate
environment, which positively aff ected the Com-
pany’s interest rate hedges in 2013. Income before
income taxes was comparatively higher in 2013 by
$37.7 million due to the change in gains and losses
on fi nancial instruments. Pre-FMV EBITDA, which
eliminates the impact of the gains and losses on
fi nancial instruments, increased 29% to $197.6 million
from $153.2 million. The increase was largely due to
the combination of higher net interest on securitized
mortgages and increased placement fees net of
broker fees. Together these provided the Company
with $40.8 million of additional pre-tax profi t.
Provision for income taxes
The provision for taxes increased 52% to
$61.4 million from $40.5 million. The provision
is higher due to the increased earnings recorded
in 2013 compared to those in 2012.
The Company aggregates its business from two segments for fi nancial 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
Year ended
Identifi able assets
Residential
Commercial
December 31
2013
December 31
2012
December 31
2013
December 31
2012
$ 10,925,390
$ 11,280,166
$
3,133,273
$
2,709,213
$
$
(3.1%)
590,976
26.9%
175,049
62.6%
$
$
465,593
107,650
$
$
15.7%
185,532
13.8%
58,462
35.4%
$
$
163,020
43,175
December 31
2013
December 31
2012
December 31
2013
December 31
2012
$ 16,282,131
$ 11,426,562
$
4,257,310
$
3,595,745
Mortgages under administration
$ 57,652,258
$ 49,636,195
$ 17,966,745
$ 17,623,891
2013 ANNUAL REPORT 21
Management’s
Discussion and
Analysis
Residential Segment
Liquidity and Capital Resources
Although residential origination decreased by
3% between 2013 and 2012, residential revenues
increased by about 27%. Part of the increase is
due to the change in gains and losses on fi nancial
instruments. Excluding these changes, revenue
increased by 21% as both MUA and the securitized
mortgage portfolio grew and produced higher
revenue. Net changes of gains on fi nancial instru-
ments of $29.4 million also aff ected net income
before income taxes, as well as revenues. Without
the impact of such fair value changes, net income
before income taxes for the residential segment
would have grown by 37% year over year, indicative
of MUA growth of 16% and higher net margins
on placement fees and securitized mortgages.
Identifi able assets have increased since Decem-
ber 31, 2012, as the Company added more
than $4.1 billion of net single-family mortgages
to mortgages pledged under securitization,
and almost $500 million of government bonds
purchased for hedging purposes.
Commercial Segment
Commercial revenues increased by almost 14%
from the prior year, in line with a 16% increase in
origination volume. Like the residential segment,
commercial revenues were aff ected by changes in
fair value. The increase in gains on fi nancial instru-
ments of $8.3 million increased revenue by 5%.
Without these movements, commercial segment
revenues grew by 9%. This slower growth is due
to tighter margins on placement and deferred
placement as the multi-unit residential mortgage
market became more competitive. Without fair value
amounts, net income before tax increased by about
$7.0 million year over year, or an increase of 17%,
as increased net interest on securitized mortgages
and mortgage investment income fl owed through
to the bottom line. Identifi able assets have increased
from those at December 31, 2012, as the Company
increased its securitized portfolio of multi-unit
residential mortgages through NHA MBS by more
than $500 million and added almost $150 million of
government bonds purchased for hedging purposes.
The Company’s fundamental liquidity strategy
has been to invest in prime Canadian mortgages.
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 eff ective during the turmoil experienced in
2007 through 2009, when capital markets retreated
and only the highest-quality assets were bid. As
the Company’s results in those years have shown,
First National had little, if any, trouble fi nding
investors to purchase its mortgage origination at
profi table margins. Originating prime mortgages
also allows the Company to securitize in the capital
markets; however, this activity requires signifi cant
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 loan
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 eight fi nancial
institutions for a total credit of $570 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, 2013, the Company has entered
into repurchase transactions with fi nancial institutions
to borrow $609 million related to $620 million of
mortgages held in “mortgages accumulated for sale
or securitization” on the balance sheet.
At December 31, 2013, outstanding bank
indebtedness (excluding bank indebtedness at the
Fund level) was $260.3 million (December 31,
2012 – $185.0 million). Together with the debenture
fi nancing of $175 million (December 31, 2012 –
$175 million), this “combined debt” was used to fund
$454.8 million (December 31, 2012 – $297.2 million)
of mortgages accumulated for sale or securitization.
At December 31, 2013, the Company’s other
interest-yielding assets included: (1) deferred
placement fees receivable of $33.6 million (Decem-
ber 31, 2012 – $41.9 million) and (2) mortgage and
22 FIRST NATIONAL FINANCIAL CORPORATION
loan investments of $184.6 million (December 31,
2012 – $173.0 million). The diff erence 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 31, 2012 and
December 31, 2013, and now stands at $nil
(December 31, 2012 – $62.8 million). Eff ectively,
the Company’s bank, debenture and repo debt
have been used entirely to fund mortgages accu-
mulated for sale or securitization such that there
is no debt needed to fund any other part of the
Company’s operations. This debt-to-equity ratio has
decreased from 0.19 to 1 as at December 31, 2012
as the Company has repaid bank debt fully with
the proceeds from the repayment of approximately
$44.7 million of cash held as collateral under
securitization together with cash 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 specifi ed 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 fi nancing 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 fi nance a
portion of the Company’s deferred placement fees
receivable and the origination costs associated with
securitization as well as other miscellaneous longer-
term fi nancing 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 on a dollar-
for-dollar basis for all mortgages not registered with
the custodian. Due to the diffi culty in obtaining
evidence from land registry offi ces on a timely basis,
the Company has been required to post cash
collateral for the pending title transfers. At Decem-
ber 31, 2013, $4.8 million (December 31, 2012 –
$37.7 million) of this collateral was held by the
custodian. The collateral will be repaid to the
Company as registration is subsequently evidenced
to the custodian on these mortgages. The other
signifi cant portion of cash collateral is the investment
made on behalf of the Company’s ABCP programs.
As at December 31, 2013, the investment in cash
collateral was $20.0 million (December 31, 2012 –
$28.0 million). In 2012, this total included $11.9 mil-
lion for the Alt-A program. In October 2013, the
Company terminated the Alt-A program, repaying
$13.6 million of debt related to securitized mort-
gages and receiving a repayment of the $11.9 million
of cash collateral. The Company will fund the
remaining portfolio of Alt-A mortgages from the
program with internal resources. The Company
continues to employ an assumption for the fair value
of credit losses in the Alt-A program. To date, this
assumption has been adequate to absorb all actual
losses experienced in the program.
As demonstrated previously, the Company
continues to see strong demand for its mortgage
product from institutional investors and liquidity
from bank-sponsored commercial paper conduits.
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
fl ow received in the fourth quarter of 2013, the
Company will receive approximately $76 million
of cash, on an annualized basis, from its servicing
2013 ANNUAL REPORT 23
Management’s
Discussion and
Analysis
operations and $120 million of annualized cash fl ow
from securitization transaction spread and deferred
placement fees receivables. Together, on an after-tax
basis, this $144 million of annual cash fl ow would
be more than suffi cient to support the annual divi-
dends of $90 million on the common shares and the
$4.65 million on the preference shares. Although this
is a simplifi ed analysis, it does highlight the sustain-
ability of the Company’s business model and divi-
dend policy through periods of economic weakness.
As described earlier, the Company issued
4,000,000 Class A preference shares, Series 1, 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 transactions
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 on the outstanding common shares and on a
quarterly basis on the outstanding preference 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 common and preference shares after Decem-
ber 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 preference shares, the Com-
pany 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.
Financial Instruments
and Risk Management
The Company has elected to treat deferred
placement fees receivable, certain mortgages pledged
under securitization that have been funded with
ABCP and NHA MBS debt and several mortgages
within mortgage and loan investments, as fi nancial
assets measured at “fair value through profi t or loss”
such that changes in market value are recorded in
the statement of income. Eff ectively, 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 fl ows. As rates in the bond market
change, the carrying values of these assets will
change. These changes may be signifi cant (favourable
and unfavourable) from quarter to quarter. The
Company enters into fi xed-for-fl oat swaps to
manage the interest rate exposure of fi xed mort-
gages sold to ABCP conduits. These instruments will
also be treated as fair value through profi t or loss.
While the Company has attempted to exactly match
the principal balances of the fi xed mortgages over
the next fi ve-year period to the notional swap values
for the same period, there will be diff erences 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 trans-
ferred 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
24 FIRST NATIONAL FINANCIAL CORPORATION
should be off set 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 some 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, 2013, the Company has $697.1 mil-
lion 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, 2013, the
Company had entered into $106.4 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, 2013 to December 31, 2013 was
a $28.7 million gain. This amount has been included in
revenue in the statement of comprehensive income.
Upon settlement of the debenture issuance, the
Company entered into a fl oat-for-fi x 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.
