ANNUAL REPORT 2015
2015 AT A GLANCE
$93.8
Billion
Mortgages Under Administration (“MUA”) grew 9% or $7.9 billion in 2015
to an all-time record. By expanding MUA, revenue grows, per unit servicing
costs decline and renewal opportunities are created.
88%
The ratio of dividends paid to earnings available to common shareholders in
2015 improved by four percentage points compared to 2014 despite ongoing
investments and a higher cash payout.
8
In 2015, First National increased its common share dividend for the eighth
time since its IPO in 2006 and now pays at an annualized rate of $1.55 per
share.
2
2015 At a Glance
Annual 2015 revenue grew 14% from $803.1 million in 2014 with contributions
from the Company’s new underwriting and fulfillment services business,
placement fees and securitization related interest revenue.
$915.3
Million
The after-tax Pre-Fair Market Value1 return on shareholders’ equity in 2015
demonstrates the Company’s efficient use of capital.
44%
The aggregate yield from distributions and dividends earned by a shareholder
who purchased First National on the IPO in June 2006 is greater than 100%.
133%
1The after-tax Pre-Fair Market Value return is a non-IFRS measure, see page 15
3
First National Financial Corporation – 2015 Annual Report LETTER FROM THE CEO
FELLOW SHAREHOLDERS:
For First National, 2015 was a successful year. Market share increased, a new business line transitioned to
profitability and lower demand for mortgages in Western Canadian communities, hurt by the cyclical decline
in the energy industry, was offset with growth in other regions.
2015 also validated—for the 27th year since our founding—the value of First National’s approach to business.
In form, our Company is different because it is a non-bank lender and funds mortgages through various
cost-effective sources: institutional partners, National Housing Act Mortgage Backed Securities, the Canada
Mortgage Bonds program, asset-backed commercial paper and commercial mortgage backed securities.
This strategy results in the efficient use of our capital and residual credit risk.
In function, First National is differentiated in the eyes
of customers by its ability to provide responsive
service. Put simply, we think like our customers and
strive to create the best financing solutions with the
best turnaround time in the industry.
We rely on proprietary technology and knowledgeable
staff members working collaboratively across origi-
nation, underwriting, credit, funding and anti-money
laundering departments to make a difference to cus-
tomers while protecting the integrity of the institution.
This approach has allowed First National to steadily
increase its position as Canada’s largest non-bank
originator and underwriter of mortgages and presence
in the mortgage broker distribution channel where
it is consistently ranked among the top three in
market share.
To quantify the Company’s growing stature, consider
that MUA at year-end 2015 was $93.8 billion. Five
years ago, MUA was $53.3 billion and ten years ago
it was $18.6 billion. This growth reflects ongoing
success in originating and renewing mortgages
across two segments. In 2015, single family mortgage
originations and renewals amounted to $17.2 billion,
up 8% over 2014. Commercial segment mortgage
originations and renewals totalled $5.3 billion, a 7%
year-over-year advancement. We are pleased with
this growth and what it says about First National as a
service provider to its customers.
Growth has also served to make the Company a con-
sistent creator of value for our shareholders. In 2015,
First National returned more money than ever to
shareholders in the form of monthly common share
dividends. In the year, $90.5 million of dividends were
declared in aggregate, or $1.51 per common share.
Since its initial public offering in 2006, First National
has raised the dividend rate eight times, including the
most recent increase of 3.3% effective with the divi-
dend paid on December 15, 2015. Total dividends and
distributions, excluding preferred share payments,
amounted to just under $800 million over this period.
Dividends at all times have been fully supported by
profitable operations, including income and cash flow
generated from MUA.
First National has been profitable every year since
the IPO on each metric it uses to assess profitability.
On a GAAP basis, the Company uses net income to
assess performance. On this basis, First National
earned $1.71 per common share, 6% more than in
2014. We also assess performance using Pre-Fair
Market Value EBITDA. This is a non-GAAP figure
but in our view, a useful gauge of profitability as it
removes the impacts of gains and losses on finan-
cial instruments, which tend to skew financial results
during periods of capital market volatility and mask
the performance of the core business itself. In 2015,
Pre-Fair Market Value EBITDA grew 15% to $209.9
million, reflecting increased earnings from securitiza-
tion and a first-time contribution from First National’s
new third party underwriting business.
4
Letter from the CEO The Importance of Mortgage
Brokers
All of First National’s single family originations come
through the broker channel and mortgage brokers
play a key role as advisors to the 250,000 plus single
family borrowers we serve.
First National is an unabashed supporter of the
channel and our alignment with it is one of the
reasons for First National’s long-term success. We
believe the channel will be equally important to our
future and to future homebuyers.
One of the telling stats from the 2015 CMHC First Time
Home Buyers Survey was that 55% of first-time home
buyers use mortgage brokers. When first-timers use
the channel to this extent, it illustrates how important
mortgage brokers are in Canada and validates First
National’s strategy to give them the best service
possible.
The starting point for that service is MERLIN, our
proprietary technology, which is viewed by mort-
gage broker users as an indispensable work tool for
interacting with us through the mortgage approval
process. But we go beyond just fintech: it is First
National’s service-driven culture around MERLIN
that creates a meaningful value proposition for our
Company with brokers.
Service is also a distinguishing feature for First
National in its commercial segment where we work
collaboratively to develop financing solutions for
more than 5,000 borrowers. Getting to know these
customers is more than just a compliance require-
ment at First National: it is a critical initiative to
achieve our vision.
With respect to net income attributable to common
shareholders, the common share dividend payout
ratio was 88% in 2015. Using after tax Pre-Fair Mar-
ket Value EBITDA, the payout ratio was 64%.
No matter how it is measured, we believe the payout
is sustainable because of First National’s ability to make
efficient use of capital through its business model.
This is demonstrated in return on shareholders’ equity
(ROE). After tax Pre-Fair Market Value EBITDA ROE
was 44% in 2015, which was also the average over
the past five years.
First National retains capital, in part, to invest in
mortgage securitization. The securitized portfolio
grew by over $2 billion in 2015 to $24.5 billion to
represent just over a quarter of all MUA. The size of
this portfolio is important because securitizations
produce net interest margin which enhances future
earnings. Consider that in 2015, First National earned
$132.2 million in net interest margin from its portfo-
lio of securitized mortgages, making this portfolio a
significant driver of profitability and a solid platform
to sustain our business.
New Business
As I reported in last year’s letter, First National
entered into an agreement with one of Canada’s
major banks to provide underwriting and fulfillment
processing services for mortgages originated by
that Bank through the residential mortgage broker
distribution channel.
After announcing the partnership in the summer of
2014, First National recruited and trained over 100
new employees to work inside a separate division
created to provide the services for this opportunity.
With the successful launch of the Ontario, Western
Canada and Quebec branches in 2015, the invest-
ment of the Company’s capital began to pay off as
the business transitioned to profitability in the third
quarter of 2015, on schedule.
While this business does not add to MUA, it lever-
ages the Company’s strong underwriting culture
and MERLIN technology to increase earnings from
existing competencies.
5
First National Financial Corporation – 2015 Annual Report Mortgages Under Administration
($ Billions)
Mortgage Originations
($ Billions)
100
80
60
40
20
0
2010 2011
2012 2013 2014 2015
9%
Year-Over-Year
Growth
2014 to 2015
20
15
10
5
0
7%
Year-Over-Year
Growth
2014 to 2015
2010
2011
2012 2013 2014 2015
Revenue
($ Millions)
1000
800
600
400
200
0
PRE-FMV EBITDA
($ Millions)
14%
Year-Over-Year
Growth
2014 to 2015
250
200
150
100
50
0
2010 2011
2012
2013 2014 2015
2010
2011 2012
2013 2014 2015
15%
Year-Over-Year
Growth
2014 to 2015
Revenue Sources
Prior To Fair
Value Gains/
Losses
(for the year ended December 31, 2015)
A
B
C
D
37%
28% Net Interest –
Institutional Placements
Securitized Mortgages
24% Mortgage Servicing
Investment Income
11%
E
D
Funding Sources
(for the year ended December 31, 2015)
D
A
A
B
C
D
E
Institutional Placements
CMB Dealers
47%
5%
38% NHA MBS
2%
8%
Internal Resources
ABCP
C
B
Mortgages Under
Administration
(as at December 31, 2015)
A
B
80%
6%
C
14%
Insured
Multi-unit Residential
and Commercial
Conventional Single
Family Residential
A
A
C
B
C
B
6
Letter from the CEO
Looking Ahead
Real estate and mortgage markets do not always
grow, even though the experience of the past few
years has made it seem that way in Canada.
In reality, these markets are cyclical and influenced
by a host of economic factors, employment being
the largest. When the unemployment rate climbs,
the housing market cools. We saw a clear demon-
stration of that in 2015 in Western Canada. In
markets where the energy industry is the dominant
employer, mortgage originations were 11% lower in
2015. Finding offsetting opportunities is not a given,
but First National’s national presence helped, as did
the continuation of a low interest rate environment.
Low rates, which look to be here for some time to
come, keep mortgage affordability at favourable
levels and mitigate refinancing risk.
First National is of course not immune to the effects
of a downturn, but over past market cycles the in-
herent strengths of our business model have tended
to stabilize performance.