This eff ectively converts the fi xed rate semi-annual
debenture-based loan payable into a fl oating rate
monthly resetting note payable. Since the date when
this swap was entered into, fi ve-year interest rates
have decreased pursuant to global economic issues
and the value of this swap has increased to $4.2 mil-
lion as at December 31, 2013. The Company has
documented this swap as a hedge for accounting
purposes, as the fi xed leg of the swap exactly
matches the cash fl ow obligations under the deben-
ture. Eff ectively, the unrealized gain of $4.2 million on
the swap has been excluded from earnings and been
applied to increase the carrying value of the deben-
ture note payable. The Company is also a party to
three amortizing fi x-for-fl oat rate swaps that eco-
nomically 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, 2013,
the aggregate notional value of these swaps was
$37.6 million. During the year the value of these
swaps increased by about $0.4 million. The amortiz-
ing swaps mature between July 2015 and June 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 CMBS market in the
spring of 2007. These mortgages were originated
at credit spreads designed to be profi table 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 widened. The Com-
pany 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 losses or
gains related to credit spread movement. Despite
entering into eff ective 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 Com-
pany is exposed to the risk that 30-day ABCP rates
are greater than 30-day BA rates. Prior to the
fi nancial crisis, the Company considered this a low
risk given the quality of the assets securitized, the
amount of credit enhancements provided by the
2013 ANNUAL REPORT 25
Management’s
Discussion and
Analysis
Company and the strong covenant of the bank-
sponsored conduits with which the Company trans-
acted. 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. The success of this approach
has been demonstrated through the increase in
volume and profi tability of the NHA MBS program
and signifi cant increases in gains on deferred place-
ment fees from the sale of prime insured mortgages.
As at December 31, 2013, the Company has various
exposures to changing credit spreads. In particular,
in mortgages accumulated for sale or securitization,
there are over $1 billion of mortgages that are sus-
ceptible to some degree of changing credit spreads.
Capital Expenditures
A signifi cant portion of First National’s business
model consists of the origination and placement
or securitization of fi nancial 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 signifi cant 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 fi xed assets,
the business requires capital expenditures on
technology (both software and hardware), leasehold
improvements and offi ce furniture. During the year
ended December 31, 2013, the Company purchased
new computers and offi ce and communications
equipment primarily to support its single-family
residential business. Going forward, the Company
expects capital expenditures on fi xed assets will
be approximately $3.0 million annually.
Summary of Contractual Obligations
The Company’s long-term obligations include fi ve
to 10-year premises leases for its fi ve offi ces 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
25,945
25,945
$
$
$
$
0–1 year
2–3 years
4–5 years After 5 years
5,150
5,150
$
$
10,253
10,253
$
$
9,065
9,065
$
$
1,477
1,477
26 FIRST NATIONAL FINANCIAL CORPORATION
Critical Accounting Policies and Estimates
The Company prepares its fi nancial 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 aff ect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the fi nancial
statements, and the reported amounts of revenue
and expenses during the reporting period. Manage-
ment bases its estimates on historical experience and
other assumptions that it believes to be reasonable
under the circumstances. Management also evaluates
its estimates on an ongoing basis. The signifi cant
accounting policies of First National are described
in Note 2 to the Company’s audited fi nancial
statements as at December 31, 2013. The Company
adopted IFRS 10, 12 and 13 in the fi rst quarter of
2013, as described in the notes to the fi nancial state-
ments. The policies which First National believes are
the most critical to aid in fully understanding and
evaluating its reported fi nancial results include the
determination of the gains on deferred placement
fees and the impact of fair value accounting on
fi nancial 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 fl ows) in the mortgages.
These retained interests are refl ected on the
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 fl ows. The annual rate of
unscheduled principal payments is determined by
reviewing portfolio prepayment experience on
a monthly basis. The Company uses diff erent rates
for its various programs, which average approxi-
mately 15% for single-family mortgages. The
Company assumes there is virtually no prepayment
on multi-unit residential fi xed 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 refl ect 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,
2013 continue to be consistent with those used for
the year ended December 31, 2012 and the quarters
ended September 30, 2013, June 30, 2013 and
March 31, 2013.
The Company has elected to treat its fi nancial
assets and liabilities, including deferred placement
fees receivable, specifi c mortgages pledged under
securitization, some mortgage and loan investments
and bonds sold short, at fair value through profi t 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 securitized mortgages has a signifi cant impact
on earnings. The Company uses diff erent prepay-
ment rates for its various programs, which average
approximately 10% for single-family mortgages.
The Company assumes there is virtually no prepay-
ment on multi-unit residential fi xed rate mortgages.
Actual prepayment experience has been consistent
with these assumptions. The Company 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 profi t margin for
the risk involved.
2013 ANNUAL REPORT 27
Management’s
Discussion and
Analysis
Future Accounting Changes
The Company adopted IFRS as at January 1, 2010.
The following new IFRS pronouncements have been
issued and, although not yet eff ective, may have a
future impact on the Company.
The Company will be required to adopt IFRS 9,
Financial Instruments (“IFRS 9”), which is the fi rst
phase of the IASB’s project to replace IAS 39. On
November 19, 2013, the IASB decided that the
previously set mandatory eff ective date of January 1,
2015 would not allow suffi cient time for entities to
prepare to apply IFRS 9, and that a new date should
be determined when IFRS 9 is closer to completion,
currently expected to be January 1, 2018. IFRS 9
will provide new requirements for the way in which
an entity should classify and measure fi nancial assets
and liabilities that are in the scope of IAS 39, with
a fi nal standard targeted in the fi rst half of 2014.
The standard requires all fi nancial assets to be
classifi ed on the basis of the entity’s business model
for managing such fi nancial assets and the contractual
cash fl ow characteristics of the fi nancial assets.
On November 19, 2013, the IASB introduced a
new hedge accounting model. The general hedge
accounting standard is intended to provide better
links between an entity’s risk management activities,
the rationale for hedging and the impact of hedging
on the fi nancial statements. The impairment phase
of the IASB’s fi nancial instruments project is currently
under development, with a review draft of the
standard issued in March 2013 and a fi nal standard
targeted in the fi rst half of 2014. Management is
currently evaluating the potential impact that the
adoption of IFRS 9 will have on the Company’s
consolidated fi nancial statements.
Disclosure Controls and Internal Controls
over Financial Reporting
The Company’s disclosure controls and proce-
dures are designed to provide reasonable assurance
that information required to be disclosed by the
Company in reports fi led under Canadian securities
laws is recorded, processed, summarized and
reported within the time periods specifi ed under
those laws, and include controls and procedures
that are designed to ensure that information is
accumulated and communicated to management,
including the Chief Executive Offi cer and Chief
Financial Offi cer, to allow timely decisions regarding
required disclosure.
As of December 31, 2013, management evaluated,
under the supervision of and with the participation
of the Chief Executive Offi cer and Chief Financial
Offi cer, the eff ectiveness of the Company’s disclo-
sure controls and procedures. Based on this evalu-
ation, management concluded that the Company’s
disclosure controls and procedures, as defi ned by
National Instrument 52-109, Certifi cation of Disclosure
in Issuers’ Annual and Interim Filings, were eff ective
as of December 31, 2013.
Management is responsible for establishing and
maintaining adequate internal control over fi nancial
reporting. Internal control over fi nancial reporting is
designed to provide reasonable assurance regarding
the reliability of fi nancial reporting and the prepara-
tion of fi nancial statements for external purposes
in accordance with reporting standards; however,
because of its inherent limitations, internal control
over fi nancial reporting may not prevent or detect
misstatements on a timely basis.
Management evaluated, under the supervision
of and with the participation of the Chief Executive
Offi cer and Chief Financial Offi cer, the eff ectiveness
of the Company’s internal control over fi nancial
reporting based on the criteria set forth in Internal
Control over Financial Reporting – Guidance for Smaller
Public Companies issued by the Committee of
Sponsoring Organizations of the Treadway Commis-
sion and, based on that evaluation, concluded that
the Company’s internal control over fi nancial
reporting was eff ective as of December 31, 2013
28 FIRST NATIONAL FINANCIAL CORPORATION
and that no material weaknesses have been
identifi ed in the Company’s internal control over
fi nancial reporting as of December 31, 2013.
No changes were made in the Company’s internal
controls over fi nancial reporting during the year
ended December 31, 2013 that have materially
aff ected, or are reasonably likely to materially
aff ect, the Company’s internal controls over
fi nancial reporting.
Risks and Uncertainties Aff ecting
the Business
The business, fi nancial condition and results of
operations of the Company are subject to a number
of risks and uncertainties, and are aff ected 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
(including the policies set for mortgage default
insurance companies), competition, reliance on
mortgage insurers, reliance on key personnel,
conduct and compensation of independent mortgage
brokers, failure or unavailability of computer and
data processing systems and software, insuffi cient
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 the Company
include those related to the dependence on FNFLP,
leverage and restrictive covenants, dividends which
are not guaranteed and could fl uctuate with FNFLP’s
performance, restrictions on potential growth, the
market price of the Company’s 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 fi nd 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 origina-
tion 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 aff ecting 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 identifi ed 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 fi nancial position, business
strategy and strategic goals, product development
activities, projected costs and capital expenditures,
fi nancial 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 admi-
nistration, future use of securitization vehicles,
industry trends and future revenues is forward-
looking information. Forward-looking information
is based on certain factors and assumptions regard-
ing, 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
2013 ANNUAL REPORT 29
Management’s
Discussion and
Analysis
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-looking information is subject to certain
factors, including risks and uncertainties, which could
cause actual results to diff er 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 as
outlined under ‘‘Risk and Uncertainties Aff ecting the
Business’’. In evaluating this information, the reader
should specifi cally consider various factors, including
the risks outlined under ‘‘Risk and Uncertainties
Aff ecting the Business’’, which may cause actual
events or results to diff er materially from any
forward-looking information. The forward-looking
information contained in this discussion represents
management’s expectations as of February 25, 2014,
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.
Outlook
Management considers fi scal 2013 to have been
very successful. Despite opening headwinds in the
fi rst quarter and the initiation of new government
controls designed to moderate consumer borrowing,
the Company originated almost $11 billion of single-
family residential mortgages. The Company was
able to increase origination in the commercial
segment by 16%, and together set a new record for
total origination of $14.1 billion. The Company took
advantage of its renewal opportunities and demand
from the capital markets to successfully securitize
approximately $4.4 billion of mortgages.