For the future, I believe we can count on First National’s
ability to generate income and cash flow from its
nearly $25 billion portfolio of mortgages pledged un-
der securitization and $69 billion servicing portfolio
to maximize financial performance. Significant value
is also available in mortgage renewal opportunities.
We can also look forward to the contributions from
the Company’s new business line and the potential
for growth in mortgages processed as mortgage
brokers respond positively to the First National
service experience.
Gauging Our Potential
Despite substantial growth over the past 27 years,
First National is far from reaching its full potential.
Today, it provides financing for about 5% of all
single family mortgages in Canada. Although our
Company is one of the biggest commercial lenders
in the country, there are still places to grow this
business as well.
“To quantify the Company’s growing
stature, consider that MUA at year-end
2015 was $93.8 billion. Five years ago,
MUA was $53.3 billion and ten years ago
it was $18.6 billion. This growth reflects
ongoing success in originating and re-
newing mortgages...”
Accordingly, there is significant opportunity ahead
for a business that is enterprising, pragmatic and en-
trepreneurial at heart. I believe First National is all of
these things because of the efforts of 900+ valued
employees and the six other dedicated members of
our Board of Directors. I thank each of you for your
ongoing contributions.
On their behalf, I thank our customers, shareholders
and funding partners for believing in First National
and choosing to be part of our successful story.
Yours sincerely,
Stephen Smith
Chairman and Chief Executive Officer
7
First National Financial Corporation – 2015 Annual Report OUR MANAGEMENT TEAM
From left to right
Rick Votano, Vice President, Information Technology
Lisa White, Vice President, Mortgage Operations
Scott McKenzie, Senior Vice President, Residential Mortgages
Stephen Smith, Co-founder, Chairman and Chief Executive Officer
Moray Tawse, Co-founder and Executive Vice President
Jeremy Wedgbury, Senior Vice President, Commercial Mortgages
Robert Inglis, Chief Financial Officer
Jason Ellis, Managing Director, Capital Markets
Hilda Wong, Vice President and General Counsel
CORPORATE PROFILE
First National Financial Corporation (TSX: FN, TSX: FN.PR.A) is the parent company of
First National Financial LP, a Canadian-based originator, underwriter and servicer of pre-
dominantly prime residential (single-family and multi-unit) and commercial mortgages.
With almost $94 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.firstnational.ca.
8
OUR DIFFERENCE
Our Product is Service
Not all mortgages are the same. Terms and condi-
tions vary between lenders making it necessary to
shop the market to find the mortgage that is right
for the borrower.
But what about the lenders behind the mortgages;
is there any real difference? First National believes
there is. It’s called service.
Our team goes beyond what other lenders call good
service by approaching each mortgage as the be-
ginning of a mutually beneficial long-term partner-
ship as well as a financial transaction.
We start with a simple pledge: treat our customers as
we want to be treated. That means being responsive,
committed, and forthright but also solutions focused.
The term we often use to describe First National’s ap-
proach is “pragmatically entrepreneurial” because it
summarizes the practical, can-do attitude that shapes
how our team responds to opportunity and innovates
in addressing customer needs.
One Core Belief
The essence of our philosophy is that our product is
service. We are accountable for delivering service
every day. However, our customers don’t come to
us simply because of our philosophy: they come
to us for tangible results which First National has
always provided.
For mortgage brokers, having First National as a
partner means gaining the support of a national
organization that is dedicated to responding quickly
to mortgage applications while providing strong un-
derwriting to ensure deals are done right every time.
To be the kind of organization that is known for
a consistently superior level of mortgage broker
service, First National is structured to encourage
collaboration and fast decision making across
underwriting, funding and account management
teams. This is achieved using our own homegrown
technology called MERLIN.
MERLIN gives mortgage brokers real-time access to
track the status of every mortgage application they
bring to First National and across each stage of the
approval process. There is nothing like it in the mar-
ket today and it is the cornerstone of our mortgage
broker partnerships.
We also look to provide value beyond a competitive
interest rate by sharing our expertise to help brokers
deliver best-in-class advice and guidance to borrow-
ers. By hosting seminars and workshops attended by
hundreds of mortgage brokers in 2015, First National
plays a constructive role in helping these indepen-
dent professionals enhance their skills and grow their
books of business.
MERLIN gives mortgage brokers real-
time access to track the status of every
mortgage application they bring to
First National and across each stage
of the approval process.
9
First National Financial Corporation – 2015 Annual Report For single family borrowers, having First National
as a partner means working with a non-bank mort-
gage lender with a decidedly non-bank attitude.