For 2014, the Company anticipates the low
interest rate environment will continue with moder-
ated, but still healthy, mortgage spreads. Manage-
ment foresees similar origination volumes in 2014
as recorded in 2013. By realizing on the signifi cant
renewal opportunities available in the year and
focusing on its partnerships with institutional
customers, the Company expects to fund almost
$20 billion of mortgages in 2014. Despite fl at
origination targets, management expects to continue
to capitalize on higher volumes of mortgage
renewals and to generate cash fl ow from its almost
$18 billion portfolio of mortgages pledged under
securitization in order to maximize the Company’s
fi nancial performance.
30 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 fi nancial statements and Management’s
Discussion and Analysis (“MD&A”). The consolidated fi nancial statements have been prepared in accordance
with International Financial Reporting Standards (“IFRS”).
The consolidated fi nancial statements and information in the MD&A necessarily include amounts based
on the best estimates and judgments by management of the expected eff ects of current events and transac-
tions with the appropriate consideration to materiality. In addition, in preparing this fi nancial information the
Company must make determinations about the relevancy of information to be included, and estimates and
assumptions that aff ect 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 diff er materially from our present assessment of this informa-
tion because future events and circumstances may not occur as expected.
In meeting our responsibility for the integrity and fairness of the annual consolidated fi nancial 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 fi nancial records are reliable for preparing
fi nancial statements and other fi nancial information, transactions are properly authorized and recorded,
and assets are safeguarded against unauthorized use or disposition.
As at December 31, 2013, the Chairman, President and Chief Executive Offi cer and Chief Financial Offi cer
evaluated, or caused an evaluation under their direct supervision, of the design and operation of our internal
controls over fi nancial reporting (as defi ned in National Instrument 52-109 – Certifi cate of Disclosure in Issuers’
Annual and Interim Filings) and, based on that assessment, determined that the Company’s internal controls
over fi nancial reporting were appropriately designed and operating eff ectively.
The Board of Directors oversees management’s responsibility for fi nancial reporting through an Audit Com-
mittee, which is composed entirely of independent directors. This committee reviews the Company’s annual
consolidated fi nancial 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
fi nancial 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 2013 and 2012
annual consolidated fi nancial 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, President and
Chief Executive Offi cer
Toronto, Canada
February 25, 2014
Robert A. Inglis
Chief Financial Offi cer
2013 ANNUAL REPORT 31
Independent
Auditors’
Report
To the shareholders of First National Financial Corporation
We have audited the accompanying consolidated fi nancial statements of First National Financial Corporation,
which comprise the consolidated statements of fi nancial position as at December 31, 2013 and 2012, and
the consolidated statements of comprehensive income, changes in equity and cash flows for the years then
ended, 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 fi nancial statements
in accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the peparation 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 fi nancial statements based on our audits.
We conducted our audits in a ccordance with Canadian generally accepted auditing standards. Those stan-
dards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated fi nancial statements are free from material misstatement.
An audit i nvolves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated fi nancial statement s. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks o f material misstatement of the consolidated fi nancial 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 fi nancial 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 poli cies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated fi nancial 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 fi nancial statements present fairly, in all material respects, the fi nancial
position of First National Financial Corporation as at December 31, 2013 and 2012, and its fi nancial
performance and its cash fl ows for the years then ended in accordance with International Financial
Reporting Standards.
Toronto, Canada
February 25, 2014
Chartered Accountants
Licensed Public A ccountants
32 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
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 attributable to shareholders
Common shares
Preferred shares
Retained earnings
Non-controlling interests
Total equity
Total liabilities and equity
See accompanying notes
On behalf of the Board:
Notes
2013
2012
(Restated –
note 24)
3
15
5
3
4
3
8
6
7
10
16
15
11
13
18
18
17
17
$
431,111
$
334,962
60,110
1,055,443
1,074,825
51,302
452,534
808,522
17,651,644
13,032,043
33,580
24,804
3,079
184,584
50,037
41,919
69,493
3,881
173,034
54,546
$ 20,569,217
$ 15,022,236
$
274,484
$
155,197
609,292
66,426
1,050,199
500,608
60,381
451,875
17,884,303
13,272,810
179,195
181,275
4,207
51,200
1,790
32,900
$ 20,119,306
$ 14,656,836
$
122,671
$
122,671
97,394
184,561
404,626
45,285
449,911
97,394
102,440
322,505
42,895
365,400
$ 20,569,217
$ 15,022,236
John Brough
Robert Mitchell
2013 ANNUAL REPORT 33
Consolidated
Statements of
Comprehensive
Income
($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 on fi nancial instruments
EXPENSES
Brokerage fees
Salaries and benefi ts
Interest
Other operating
Amortization of intangible assets
Notes
2013
2012
3
4
$
429,223
$
336,987
(323,236)
(246,736)
105,987
90,251
145,407
151,919
11,021
54,166
92,825
43,866
7,705
35,934
89,915
6,153
453,272
381,877
84,420
62,029
29,170
38,579
5,563
115,978
56,299
19,829
32,478
6,468
219,761
231,052
Income before income taxes
Income tax
233,511
150,825
18
61,410
40,500
Net income and comprehensive income for the year
172,101
110,325
Net income attributable to:
Shareholders
Non-controlling interests
Earnings per share
Basic
See accompanying notes
169,726
110,325
2,375
–
$
172,101
$
110,325
17
$ 2.75
$ 1.76
34 FIRST NATIONAL FINANCIAL CORPORATION
Consolidated
Statements of
Changes in
Equity
($000s)
Common
shares
Preferred
shares
Retained
earnings
Non-
controlling
interests
Total
equity
Balance at January 1, 2013
$
122,671
$
97,394
$ 102,440
$
42,895
$
365,400
Comprehensive income
Dividends paid or declared
Non-controlling interests
–
–
–
–
–
–
169,726
2,375
172,101
(87,605)
(2,689)
(90,294)
–
2,704
2,704
Balance at December 31, 2013
$
122,671
$
97,394
$ 184,561
$
45,285
$
449,911
Balance at January 1, 2012
$
122,671
$
97,394
$
72,974
$
Comprehensive income
Dividends paid or declared
Initial recognition of
non-controlling interests
–
–
–
–
–
–
110,325
(80,859)
(Restated –
note 24)
–
–
–
$
293,039
110,325
(80,859)
–
42,895
42,895
Balance at December 31, 2012
$
122,671
$
97,394
$ 102,440
$
42,895
$
365,400
See accompanying notes
2013 ANNUAL REPORT 35
Consolidated
Statements of
Cash Flows
($000s)
Years ended December 31
OPERATING ACTIVITIES
Net income for the year
Add (deduct) items not aff ecting 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 fi nancial instruments
Net change in non-cash working capital balances related to operations
2013
2012
(Restated –
note 24)
$
172,101
$
110,325
18,300
(9,912)
(96,149)
2,600
(5,976)
(91,278)
(4,600,694)
(3,260,336)
4,630,915
3,353,695
17,955
22,363
802
2,374
5,563
(19,286)
121,969
(272,641)
890
2,059
6,468
(16,755)
124,055
42,542
Cash provided by (used in) operating activities
$
(150,672)
$
166,597
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
(3,428)
44,689
(2,955)
(12,611)
(142,353)
(176,064)
130,803
183,452
Cash provided by (used in) investing activities
$
29,711
$
(8,178)
FINANCING ACTIVITIES
Dividends paid
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
Non-controlling interest
$
(87,106)
$
(80,609)
108,684
(163,816)
(19,422)
(602,909)
(38,104)
205,092
602,412
(198,466)
15
42,895
Cash provided by (used in) fi nancing activities
$
1,674
$
(233,008)
Net increase in bank indebtedness during the year
Bank indebtedness, beginning of year
Bank indebtedness, end of year
Supplemental cash fl ow information
Interest received
Interest paid
Income taxes paid
See accompanying notes
(119,287)
(155,197)
(74,589)
(80,608)
$
(274,484)
$
(155,197)
$
536,524
$
398,094
335,516
40,693
260,246
32,554
36 FIRST NATIONAL FINANCIAL CORPORATION
Notes to
Consolidated
Financial
Statements
December 31, 2013 and 2012
($000s, except per unit amounts or unless otherwise noted)
Note 1
General Organization and Business
of First National Financial Corporation
First National Financial Corporation (the “Corpo-
ration” or “Company”) 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
$75 billion in mortgages under administration,
FNFLP is an originator and underwriter of mortgages
and a signifi cant participant in the mortgage broker
distribution channel.
The Corporation is incorporated under the laws
of the Province of Ontario, Canada and has its
registered offi ce 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 under
the symbols FN and FN.PR.A, respectively.
Note 2
Signifi cant Accounting Policies
2.1 Basis of preparation
The consolidated fi nancial statements have been
prepared in accordance with International Financial
Reporting Standards (“IFRS”). The consolidated
fi nancial statements have been prepared on a
historical cost basis, except for derivative fi nancial
instruments and fi nancial assets and fi nancial liabilities
that are recorded at fair value through profi t 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 fi nancial statements are presented
in Canadian dollars and all values are rounded to the
nearest thousand except when otherwise indicated.
The consolidated fi nancial statements were autho-
rized for issue by the Board of Directors on
February 25, 2014.
2.2 Basis of consolidation
The consolidated fi nancial statements comprise the
fi nancial statements of the Company and its subsid-
iaries, including FNFLP, First National Financial GP
Corporation (the general partner of FNFLP), 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”), First National Asset
Management Inc., First National Mortgages Cor-
poration, First National Mortgage Investment Fund
(the “Fund”), and FN Mortgage Investment Trust
(the “Trust”).
Eff ective January 1, 2013, IFRS 10 – Consolidated
Financial Statements has replaced portions of IAS 27 –
Consolidated and Separate Financial Statements,
and interpretation SIC-12 – Consolidation – Special
Purpose Entities. IFRS 10 requires the consolidation
of an investee only if the investor possesses power
over the investee, has exposure to variable returns
from its investment with the investee and has the
ability to use its power over the investee to aff ect its
returns. The Company reassessed its consolidation
conclusions on January 1, 2013 under IFRS 10 and
determined that it controls both the Fund and the
Trust, and accordingly has consolidated the opera-
tions and net assets of the Fund and Trust for the
year ended December 31, 2013.
The Fund and Trust were created in 2012 as
special purpose vehicles to obtain exposure to a
diversifi ed portfolio of high-yielding mortgages.
The Company had accounted for the Fund and Trust
using the cost method of accounting in the consoli-
dated fi nancial statements of the Company for the
year ended December 31, 2012. With the adoption
of IFRS 10 – Consolidated Financial Statements
on January 1, 2013, the Company reassessed its
consolidation conclusions and determined that it
controls both the Fund and Trust. While the
Company has legal ownership of approximately
16% of the units issued by the Fund, because of its
status as the sole seller of assets to the Fund and its
rights as promoter, the Company determined that
it had de facto control of the Fund. The Company
has restated the 2012 comparative information on
the consolidated fi nancial statements (note 24).
2013 ANNUAL REPORT 37
Notes to Consolidated
Financial Statements
As a result of the consolidation, non controlling
interests in the Fund and Trust are shown as a
separate component of equity on the consolidated
statements of fi nancial position to distinguish them
from the equity of the Company’s shareholders.
The net income attributable to non-controlling
interest is also separately disclosed on the consoli-
dated statements of comprehensive income and
retained earnings.
Certain special purpose vehicles that were struc-
tured by third parties, where the Company does not
have control, are not consolidated in the Company’s
fi nancial statements.
The consolidated fi nancial statements have been
debt related to securitized mortgages and the
Company continues to hold the mortgages on its
consolidated statement of fi nancial position, unless:
substantially all of the risks and rewards
(i)
associated with the fi nancial instruments have
been transferred, in which case the assets are
derecognized in full; or
a signifi cant 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 fi nancial asset; otherwise the
asset continues to be recognized to the extent
of the Company’s continuing involvement.
(ii)
prepared using consistent accounting policies for
like transactions and other events in similar circum-
stances. All intercompany balances and revenues and
expenses have been eliminated on consolidation.
Where (i) or (ii) above applies to a fully proportion-
ate share of all or specifi cally identifi ed cash fl ows,
the relevant accounting treatment is applied to that
proportion of the mortgage.
2.3 Use of estimates
The preparation of fi nancial statements in conformity
with IFRS requires management to make estimates
and assumptions that aff ect the reported amounts
of assets and liabilities, including contingencies, at
the date of the consolidated fi nancial statements
and the reported amounts of revenue and expenses
during the reporting period. Actual results may diff er
from those estimates. Major areas requiring use
of estimates by management are those that require
reporting of fi nancial assets and liabilities at fair value.
2.4 Signifi cant 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 ser-
vicing 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 vehi-
cles, the Company receives cash proceeds from the
transaction. These proceeds are accounted for as
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
fi nancing 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
eff ective yield basis over the term of the related
mortgages or debt.
derecognition
A fi nancial asset is derecognized when:
• The right to receive cash fl ows from the asset
has expired;
• The Company has transferred its rights to receive
cash fl ows from the assets or has assumed an
obligation to pay the cash fl ows, 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.
38 FIRST NATIONAL FINANCIAL CORPORATION
When the Company has transferred its rights
to receive cash fl ows 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 fl ows
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 mort-
gages. Placement fees are earned by the Company
for its origination and underwriting activities on
a completed 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 fl ows, 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 fl ows 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 classifi ed 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.
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 fl ows 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 classifi ed as loans and receivables and are
measured at their amortized cost using the eff ective
yield method. Certain mortgages (primarily those
funded under bank-sponsored ABCP programs)
are classifi ed as fair value through profi t or loss and
recorded at fair value. Origination costs, such as
brokerage fees, bulk insurance premiums 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
eff ective yield basis.
2013 ANNUAL REPORT 39
Notes to Consolidated
Financial Statements
Debt related to securitized
and participation mortgages
Debt related to securitized mortgages represents
obligations related to the fi nancing of mortgages
pledged under securitization. This debt is measured
at its amortized cost using the eff ective 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 fi nancing of a portion
of commercial mortgages included in mortgage
and loan investments. These mortgages are subject
to participation agreements with other fi nancial
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 fi nancial position with an
off setting 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 classifi ed as fair value through profi t 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 Com-
pany’s various programs and are classifi ed 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 specifi ed 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 classifi ed as fair value
through profi t 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 diff er-
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 off set to hedge expense. Transac-
tions are recorded on a settlement date basis.
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 specifi c
provisions for credit losses, if any.
Mortgage and loan investments are classifi ed as
loans and receivables, and 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 .
Intangible assets
Intangible assets are comprised of broker relation-
ships and customer service contracts and arose
in connection with the initial public off ering (“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.
40 FIRST NATIONAL FINANCIAL CORPORATION
Intangible assets with fi nite 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
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.
Goodwill
Goodwill represents the price paid for the Corpo-
ration’s business in excess of the fair value of the
net tangible assets and identifi able 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
Offi ce 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
Bank indebtedness
Bank indebtedness consists of bank indebtedness
net of cash balances with banks.
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 a Canadian Trust Company acting as the title
custodian for the Company’s NHA MBS program.
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 statement of fi nancial position.
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.
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.
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.
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 fl ows 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.
Deferred income taxes arise on temporary
diff erences between the carrying amounts of assets
and liabilities on the consolidated statement of
fi nancial position and their tax bases. Deferred tax
liabilities are generally recognized for all taxable
temporary diff erences and deferred tax assets are
recognized to the extent that future realization of
the tax benefi t 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 off set
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 off set
exists in the entity.
2013 ANNUAL REPORT 41
as held-for-trading (together with other ABCP-
funded mortgages, “HFT mortgages”). For the large
portion of mortgages pledged under securitization
and funded with ABCP-related debt, the Company
has entered into swaps to convert the mortgages
from fi xed rate to fl oating rate in order to match
the mortgages with the 30-day fl oating 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 signifi cantly
with the passage of time as the interest rate envi-
ronment changes. In order to avoid a signifi cant
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 fl ows
related to deferred placement fees receivable are
typically received over fi ve-to-10 year terms. These
cash fl ows 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 fi nancial liabilities held at fair
value through profi t 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 fi nancial assets
can only be transferred out of the held at fair value
through profi t 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 defi nition of a loan
and receivable at the date of reclassifi cation and
the Company has the intent and ability to hold the
assets for the foreseeable future or until maturity.
Notes to Consolidated
Financial Statements
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.
Financial assets and liabilities
The Company classifi es its fi nancial assets as either
fi nancial instruments at fair value through profi t or
loss or loans and receivables. Financial liabilities are
classifi ed as either held at fair value through profi t or
loss or at amortized cost. Management determines
the classifi cation of fi nancial assets and liabilities at
initial recognition.
financial assets and financial liabilities held
at fair value through profit or loss
Financial instruments are classifi ed in this category
if they are held for trading or if they are designated
by management at fair value through profi t or loss
at inception.
Financial instruments are classifi ed as fair value
through profi t or loss if they are acquired principally
for the purpose of selling in the short term. Financial
assets and fi nancial liabilities may be designated at
fair value through profi t or loss when:
(i)
the designation eliminates or signifi cantly 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 diff erent basis; or
a group of fi nancial assets and/or fi nancial
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 profi t or loss.
The most signifi cant of these assets include: a large
portion of mortgages pledged under securitization
and funded with ABCP-related debt, certain
mortgages funded with MBS debt, and deferred
placement fees receivable. The mortgages funded
with MBS debt were previously funded by ABCP
debt and as such have retained their classifi cation
42 FIRST NATIONAL FINANCIAL CORPORATION
loans and receivables
Loans and receivables are non-derivative fi nancial
assets with fi xed 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.
held-to-maturity
Held-to-maturity assets are non-derivative fi nancial
assets with fi xed or determinable payments and
fi xed 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
eff ective interest method.
Held-to-maturity assets can be reclassifi ed 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 fi nancial 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 re-measured 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 fi xed-rate receivables with fl oating rate debt
and to convert the fi xed-rate debenture into fl oating
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 fi nancial 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 eff ective in off setting
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 carry-
ing amount of a hedged item for which the eff ective
interest method is used is amortized to the con-
solidated statement 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 fi xed and fl oating 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.
2013 ANNUAL REPORT 43
Notes to Consolidated
Financial Statements
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, 2013,
the cash held as collateral for securitization was
$24,804 (2012 – $69,493).
The following table compares the carrying amount of mortgages pledged for securitization and the
associated debt:
Securitized mortgages at face value
Mark to market adjustment
Capitalized origination costs
Debt discounts
Add:
Principal portion of payments held in restricted cash
Participation debt
Securitized mortgages at face value
Mark to market adjustment
Capitalized origination costs
Debt discounts
Add:
Principal portion of payments held in restricted cash
Participation debt
2013
Carrying amount
of securitized
mortgages
Carrying amount
of associated
liabilities
$ 17,532,693
$ 17,919,788
37,956
80,995
–
17,651,644
398,285
–
–
–
(47,161)
17,872,627
–
11,676
$ 18,049,929
$ 17,884,303
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
The principal portion of payments held in restricted
cash represents payments on account of mortgages
pledged under securitization which have been received
at year end but have 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 mort-
gages pledged under securitization in the above table.