While we follow disciplined processes to arrive at
our funding decisions, we also strive to eliminate
roadblocks and red tape on the way to creating
financial solutions. Put simply, we try to make it as
easy as possible to do business with First National
whether the borrower is buying a home for the first
time, or renewing a mortgage for the tenth time.
Here again First National employs its own technol-
ogy to enhance the borrower experience. Called
My Mortgage, our online portal gives borrowers
anywhere, anytime access to critical details includ-
ing mortgage balances, and the power to change
payment dates and calculate interest savings from
accelerating payment frequency.
A key objective for our single family team is what
we term “first-call resolution”. It means striving to
resolve each customer’s question or concern in
its entirety the first time they reach us. We don’t
always succeed, but more often than not our team
members take ownership of the issue instead of just
passing it on to another department.
Commercial borrowers also find a welcoming differ-
ence at First National, where partnerships are built on
knowledge. Our originators are experts in financing
alternatives (CMHC, conventional, bridge, mezzanine,
private placements, to name a few) as well as in real
estate itself. They know what questions to ask and
when to ask them in order to gain an understanding
of not just the property and risk profile of the trans-
action, but the vision and objectives of the owners.
“We start with a simple pledge: treat
our customers as we want to be treated.
That means being responsive, commit-
ted, and forthright but also solutions
focused. The term we often use to
describe First National’s approach is
pragmatically entrepreneurial.”
What’s more, our commercial team is entrepreneurial
—just like the borrowers they serve—this gives us
the expertise and confidence to find innovative
financing strategies. As commercial financing has
many moving parts, First National is valued as a
partner because we know how to make even the
most complex decisions quickly, which expedites
funding across all major asset classes including re-
tail, medical and other types of offices, self-storage,
light industrial, retirement and, our bread and butter,
apartment buildings.
At its heart, mortgage lending is not about assets or
liabilities, profit spreads or terms. It is about people,
their goals, the home they want to own or the busi-
ness they want to grow.
First National keeps that in mind every day.
10
TABLE OF CONTENTS
Management’s Discussion and Analysis . . . . . . . 12
General Description of the Company . . . . . . . . . . . . . . . . . 13
Management’s Responsibility
for Financial Reporting . . . . . . . . . . . . . . . . . . . . 36
2015 Results Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Financial Statements
Outstanding Securities of the Corporation . . . . . . . . . . . .14
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . 37
Selected Quarterly Information . . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Financial Position . . . . . . . 38
Consolidated Statements of Comprehensive Income . 39
Consolidated Statements of Changes In Equity . . . . . . 40
Consolidated Statements of Cash Flows. . . . . . . . . . . . . .41
Notes to Consolidated Financial Statements . . . . . . . . . 42
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . 72
Stakeholder Information . . . . . . . . . . . . . . . . . . . . . . . 75
Selected Annual Financial Information and
Reconciliation to Pre-FMV EBITDA . . . . . . . . . . . . . . . . . .16
Vision and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Key Performance Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Growth in Portfolio of Mortgages under
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Growth in Origination of Mortgages . . . . . . . . . . . . . . . . . 17
Mortgage Underwriting and Fulfillment Processing
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Lowering Costs of Operations . . . . . . . . . . . . . . . . . . . . . . .18
Employing Securitization Transactions to
Minimize Funding Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Key Performance Indicators . . . . . . . . . . . . . . . . . . . . . . . 20
Determination of Common Share Dividend
Payout Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Revenues and Funding Sources . . . . . . . . . . . . . . . . . . . . . 21
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Operating Segment Review . . . . . . . . . . . . . . . . . . . . . . . 27
Residential Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Commercial Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . 28
Financial Instruments and Risk Management . . . . . . . . . 30
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Summary of Contractual Obligations. . . . . . . . . . . . . . . . 32
Critical Accounting Policies and Estimates . . . . . . . . . . 32
Future Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . 33
Disclosure Controls and Internal Controls over
Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Risks and Uncertainties Affecting the Business . . . . . . . 34
Forward-Looking Information . . . . . . . . . . . . . . . . . . . . . . 34
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11
First National Financial Corporation – 2015 Annual Report 2015 FINANCIAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Dividend Payout Ratio” should not be construed as
alternatives to net income or loss or other compa-
rable measures determined in accordance with IFRS
as an indicator of performance or as a measure of
liquidity and cash flow.
These measures do not have standard meanings
prescribed by IFRS and therefore may not be
comparable to similar measures presented by other
issuers.
Unless otherwise noted, tabular amounts are in
thousands of Canadian dollars.
Additional information relating to the Company is
available in First National Financial Corporation’s pro-
file on the System for Electronic Data Analysis and
Retrieval (“SEDAR”) website at www.sedar.com.