44 FIRST NATIONAL FINANCIAL CORPORATION
The changes in capitalized origination costs for the year ended December 31 are summarized as follows:
Opening balance, January 1
Add: new origination costs capitalized in the year
Less: costs amortized in the year
Ending balance, December 31
2013
55,130
$
56,542
(30,677)
2012
49,782
28,809
(23,461)
80,995
$
55,130
$
$
During the year ended December 31, 2013, the
Company advanced funds and transferred into
the securitization vehicles $6,532,494 (2012 –
$4,718,680) of mortgages.
As at December 31, 2013, mortgages pledged
under securitization include $17,440,211 (2012 –
$12,691,496) of insured mortgages and $92,482
(2012 – $256,374) of uninsured mortgages.
The contractual maturity profi le of the mortgages
pledged under securitization programs is summarized
as follows:
The mortgages securitized through NHA MBS and
CMB programs have been classifi ed as loans and
receivables, except for approximately $1.1 billion
(2012 – $1.0 billion) of securitized mortgages
included in HFT mortgages. These mortgages are
carried at par plus adjustment for unamortized
origination costs. Most mortgages in bank-sponsored
ABCP programs have been classifi ed as fair value
through profi t or loss.
The following table summarizes the mortgages
pledged under securitization that are past due as
at December 31:
2014
2015
2016
2017
$ 1,747,687
2,777,610
Arrears (days)
2013
3,073,198
31 to 60
3,696,547
61 to 90
$
71,634
$
15,388
30,284
2012
42,185
13,716
30,263
86,164
17,532,693
$
117,306
$
2018 and thereafter
6,237,651
Greater than 90
Add:
Capitalized origination costs
Fair value premium – HFT mortgages
80,995
37,956
$ 17,651,644
Interest revenue-securitized mortgages consists
of $100,160 (2012 – $82,324) of interest revenue
related to ABCP-funded mortgages, which are
mostly measured at fair value and $329,063 (2012 –
$254,663) of interest revenue related to mortgages
pledged under securitization and securitized mort-
gages included in HFT mortgages.
2013 ANNUAL REPORT 45
Notes to Consolidated
Financial Statements
The Company uses various assumptions to
value the HFT mortgages, which are set out in the
tables below, including the rate of unscheduled
prepayment. Accordingly, HFT mortgages are subject
to measurement uncertainty. The eff ect of variations
between actual experience and assumptions will
be recorded in future statements of comprehen-
sive income. Key economic weighted average
assumptions and the sensitivities of the current
carrying values to immediate 10% and 20% adverse
changes in those assumptions as at December 31
are as follows:
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
2013
Commercial
mortgages
Residential
mortgages
$
190,939
$ 3,097,341
24
8.2%
4
8
2.3%
968
1,914
$
$
$
$
27
11.6%
517
1,028
2.1%
12,156
24,230
$
$
$
$
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
$
$
$
$
(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 fi gures 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 eff ect 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.
46 FIRST NATIONAL FINANCIAL CORPORATION
Note 4
Deferred Placement Fees Receivable
The Company enters into transactions with
institutional investors to sell primarily fi xed-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
substantially all of the risks and rewards of owner-
ship are transferred and the Company has minimal
exposure to the variability of future cash fl ows from
these mortgages. The investors have no recourse
to the Company’s other assets for failure of
mortgagors to pay when due.
During the year ended December 31, 2013,
$1,881,030 (2012 – $1,153,863) of mortgages were
placed with institutional investors, which created
gains on deferred placement fees of $11,021
(2012 – $7,705). Cash receipts on deferred place-
ment fees receivable for the year ended Decem-
ber 31, 2013 were $18,919 (2012 – $23,695).
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 eff ect 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 fl ows to immediate
10% and 20% adverse changes in those assumptions
are summarized as at December 31 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 fl ows 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 fl ows discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
2013
Commercial
mortgages
Residential
mortgages
$
$
$
$
$
33,204
$
54
–
–
–
4.8%
393
778
$
$
$
$
376
24
15%
1
2
4.8%
–
1
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
(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.
2013 ANNUAL REPORT 47
Notes to Consolidated
Financial Statements
These sensitivities are hypothetical and should be
used with caution. As the fi gures 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 eff ect 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
fl ows 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 classifi cation:
2013
2012
Mortgages
accumulated
for securitization
$ 1,063,068
$
800,768
Mortgages
accumulated
for sale
11,757
7,754
$ 1,074,825
$
808,522
Note 6
Mortgage and Loan Investments
2014
2015
2016
2017
2018 and thereafter
$
10,269
6,970
6,177
5,204
9,377
As at December 31, 2013, mortgage and loan
investments consist primarily of commercial fi rst
and second mortgages held for various terms,
the majority of which mature within one year.
Mortgage and loan investments consist of
$
37,997
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 together
with mortgages funded for placement with insti-
tutional investors.
Mortgages originated for the Company’s own
securitization programs are classifi ed 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,
classifi ed as loans
and receivables
Mortgage loans,
designated as fair
value through
profi t or loss
2013
2012
(Restated –
Note 24)
$
115,630
$
148,013
68,954
25,021
$
184,584
$
173,034
Mortgage and loan investments classifi ed as loans
and receivables are carried at outstanding principal
balances adjusted for unamortized premiums or
discounts and are net of specifi c provisions for
credit losses, if any.
48 FIRST NATIONAL FINANCIAL CORPORATION
The following table discloses the composition
of the Company’s portfolio of mortgage and loan
investments by geographic region as at Decem-
ber 31, 2013:
Province/territory
Portfolio
balance
Percentage
of portfolio
Alberta
$
17,927 %
British Columbia
Manitoba
New Brunswick
Newfoundland
and Labrador
Nova Scotia
Ontario
Quebec
Saskatchewan
Yukon
32,635
24,810
4,246
2,873
4,549
73,281
22,258
1,102
903
$
184,584 %
9.71
17.68
13.44
2.30
1.56
2.46
39.70
12.06
0.60
0.49
100.0
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
2013
278
409
5,773
2012
$
12,699
181
7,366
15,903
$
20,246
$
$
The portfolio contains $3,900 (2012 – $543) of
insured mortgages and $180,684 (2012 – $172,491)
of uninsured mortgage and loan investments as at
December 31, 2013.
Of the above total amount, the Company
considers $4,914 (2012 – $6,938) as impaired, for
which it has provided an allowance for potential loss
of $4,041 (2012 – $5,679) as at December 31, 2013.
The maturity profi le in the table below is based on the earlier of contractual renewal or maturity date.
2013
2014
2015
2016
2017
2018 and
thereafter
Book
value
2012
Book
value
Residential
$ 16,515
$
747
$
392
$
356
$
Commercial
116,458
30,276
8,325
10,265
347
903
$ 18,357
$
5,182
166,227
167,852
$ 132,973
$ 31,023
$
8,717
$ 10,621
$
1,250
$ 184,584
$ 173,034
Interest income for the year was $9,420 (2012 – $8,848) and is included in mortgage investment income on
the consolidated statement of comprehensive income and retained earnings.
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
2013
2012
$
$
7,761
$
12,500
29,776
50,037
$
6,706
18,064
29,776
54,546
The intangible assets have a remaining amortization
period of less than three years.
For the purpose of testing goodwill for impairment,
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, mort-
gages under administration, origination volume, and
profi tability. These factors indicate that the Corpora-
tion’s recoverable amount exceeds the carrying
value of its net assets and accordingly, goodwill is
not impaired.
2013 ANNUAL REPORT 49
Notes to Consolidated
Financial Statements
Note 8
Purchased Mortgage Servicing Rights
Purchased mortgage servicing rights consist of the following components:
2013
2012
Cost
Accumulated
amortization
Net book
value
Cost
Accumulated
amortization
Net book
value
Third-party commercial
mortgage
servicing rights
$
3,614
$
3,183
$
431
$
3,614
$
3,061
$
553
Commercial mortgage-
backed securities
primary and master
servicing rights
8,705
6,057
2,648
8,705
5,377
3,328
$
12,319
$
9,240
$
3,079
$ 12,319
$
8,438
$
3,881
The Company did not purchase any new servicing rights during the years ended December 31, 2013 and 2012.
Amortization charged to income for the year ended December 31, 2013 was $802 (2012 – $890).
Note 9
Mortgages under Administration
As at December 31, 2013, the Company had
mortgages under administration of $75,619,003
(2012 – $67,260,086), including mortgages held on
the Company’s consolidated statements of fi nancial
position. Mortgages under administration are
serviced for fi nancial institutions such as banks,
insurance companies, pension funds, mutual funds,
trust companies, credit unions and securitization
vehicles. As at December 31, 2013, the Company
administered 245,291 mortgages (2012 – 218,267)
for 91 institutional investors (2012 – 90) with an
average remaining term to maturity of 42 months
(2012 – 42 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
2013
2012
$ 48,245,957
$ 44,618,488
1,255,267
5,075,254
970,081
4,844,379
17,532,693
12,947,870
3,509,832
3,879,268
$ 75,619,003
$ 67,260,086
The Company’s exposure to credit loss is limited
to mortgages under administration totalling $201,271
(2012 – $406,589), of which $4,971 of mortgages
have principal and interest payments outstanding
as at December 31, 2013 (2012 – $22,415). The
Company incurred actual credit losses, net of
recoveries, of $3,752 during the year ended Decem-
ber 31, 2013 (2012 – $3,234). As at December 31,
2013, the Company has $7,687 (2012 – $2,556)
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 mort-
gagors. Since the Company does not hold a benefi cial
interest in these funds, they are not presented on
the consolidated statement of fi nancial position.