The following management’s discussion and
analysis (“MD&A”) of financial condition and
results of operations is prepared as of February 23,
2016. This discussion should be read in conjunction
with the audited consolidated financial statements
and accompanying notes of First National Financial
Corporation (the “Company” or “Corporation” or
“First National”) as at and for the year ended De-
cember 31, 2015. The audited consolidated financial
statements of the Company have been prepared in
accordance with International Financial Reporting
Standards (“IFRS”).
This MD&A contains forward-looking information.
Please see “Forward-Looking Information” for a dis-
cussion of the risks, uncertainties and assumptions
relating to these statements.
The selected financial information and discussion
below also refer to certain measures to assist in as-
sessing financial performance. These other measures
such as “Pre-FMV EBITDA” and “After tax Pre-FMV
12
Management Discussion and Analysis
Because of the Company’s small proportionate in-
terest in the Fund’s units, it has also recorded a $33
million (December 31, 2014 - $39 million) non-con-
trolling interest in equity which offsets these assets.
2015 Results Summary
The Company is pleased with 2015 results. Single-
family origination increased 3% compared to 2014 to
a new annual record in spite of weakness in Alberta
and Saskatchewan’s economies. New commercial
origination was very strong and increased by 19%.
These volumes and consistent renewal rates enabled
the Company to grow its MUA and build the value of
its portfolio of securitized mortgages.
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 $93 billion in mortgages under administration
(“MUA”), First National is Canada’s largest non-bank
originator and underwriter of mortgages and is
among the top three in market share in the mortgage
broker distribution channel.
In 2013, First National consolidated its interest
in First National Mortgage Investment Fund (the
“Fund”), which it launched in late 2012. Although the
Company only owns about 18% of the units issued
by the Fund, because of its status as sole seller to
the Fund and its rights as promoter, the applica-
tion of IFRS suggests that First National exercises
control over the Fund. The Fund was created to
obtain economic exposure to a diversified portfolio
of primarily commercial mezzanine mortgages.
Through the Fund’s consolidation, the Company has
effectively taken on a portfolio of about $47 million
(December 31, 2014 - $55 million) of mortgages.
13
First National Financial Corporation – 2015 Annual Report “With First National’s large portfolio
of mortgages pledged under securi-
tization, quarterly revenue is driven
primarily by the gross interest earned
on the mortgages pledged under
securitization.”
• MUA grew to $93.8 billion at December 31, 2015
from $85.9 billion at December 31, 2014, an
increase of 9%; the growth from September 30,
2015, when MUA was $92.6 billion, represented
an annualized increase of 5%;
• The Canadian single-family real estate market per-
formed steadily in 2015 despite the oil-related
slowdown evident in Western Canada. Even with a
decrease in origination of 11% out of its Calgary
office, the Company increased national new
single-family mortgage origination by 3% to
$12.9 billion in 2015 from $12.5 billion in 2014. The
commercial segment had a very strong year as
volumes increased by 19%, from $3.7 billion in 2014
to over $4.4 billion in 2015. Together, overall origi-
nation for 2015 increased by 7% year over year;
• The Company also took advantage of opportunities
in the year to renew $4.3 billion of single-family
mortgages. In 2014, the Company renewed $3.4
billion of single-family mortgages. The growth is
attributable to more mortgages up for renewal
than in the prior year and slightly higher reten-
tion rates. For the commercial segment, renewals
decreased to $0.9 billion from $1.3 billion as more
borrowers elected to refinance with the Company
at increased mortgage values on maturity. While
this reduced renewal production, this trend was
reflected in the higher new origination volumes
noted above;
• Revenue for 2015 increased to $915.3 million from
$803.1 million in 2014. The 14% increase is attrib-
utable to higher revenues from the Company’s
underwriting and fulfillment business offset by
losses on financial instruments which decreased
revenue by $17.2 million year over year.
• Placement fee revenue and Interest revenue –
securitized mortgages also grew as the Company
increased the volume of mortgages placed with
institutions and its portfolio of securitized mort-
gages;
• Income before income taxes for the year increa-
sed by 6% from $140.3 million in 2014 to $148.7
million in 2015. The increase was achieved de-
spite large changes in the capital markets, which
negatively affected the Company’s interest rate
hedges and mortgages held at fair value in both
years. The Company recorded losses of $52.1
million on financial instruments in 2015 in con-
trast to smaller losses on financial instruments
of $34.9 million in 2014. The net change in losses
on financial instruments between 2015 and 2014
decreased income before income taxes between
the years by $17.2 million.
• Without the impact of gains and losses on
financial instruments, the Company’s earnings
before income taxes, depreciation and amortiza-
tion (“Pre-FMV EBITDA1”) for 2015 increased by
almost 15%, from $183.1 million in 2014 to $209.9
million in 2015. The increase was due primarily to
increased earnings from securitization and the
transition to profitability in the new underwriting
and fulfilment processing services business.
The Company was very pleased with these results
as the year progressed. In October 2015, the Board
of Directors approved an increase in the dividend on
its common shares. Effective with the dividend paid
on December 15, 2015, the annual dividend rate was
increased from $1.50 per share to $1.55 per share, an
increase of 3.3%.
Outstanding Securities of the
Corporation
At December 31, 2015 and February 23, 2016, the
Corporation had 59,967,429 common shares,
4,000,000 Class A preference shares, Series 1
and 175,000 April 2020 notes outstanding.
1Non-GAAP measure.
14
Management’s Discussion and Analysis Selected Quarterly Information
Quarterly Results of First National Financial Corporation
($000s, except per share amounts)
Revenue
Net Income (Loss)
for the period
Pre-FMV EBITDA for
the period (1)
Net Income (Loss)
per Common Share
Total Assets
2015
Fourth Quarter
$ 250,008
Third Quarter
$ 246,641
Second Quarter
$ 251,206
First Quarter
$ 167,460
2014
Fourth Quarter
$ 198,254
Third Quarter
$ 230,552
Second Quarter
$ 201,596
First Quarter
$ 172,705
$ 41,084
$ 29,308
$ 42,538
($3,499)
$ 17,856
$ 35,331
$ 28,217
$ 23,061
$ 58,527
$ 60,955
$ 52,012
$ 38,439
$ 43,229
$ 50,121
$ 48,392
$ 41,388
$ 0.66
$ 27,926,732
$ 0.46
$ 27,624,359
$ 0.68
$ 27,585,945
($0.09)
$ 26,638,048
$ 0.27
$ 25,953,914
$ 0.56
$ 25,077,361
$ 0.44
$ 23,902,513
$ 0.35
$ 21,683,307
(1)This non-IFRS measure adjusts income before income taxes by adding back expenses for amortization of intangible and capital assets
but it also eliminates the impact of changes in fair value by adding back losses on the valuation of financial instruments and deducting
gains on the valuation of financial instruments.
Generally, in the last eight quarters, the Company
has grown 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 grew steadily to over $209 million
in 2015. Despite continued success in growing MUA
and mortgage origination volume, tightening mort-
gage spreads over the past 5 years has reduced
relative profitability of mortgages pledged for secu-
ritization and deferred placements fees. The table
above shows a trend of growing income reflecting
typical Canadian seasonality: slower first and fourth
quarters and stronger mid-year quarters. In the first
quarter of 2015, the surprise cut in the Bank of Can-
ada’s overnight rate on January 21, 2015, had a large,
unfavourable effect on the Company’s net income.
With First National’s large portfolio of mortgages
pledged under securitization, quarterly revenue is
driven primarily by the gross interest earned on the
mortgages pledged under securitization. Servicing
revenue will also change as the third-party port-
folio 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. Although mortgage rates
have declined recently, the Company has steadi-
ly increased MUA and its portfolio of securitized
mortgages over the last 24 months. Net income is
partially dependent on conditions in the debt mar-
kets, which affect the value of gains and losses on
financial 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 Company’s core
business (primarily conditions in the bond markets).
By removing this volatility and analyzing Pre-FMV
EBITDA, management believes a more appropriate
measurement of the Company’s performance can be
assessed.
15
First National Financial Corporation – 2015 Annual Report Although the Company recorded growth in origina-
tion volumes and grew its MUA, the first quarter of
2015 featured large net losses on the fair value of
financial instruments as bond yields fell. In the third
and fourth quarters of 2015, the Company achieved
the highest quarterly levels of Pre-FMV EBITDA
since the Company began tracking this measure in
2012 due to a combination of steady origination and
contributions from its third party underwriting and
fulfillment services business.
Selected Annual Financial Information and Reconciliation to Pre-FMV EBITDA
($000s, except per share amounts)
FOR THE YEAR ENDED DECEMBER 31,
Income Statement Highlights
2015
2014
2013
Revenue
$ 915,315
$ 803,107
$ 776,508
Interest expense – securitized mortgages
(488,659)
(434,726)
(323,236)
Brokerage fees
(107,045)
(77,105)
(84,420)
Salaries, interest and other operating expenses
(161,821)
(143,062)
(127,404)
Add (deduct): realized and unrealized (gains) losses on
financial instruments
Pre-FMV EBITDA(1)
Amortization of capital assets
Amortization of intangible assets
Add (deduct): realized and unrealized gains (losses) on
financial 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
52,143
209,933
(4,114)
(5,000)
(52,143)
(39,245)
109,431
95,101
1.71
1.51
34,916
183,130
(2,909)
(5,000)
(34,916)
(35,840)
104,465
93,602
1.62
1.48
(43,866)
197,582
(2,374)
(5,563)
43,866
(61,410)
172,101
90,294
2.75
1.38
$ 27,926,732
$ 25,953,914
$ 20,569,217
Total long-term financial liabilities
$ 174,420
$ 176,418
$ 179,195
Notes:
(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 flows from operating, investing and financing activities as a measure of liquidity and cash flows.