The aggregate of these accounts as at December 31,
2013 was $405,426 (2012 – $419,368).
50 FIRST NATIONAL FINANCIAL CORPORATION
Note 10
Bank Indebtedness
Bank indebtedness includes a revolving credit facility
of $570,000 (2012 – $545,000) maturing in Decem-
ber 2016, of which $258,421 (2012 – $197,717) was
drawn as at December 31, 2013 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 credit facility bears a variable rate of interest
based on prime and bankers’ acceptance rates.
Subsequent to the year end, the Company
renegotiated the credit facility. The new agree-
ment increased the commitment to $1 billion
and extended the term to January 2018.
Note 11
Debt Related to Securitized and
Participation Mortgages
Debt related to securitized mortgages represents
the funding for mortgages pledged under the
NHA MBS, CMB and ABCP programs. As at
December 31, 2013, debt related to securitized
mortgages was $17,872,627 (2012 – $13,241,712),
net of unamortized discounts of $47,161 (2012 –
$8,067). A comparison of the carrying amounts
of the pledged mortgages and the related debt
is summarized in note 3.
As at December 31, 2013, debt related to partici-
pation mortgages was $11,676 (2012 – $31,098).
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
eff ective yield basis.
Note 12
Swap Contracts
Swaps are over-the-counter contracts in which
two counterparties exchange a series of cash fl ows
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 accumu-
lated for sale held on the consolidated statements
of fi nancial position. The swap agreement that the
Company entered into was an interest rate swap
where two counterparties exchange a series of
payments based on diff erent 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, 2013 and 2012:
Less than
3 years
3 to 5 years
6 to 10 years
Total notional
amount
Fair value
2013
Interest rate swap contract
$
923,959
$ 1,678,567
$
13,283
$ 2,615,808
$
2,987
Less than
3 years
3 to 5 years
6 to 10 years
Total notional
amount
Fair value
2012
Interest rate swap contract
$
224,262
$ 1,408,997
$
457,816
$ 2,091,075
$
3,224
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
fi nancial position.
2013 ANNUAL REPORT 51
Notes to Consolidated
Financial Statements
Note 13
Debenture Loan Payable
The $175 million of fi ve-year term senior secured
debentures, with an interest rate of 5.07%, maturing
on May 7, 2015, 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% fi xed coupon and pay monthly
CDOR+2.134%, eff ectively 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.
Note 14
Commitments, Guarantees
and Contingencies
As at December 31, 2013, the Company has
the following operating lease commitments for
its offi ce premises:
2014
2015
2016
2017
2018 and thereafter
$
5,150
5,160
5,093
5,073
5,469
$
25,945
Outstanding commitments for future advances on
mortgages with terms of one to 10 years amounted
to $803,991 as at December 31, 2013 (2012 –
$641,060). The commitments generally remain
open for a period of up to 90 days. These commit-
ments have credit and interest rate risk profi les
similar to those mortgages that are currently under
administration. Certain of these commitments have
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 insignifi cant.
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 three months.
Note 16
Obligations Related to Securities
and Mortgages Sold
under Repurchase Agreements
The Company uses repurchase agreements to
fund specifi c mortgages included in mortgages
accumulated for sale or securitization. The current
contracts are with fi nancial institutions, are based on
bankers’ acceptance rates and mature on or before
January 31, 2014. Such agreements are entered into
concurrently with a total return swap which, with
the mortgage sale, is the economic equivalent of a
repurchase agreement.
52 FIRST NATIONAL FINANCIAL CORPORATION
Note 17
Shareholders’ Equity
(a) Authorized
Unlimited number of common shares
Unlimited number of cumulative 5-year rate reset preferred shares, Class A Series 1
Unlimited number of cumulative 5-year rate reset preferred shares, Class A Series 2
(b) Capital stock activities
Balance, December 31, 2012 and 2013
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 Series 1 Preferred Shares
are entitled to receive a cumulative quarterly
fi xed dividend yielding 4.65% annually for the
initial period ending March 31, 2016. Thereafter,
the dividend rate may be reset every fi ve years
at a rate equal to the fi ve-year Government of
Canada 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, fl oating rate Class A
Preferred Shares, Series 2 (“Series 2 Preferred
Shares”), subject to certain conditions, on
March 31, 2016 and on March 31 every fi ve
years thereafter. Holders of the Series 2
Preferred Shares will be entitled to receive
cumulative quarterly fl oating 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 $25.00.
(d) Earnings per share
Net income attributable to shareholders
Less: dividends declared on preferred shares
Net earnings attributable to common shareholders
Number of common shares outstanding
Basic earnings per common share
2013
169,726
(4,650)
165,076
$
$
2012
110,325
(4,650)
105,675
$
$
59,967,429
59,967,429
$ 2.75
$ 1.76
2013 ANNUAL REPORT 53
Notes to Consolidated
Financial Statements
Note 18
Income Taxes
The major components of deferred tax expense for the years ended December 31 consist of the following:
Income taxes relating to prior year
Changes to tax legislation
Relates to origination and reversal of timing diff erences
2013
$
–
–
18,300
18,300
$
$
$
2012
187
689
1,724
2,600
The major components of current income tax expense (recovery) for the years ended December 31 consist
of the following:
Income taxes relating to prior year
Income taxes relating to the year
Changes to tax legislation
2013
(260)
$
43,370
–
2012
(262)
38,500
(338)
43,110
$
37,900
$
$
The eff ective income tax rate reported in the consolidated statements of comprehensive income and retained
earnings varies from the Canadian tax rate of 26.37% for the year ended December 31, 2013 (2012 – 26.30%)
for the following reasons:
Company’s statutory tax rate
Income before income taxes
Income tax at statutory tax rate
Increase (decrease) resulting from:
Prior year adjustments
Income not subject to tax
Permanent diff erences
Diff erences in current and future tax rates
Change in tax legislation
Other
Income tax expense
2013
26.37%
2012
26.30%
$
233,511
$
150,825
61,577
39,682
(260)
(610)
254
14
–
435
(75)
–
397
776
(338)
58
$
61,410
$
40,500
54 FIRST NATIONAL FINANCIAL CORPORATION
Signifi cant 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
Gains (losses) on interest rate swaps
Loan loss reserves not deducted for tax purposes
Debenture issuance costs
Share issuance costs
Other
Deferred tax liabilities
2013
$
8,855
$
21,358
10,009
3,296
12,436
(6,063)
978
(845)
(67)
(422)
1,665
2012
11,025
14,499
8,168
4,751
2,122
(6,502)
(1,051)
(1,583)
(117)
(644)
2,232
$
51,200
$
32,900
The movements in signifi cant components of the Company’s deferred tax liabilities and assets for the year
ended December 31, 2013 and 2012 are 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
Gains on interest rate swaps
Intangible assets
Unamortized discount on debt related to securitized mortgages
Other
As at
January 1
2013
Recognized
in income
As at
December 31
2013
$
11,025
$
(2,170)
$
14,499
6,859
8,168
–
4,751
2,122
2,232
1,841
978
(1,455)
10,314
(567)
8,855
21,358
10,009
978
3,296
12,436
1,665
Total deferred income tax liabilities
$
42,797
$
15,800
$
58,597
Deferred income tax assets
Cumulative eligible capital property
Loan loss reserves not deducted for tax purposes
Losses on interest rate swaps
Debenture issuance costs
Share issuance costs
Total deferred income tax assets
Net deferred income tax liabilities
(6,502)
(1,583)
(1,051)
(117)
(644)
(9,897)
32,900
$
$
439
738
1,051
50
222
2,500
18,300
$
$
(6,063)
(845)
–
(67)
(422)
(7,397)
51,200
$
$
2013 ANNUAL REPORT 55
Notes to Consolidated
Financial Statements
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 diff erent view from management, the Company may be
required to change its provision for income taxes or deferred tax balances and the change could be signifi cant.
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 aff ect the fair value of fi nancial 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 fi xed.
As interest rates change, the values of these interest
rate dependent fi nancial 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 off set by the
reduced future spread on mortgages pledged under
securitization as the mortgage rate committed to
the borrower is fi xed 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
56 FIRST NATIONAL FINANCIAL CORPORATION
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 fl uctuations by
off setting the exposure of the Company’s bank
indebtedness and funds held in trust. Bank indebted-
ness, obligations related to debt and the debenture
loan payable (after the eff ect of the interest rate
swap) are all fl oating rate obligations indexed to
30-day CDOR; the funds held in trust earn the
Company interest based on the same fl oating rate
basis. Because both the indebtedness and funds
held in trust have comparable values, with the
liabilities at $883,776 (2012 – $685,652) as at
December 31, 2013 and the funds held in trust
at $617,227 (2012 – $561,204) on the same
date, the Company considers the arrangement
to be a natural hedge against short-term interest
rate fl uctuations.
The table below provides the fi nancial 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 2013 and 2012.
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)
2013
2012
2013
2012
1,414
$
234
$
(1,414)
$
(234)
7,157
$
468
$
(2,828)
$
3,676
The Company has exposure to the risk that short-
term interest rates increase, and credit losses as the
Company has a fi rst-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 fulfi ll 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, 2013,
99% (2012 – 92%) 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 fi nancial
assets are their carrying values as refl ected on
the consolidated statement of fi nancial position.
The Company does not have signifi cant concentra-
tion of credit risk within any particular geographic
region or group of customers.
The Company is at risk that the underlying
mortgages will default and the servicing cash fl ows
will 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.