16
Management’s Discussion and Analysis 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 inter-
est from securitized mortgages, but perhaps more
importantly, longer-term value from servicing fees,
mortgage administration fees, renewals and the
growth of the customer base for marketing initia-
tives. As at December 31, 2015, MUA totalled $93.8
billion, up from $85.9 billion at December 30, 2014,
an increase of 9%. This compares to $92.6 billion
at September 30, 2015, representing an annualized
increase of 5%.
Growth in Origination of Mortgages
The origination of mortgages not only drives the
growth of MUA as described above, but leverages
the Company’s origination platform, which has a
large fixed-cost component. As more mortgages
are originated, the marginal costs of underwriting
decrease. By growing origination, not only can
the Company satisfy demand from its institutional
customers, but it can also produce volume for its
own securitization programs. Despite a decrease in
origination of 11% out of its Calgary office, the Com-
pany exceeded the record origination experienced
in 2014 by 3%. The commercial segment had a very
strong year as volumes increased by 19%, from
$3.7 billion in 2014 to $4.4 billion in 2015. Together,
overall origination for 2015 increased by 7% year
over year.
Vision and Strategy
The Company provides mortgage financing solutions
to virtually the entire mortgage market in Canada.
By offering a full range of mortgage products, with a
focus on customer service and superior technology,
the Company believes that it is the leading non-
bank mortgage lender in the industry. Growth has
been achieved while maintaining a relatively conser-
vative risk profile. 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 cornerstones:
providing a full range of mortgage solutions for
Canadian single family and commercial customers;
growing assets under administration; employing
technology to enhance service to mortgage bro-
kers and borrowers, lower costs and rationalize
business processes; and maintaining a conservative
risk profile. An important element of the Company’s
strategy is its direct relationship with the mortgage
borrower. Although the Company places most of its
originations with third parties, FNFLP is perceived
by most of its borrowers as the mortgage lender.
This is a critical distinction. It allows the Company to
communicate with each borrower directly through-
out the term of the related mortgage. Through this
relationship, the Company can negotiate new trans-
actions and pursue marketing initiatives. Management
believes this strategy will provide long-term prof-
itability 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.
17
First National Financial Corporation – 2015 Annual Report Mortgage Underwriting and
Fulfillment Processing Services
Early in the third quarter of 2014, the Company
entered into an agreement with a large Canadian
schedule I bank (“Bank”) to provide underwriting
and fulfillment processing services for mortgages
originated by the Bank through the single-family
residential mortgage broker channel. Under the
strategic agreement, First National employs a
customized software solution based on its industry
leading MERLIN technology to accept mortgage
applications from the Bank in the mortgage broker
channel and underwrite these mortgages in accor-
dance with the Bank’s underwriting guidelines. The
Bank funds all the mortgages underwritten under
the agreement and retains full responsibility for
mortgage servicing and the client relationship. The
new business was launched in Ontario in early 2015,
Western Canada in April 2015, and finally in Quebec
in July 2015. Management considers the agreement
a way to leverage the capabilities and strengths
of First National in the mortgage broker channel
and add some diversity to the Company’s service
offerings. In the third quarter of 2015, this business
transitioned to profitability as volumes of mortgages
underwritten increased with the summer season and
operations normalized.
Lowering Costs of Operations
Innovations in Systems and Technology
The Company has always used technology to provide
for efficient and effective operations. This is particularly
true for its MERLIN underwriting system, Canada’s only
web-based, real-time broker information system. By
creating a paperless, 24/7 commitment management
platform for mortgage brokers, the Company is
now ranked among the top three lenders by market
share in the broker channel. This has translated into
increased single-family origination volumes and
higher closing ratios (the percentage of mortgage
commitments the Company issues that actually
become closed mortgages).
Bank Credit Facility
The Company uses a $1 billion revolving line of cred-
it with a syndicate of banks. This facility enables the
Company to fund the increasing amount of mort-
gages accumulated for securitization. The entire
facility is floating rate and has a five-year term.