2013 ANNUAL REPORT 57
Notes to Consolidated
Financial Statements
Liquidity risk and capital resources
Liquidity risk is the risk that the Company will
be unable to meet its fi nancial 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 fl ow from operations to fund
longer-term assets. The Company’s credit facilities
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 fi nancial institutions, which provides for a total
of $570,000 in fi nancing. Bank indebtedness also
includes borrowings obtained through outstanding
cheques and overdraft facilities.
Subsequent to the year end, the Company
renegotiated the credit facility. The new agreement
increased the commitment to $1 billion and
extended the term to January 2018.
Customer concentration risk
Placement fees and mortgage servicing income
from one (2012 – two) Canadian fi nancial institution
represent approximately 16% (2012 – 36%) of the
Company’s total revenue. During the year ended
December 31, 2013, the Company placed 31%
(2012 – 62%) of all mortgages it originated with
the same (2012 – two) institutional investor.
Fair value measurement
The Company uses the following hierarchy for
determining and disclosing the fair value of fi nancial
instruments recorded at fair value in the consolidated
statements of fi nancial 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 signifi cant
inputs are based on observable market
data; and
Level 3 – Valuation techniques in which one or
The Company fi nances the majority of its
more signifi cant inputs are unobservable.
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 fi nancing 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.
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 fl ow analysis. The valuation methods and key
assumptions used in determining fair values for the
fi nancial assets and fi nancial 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 fl ows 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 refl ect changes
in interest rates which have occurred since the
mortgages were originated. Impaired mort-
gages are recorded at net realizable value.
58 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 fl ows related to the placed mort-
gages at market interest rates. The expected
future cash fl ows 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 fi nancial assets and
fi nancial liabilities
The fair value of mortgage and loan investments
classifi ed 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 profi les.
Carrying value and fair value of selected fi nancial instruments
The following tables provide a comparison of the carrying and fair values for each classifi cation of fi nancial
instruments as at December 31:
Financial
instruments
classifi ed as
FVTPL
Financial
instruments
designated
as FVTPL
2013
Loans and
receivables/
fi nancial
liabilities at
amortized
cost
Total
carrying
value
Total
fair value
Financial 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
Mortgage and loan investments
$
–
–
–
11,757
–
–
–
–
$
–
$
431,111
$
431,111 $
432,518
6,976
53,134
60,110
58,703
–
–
1,055,443
1,055,443
1,055,443
1,063,068
1,074,825
1,074,825
3,969,524
13,682,120
17,651,644
17,729,958
33,580
–
68,954
–
24,804
115,630
33,580
24,804
33,580
24,804
184,584
184,584
Total fi nancial assets
$
11,757
$ 4,079,034
$ 16,425,310
$ 20,516,101 $ 20,594,415
Financial 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
Total fi nancial liabilities
$
$
–
$
–
$
274,484
$
274,484 $
274,484
–
–
–
–
–
–
–
3,639
609,292
62,787
609,292
66,426
609,292
66,426
1,050,199
–
1,050,199
1,050,199
–
17,884,303
17,884,303
17,911,851
179,195
–
179,195
179,195
$ 1,233,033
$ 18,830,866
$ 20,063,899 $ 20,091,447
2013 ANNUAL REPORT 59
Notes to Consolidated
Financial Statements
Financial
instruments
classifi ed as
FVTPL
Financial
instruments
designated
as FVTPL
2012
Loans and
receivables/
fi nancial
liabilities at
amortized
cost
Total
carrying
value
Total
fair value
$
Financial 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
Mortgage and loan investments
–
–
–
7,754
–
–
–
–
$
–
$
334,962
$
334,962 $
334,962
8,615
42,687
51,302
51,302
–
–
452,534
452,534
452,534
800,768
808,522
808,522
3,118,827
9,913,216
13,032,043
13,272,361
41,919
–
25,021
–
69,493
148,013
41,919
69,493
41,919
69,493
173,034
173,034
Total fi nancial assets
$
7,754
$ 3,194,382
$ 11,761,673
$ 14,963,809 $ 15,204,127
Financial 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
$
–
$
–
$
155,197
$
155,197 $
155,197
–
–
–
–
–
–
–
6,660
500,608
53,721
500,608
60,381
500,608
60,381
451,875
–
451,875
451,875
–
13,272,810
13,272,810
13,379,811
181,275
–
181,275
181,275
$
639,810
$ 13,982,336
$ 14,622,146 $ 14,729,147
Total fi nancial liabilities
$
60 FIRST NATIONAL FINANCIAL CORPORATION
The following tables represent the Company’s fi nancial instruments measured at fair value on a recurring basis
at December 31:
Financial assets
Mortgages accumulated for sale
HFT mortgages
Deferred placement fees receivable
Mortgage and loan investments
Interest rate swaps
Total fi nancial assets
Financial liabilities
Securities sold under repurchase agreements
and sold short
Interest rate swaps
Total fi nancial liabilities
2013
Level 1
Level 2
Level 3
Total
$
$
–
–
–
–
–
–
$
11,757
$
–
$
11,757
–
–
–
6,976
3,969,524
3,969,524
33,580
68,954
–
33,580
68,954
6,976
$
18,733
$ 4,072,058
$ 4,090,791
$ 1,050,199
–
$ 1,050,199
$
$
–
3,639
3,639
$
$
–
–
–
$ 1,050,199
3,639
$ 1,053,838
2012
Level 1
Level 2
Level 3
Total
Financial assets
Mortgages accumulated for sale
HFT mortgages
Deferred placement fees receivable
Mortgage and loan investments
Interest rate swaps
Total fi nancial assets
Financial liabilities
Securities sold under repurchase agreements
and sold short
Interest rate swaps
Total fi nancial liabilities
$
$
$
$
–
–
–
–
–
–
$
7,754
$
–
$
7,754
–
–
–
8,615
3,118,827
3,118,827
41,919
25,021
–
41,919
25,021
8,615
$
16,369
$ 3,185,767
$ 3,202,136
451,875
–
451,875
$
$
–
6,818
6,818
$
$
–
–
–
$
$
451,875
6,818
458,693
In estimating the fair value of fi nancial assets
and fi nancial 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 Decem-
ber 31, 2013 that was estimated using a valuation
technique based on assumptions that are not fully
supported by observable market prices or rates was
a gain of approximately $19,286 (2012 – $16,755).
Although the Company’s management believes
that the estimated fair values are appropriate as
at the date of the consolidated statements of fi nan-
cial position, those fair values may diff er if other
reasonably possible alternative assumptions are used.
2013 ANNUAL REPORT 61
Notes to Consolidated
Financial Statements
The following table presents changes in the fair
values, including realized gains of $24,580 (2012 –
realized losses of $10,602) of the Company’s
fi nancial assets and fi nancial liabilities for the
years ended December 31, 2013 and 2012, all of
which have been classifi ed as fair value through
profi t or loss:
HFT mortgages
$
15,141
$
2013
Deferred placement
fees receivable
Mortgage and loan
investments
Securities owned
and sold short
Interest rate swaps
(297)
–
28,668
354
$
43,866
$
2012
4,623
(203)
(374)
1,934
173
6,153
The Company does not have any assets or
liabilities that are measured at fair value on a non-
recurring basis.
Movement in Level 3 fi nancial instruments measured at fair value
The following tables show the movement in Level 3 fi nancial instruments in the fair value hierarchy for the
years ended December 31, 2013 and 2012 (restated). The Company classifi es fi nancial instruments to Level 3
when there is reliance on at least one signifi cant unobservable input in the valuation models.
Fair value
as at
January 1
2013
Investments
Unrealized
gain (loss)
recorded in
income
Payment and
amortization
Fair value
as at
December 31
2013
Financial assets
HFT mortgages
Deferred placement fees
receivable
Mortgage and loan investments
$ 3,118,827
$ 3,546,819
$
18,907
$ (2,715,029)
$ 3,969,524
41,919
25,021
9,912
46,117
(296)
–
(17,955)
(2,184)
33,580
68,954
Total fi nancial assets
$ 3,185,767
$ 3,602,848
$
18,611
$ (2,735,168)
$ 4,072,058
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
$ (2,820,464)
$ 3,118,827
58,509
5,801
5,976
13,636
(203)
(450)
(22,363)
6,034
41,919
25,021
Total fi nancial assets
$ 2,736,473
$ 3,276,954
$
9,133
$ (2,836,793)
$ 3,185,767
Derivative fi nancial 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 fi xed-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
eff ectiveness. 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, 2013,
accounts receivable and sundry have been increased
by $4,195 (2012 – $6,275) to account for the swap
derivative, and the debenture loan payable has
been increased by the same amount.
62 FIRST NATIONAL FINANCIAL CORPORATION
Note 20
Capital Management
The Company’s objective is to maintain a strong
capital base so as to maintain investor, creditor
and market confi dence and sustain future develop-
ment of the business. Management defi nes capital
as the Company’s equity, debenture loan payable
and retained earnings. The Company has a mini-
mum 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,
2013, the ratio was 1.1:1 (2012 – 1.2:1). The
Company was in compliance with the bank
covenant throughout the year.
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. Identifi able 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
2013
Residential
Commercial
Total
$
315,512
$
113,711
$
429,223
(232,626)
82,886
(90,610)
23,101
(323,236)
105,987
241,427
34,037
358,350
5,176
26,663
151,462
183,301
51,692
20,129
94,922
2,761
2,507
31,192
36,460
293,119
54,166
453,272
7,937
29,170
182,654
219,761
Income before income taxes
$
175,049
$
58,462
$
233,511
Identifi able assets
Goodwill
Total assets
16,282,131
4,257,310
20,539,441
–
–
29,776
$ 16,282,131
$ 4,257,310
$ 20,569,217
Capital expenditures
$
2,400
$
1,028
$
3,428
2013 ANNUAL REPORT 63
Notes to Consolidated
Financial Statements
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
Identifi able assets
Goodwill
Total assets
11,426,562
3,565,898
14,992,460
–
–
29,776
$ 11,426,562
$ 3,565,898
$ 15,022,236
Capital expenditures
$
2,069
$
886
$
2,955
Note 22
Related Party Transactions
For the past three years, several of the Company’s
commercial borrowers applied to the Company for
mezzanine mortgage fi nancing. The amounts of the
mortgages requested were in excess of the Com-
pany’s internal investment policies for investments
of that nature; however, businesses 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 $31,245 as
at December 31, 2013 (2012 – $29,685). During the
year, the Company originated and placed $7.0 million
of new mortgages to these related-party companies.
A senior executive and shareholder of the Com-
pany has a signifi cant 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 provided the Company
with portfolio insurance at market premiums. The
total bulk insurance purchased during 2013 was
$2,348 (2012 – $913), net of third-party investor
reimbursement. The insurance company has also
engaged the Company to service a portfolio of
mortgages at market commercial servicing rates.
As at December 31, 2013, the portfolio had an
outstanding balance of $9.0 million (December 31,
2012 – $11.0 million).
64 FIRST NATIONAL FINANCIAL CORPORATION
IAS 32 – Financial Instruments:
Presentation
As at January 1, 2014, the Company will be required
to adopt this standard which clarifi es the existing
requirements for off setting fi nancial assets and
fi nancial liabilities. The amendment is not expected
to have a material impact on the Company’s
consolidated fi nancial statements.
IFRIC 21 – IFRS Interpretations Committee
Interpretation 21: Levies
In May 2013, the IASB issued IFRIC 21, which requires
an entity to recognize a liability for a levy when the
activity that triggers payment occurs. The Company
will adopt this standard on January 1, 2014.
Note 24
Comparative Consolidated
Financial Statements
The comparative audited consolidated fi nancial
statements have been restated from statements
previously presented to conform to the presentation
of the 2013 audited consolidated fi nancial statements
for the adoption of IFRS 10.
A senior executive and shareholder of the
Company is a director on the board of a retirement
home company. The Company has provided a
commitment to fund up to $10 million through a
secured revolving line of credit until January 2015
to the retirement home company. The Company
earns a standby fee at market rate on any undrawn
portion to the end of the commitment period.
The total standby fees earned by the Company
in the year were $28.
During the year ended December 31, 2013,
the Company paid a total compensation of $3,657
(2012 – $3,008) to six (2012 – fi ve) senior managers.
Note 23
Future Accounting Changes
The following accounting pronouncements issued
by the IASB, although not yet eff ective, may have
a future impact on the Company:
IFRS 9 – Financial Instruments
In November 2009, the IASB issued IFRS 9 as part
of its plan to replace IAS 39 – Financial Instruments:
Recognition and Measurement. IFRS 9 provides
new requirements for how an entity should classify
and measure fi nancial assets and fi nancial liabilities
that are in the scope of IAS 39. IFRS 9 has also
introduced the proposed expected credit loss
model for credit loss provision and a general hedge
accounting model which expands the scope of
permissible hedging relationships. In February 2014,
the IASB has decided to defer the mandatory
eff ective date from January 1, 2015 to the currently
expected date of January 1, 2018. Management is
currently evaluating the potential impact that the
adoption of IFRS 9 will have on the Company’s
consolidated fi nancial statements.
2013 ANNUAL REPORT 65
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.
The Audit Committee consists of three independent
directors, all of whom are considered fi nancially
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 offi cers;
• 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 fi lling
director vacancies;
• Periodically reviewing the composition and
eff ectiveness 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 three independent directors
for the purposes of the Canadian Securities Adminis-
trators’ Multilateral Instrument 58-101 – Disclosure
of Corporate Governance Practices.
committee members
Peter Copestake (Chair), Duncan Jackman
and Barbara Palk
Sound corporate governance is fundamental to
maintaining the confi dence of investors and increas-
ing shareholder value. As such, First National is
committed to the highest standards of integrity,
transparency, compliance and discipline.
These standards defi ne the relationships among
all of our stakeholders – Board, management and
shareholders – and are the basis for building these
values and nurturing a culture of accountability
and responsibility across the organization.
Policies
The Board supervises and evaluates the management
of the Company, 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 refl ect recommended
practices in governance and disclosure. These include
a Disclosure Policy, a Code of Business Conduct,
a Whistleblower Policy and an Insider Trading Policy.
These policies follow 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 fi t.
Committees
The Board of Directors has established an Audit
Committee and a Compensation, Governance
and Nominating Committee to assist in the
effi cient 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 fi nancial statements;
• Oversight and supervision of the quality and
integrity of the Company’s fi nancial statements;
and
• Oversight and supervision of the adequacy
of the Company’s internal accounting
controls and procedures, as well as its
fi nancial reporting practices.
66 FIRST NATIONAL FINANCIAL CORPORATION
Board Members
Collectively, the Board of Directors has extensive experience in mortgage
lending, real estate, strategic planning, law and fi nance. The Board consists of
seven members, fi ve of whom are independent.
Stephen Smith is Chairman, President and
Chief Executive Offi cer of the Corporation,
President of First National and co-founder of
First National. Mr. Smith, one of Canada’s leading
fi nancial services entrepreneurs, has been an
innovator in the development and utilization of
various securitization techniques to fi nance mortgage
assets and has been a regular speaker at fi nancial
services conferences. He is Chairman of the Canada
Guaranty Mortgage Insurance Company as well
as a director of 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 (Economics)
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 Execu-
tives. Mr. Smith is a graduate of the Directors
Education Program at the University of Toronto,
Rotman School of Management. In 2012, he was
awarded The Queen’s Diamond Jubilee Medal
for contributions to Canada.
Moray Tawse is Executive Vice President and
Secretary of the Corporation, Executive 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 experience in the real estate fi nance 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
symposiums. In addition, Mr. Tawse is also an
independent director of Regal Lifestyle Commu-
nities Inc., a TSX listed company that owns and
operates retirement properties across Canada and
of BLF REIT, a TSX Venture listed company that
owns and manages multi-unit residential properties,
mainly in Quebec.
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 Offi cer
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, is a member of
the Institute of Corporate Directors and holds the
designation Chartered Professional Accountant.
2013 ANNUAL REPORT 67
Peter Copestake currently serves as the
founding CEO of Continental Bank of Canada,
a new Canadian Schedule 1 Chartered Bank.
He also continues to serve 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 fi nancial and executive management positions
at federally regulated fi nancial institutions and in
the federal government. Other current directorships
include membership on the Finance and Pension
committees of Queen’s University and directorships
at Royal and Sun Alliance Insurance Company of
Canada and Canadian Derivatives Clearing Corpora-
tion. He additionally serves on the Independent
Review Committees at First Trust Portfolios Canada
and at PIMCO Canada and as Chair of the South-
eastern Ontario Academic Medical Organization.
Duncan Jackman is the Chairman, President and
Chief Executive Offi cer 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
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.,
and is a trustee for Discovery Parks Trust. Discov-
ery Parks Trust was established to support the
high technology and research industries in British
Columbia through the development of its real
estate assets. Mr. Mitchell has an MBA from
University of Western Ontario, a Bachelor of
Commerce (Finance) from University of Calgary,
and is a CFA charterholder.
Barbara Palk retired as President of TD Asset
Management Inc. in 2010 following a 30 year career
in institutional investment and investment manage-
ment. She currently serves on the Boards of TD
Asset Management USA Funds Inc. in New York,
Ontario Teachers’ Pension Plan, Queen’s University
where she is Chair, The Perimeter Institute and
Greenwood College School. Her previous board
experience includes the Canadian Coalition for
Good Governance, whose Governance Committee
she chaired, the Investment Counselling Association
of Canada, the Shaw Festival and UNICEF Canada.
Ms. Palk is a member of the Institute of Corporate
Directors, a Fellow of the Canadian Securities
Institute and a CFA charterholder. She holds a
Bachelor of Arts (Honours, Economics) degree
from Queen’s University, and has been named
one of Canada’s Top 100 Most Powerful
Women (2004).
68 FIRST NATIONAL FINANCIAL CORPORATION
Shareholder
Information
Corporate Address
Legal Counsel
First National Financial Corporation
Stikeman Elliott LLP, Toronto, Ontario
Auditors
Ernst & Young LLP, Toronto, Ontario
Investor Relations Contacts
Robert Inglis
Chief Financial Offi cer
rob.inglis@fi rstnational.ca
Ernie Stapleton
President, Fundamental
ernie@fundamental.ca
Investor Relations Website
www.fi rstnational.ca
Registrar and Transfer Agent
Computershare Investor Services Inc., Toronto, Ontario
1.800.564.6253
Exchange Listing and Symbols
Common shares: (TSX) FN
Preferred shares: (TSX) FN.PR.A
100 University Avenue
North Tower, Suite 700
Toronto, Ontario M5J 1V6
Phone: 416.593.1100
Fax: 416.593.1900
Annual Meeting
May 5, 2014, 10 a.m. EDT
TMX Broadcast Centre
The Gallery
The Exchange Tower
130 King Street West
Toronto, Ontario
Senior Executives of First National
Financial LP
Stephen Smith
Co-founder, Chairman, President and
Chief Executive Offi cer
Moray Tawse
Co-founder and Executive Vice President
Robert Inglis
Chief Financial Offi cer
Scott McKenzie
Senior Vice President, Residential Mortgages
Jeremy Wedgbury
Senior Vice President, Commercial Mortgages
Lisa White
Vice President, Mortgage Administration
Hilda Wong
General Counsel
Jason Ellis
Managing Director, Capital Markets
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