The Company has elected to undertake this 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 Compa-
ny requires, providing more flexibility than the Senior
Unsecured Notes, which are fully drawn during their
term; (3) the five-year term extension gives the
Company a committed facility for the medium term;
and (4) the cost of borrowing reflects the Compa-
ny’s BBB issuer rating.
Note Issuance
On April 6, 2015, the Company issued 175,000 4.01%
Series 1 Senior Unsecured Notes due April 9, 2020
pursuant to a private placement under an offering
memorandum. The net proceeds of the offering,
after broker commissions, of $174.3 million were
invested in FNFLP. On settlement, the proceeds
were used to repay a portion of the outstanding
amount drawn on the bank credit facility. On May 7,
2015, the Company drew on the bank credit facility
to repay the maturing 5.07% $175 million debenture.
Effectively the new note issuance has replaced the
funding provided by the maturing debenture. Unlike
the debenture, which was secured on a pari pas-
su basis with the bank syndicate, the newly issued
notes are unsecured and can be invested in FNFLP
such that the amount will qualify as “net worth”
which allows the Company to increase the amount
of NHA MBS it can issue under CMHC guidelines.
Accordingly, the Company considers these funds to
represent a source of capital to fund the upfront in-
vestment required by its securitization program. The
5.07% debenture was used primarily to fund mort-
gages in the holding period prior to securitization.
Employing 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. 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
18
Management’s Discussion and Analysis more importantly, seller status for the CMB gives the
Company direct access to the CMB. Generally, the
demand for high-quality fixed and floating rate in-
vestments increased significantly with the economic
turmoil in 2009. This demand has continued into
2015 and allowed the Company to issue almost $6.4
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 creat-
ed for sale to the “market”. CMHC indicated that the
amount of guarantees it was providing for such mar-
ket pools (generally any pool not sold to the Canada
Housing Trust (“CHT”) for the CMB) was growing
significantly. In order to better control the absolute
amount of risk that it takes on in this respect, CMHC
has implemented policies to allocate the amount
of guarantees to issuers. The current amount being
allocated to First National is approximately the
amount that the Company used in 2015. These rules
are similar to the CMB allocation rules described
below, which have been in place since 2008 and are
subject to change each year.
Mortgage spreads can be illustrated by comparing
posted five-year fixed single-family mortgage rates
to a similar-term Government of Canada bond as
listed in the table below.
Period
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Average five year
Mortgage Spread for the
Period
1.12%
1.50%
2.68%
1.76%
1.75%
1.76%
1.92%
1.75%
1.57%
1.87%
The table shows an average spread of 1.12% in 2006.
With the credit crisis, this spread ballooned to as
high as 3.46% in 2008. Between 2009 and 2011, li-
quidity issues at financial institutions diminished and
the competition for mortgages increased such that
spreads remained consistently higher than pre-crisis
levels. In mid-2011, the United States credit rating was
downgraded and interest rates fell significantly,
accounting for wider mortgage spreads in 2012
which tightened again in 2013. In 2014, more com-
petitive pressures took mortgage rates lower and
compressed mortgage spreads to 2007 levels. To
begin 2015, mortgage spreads quickly widened as
a slowdown in economic growth and the Bank of
Canada rate cut reduced bond yields dramatically.
This trend continued through to the end of the year
as economic indicators continued to decline such
that as at December 31, 2015, the spread widened to
1.87%. While funding spreads have also moved out,
spreads are wide enough to support the Company’s
securitization program. In 2015, the Company
originated and renewed for securitization purposes
approximately $6.7 billion of single-family mortgages
and $1.7 billion of multi-unit residential mortgages in
order to take advantage of these spreads. In 2015,
the Company securitized through NHA-MBS ap-
proximately $2.0 billion of floating rate single-family
mortgages, $3.7 billion of fixed rate single-family
mortgages and $0.6 billion of fixed rate multi-unit
residential mortgages.
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 five—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 similari-
ties to a traditional Government of Canada bond (both
have five- and 10-year non-amortizing 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 securitizations. The Company also enjoys
demand for mortgages from investment dealers who
sell directly into the CMB. Because of the effective-
ness 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.
19
First National Financial Corporation – 2015 Annual Report Key Performance Indicators
The principal indicators used to measure the Company’s
performance are:
• Earnings before income taxes, depreciation and
amortization, and losses and gains on financial
instruments (“Pre-FMV EBITDA” (1)) ; and
• Dividend payout ratio.
Pre-FMV EBITDA is not a recognized measure under
IFRS. However, management believes that Pre-FMV
EBITDA is a useful measure that provides investors
with an indication of income normalized for capital
market fluctuations and prior to capital expendi-
tures. Pre-FMV EBITDA should not be construed as
an alternative to net income determined in accor-
dance with IFRS or to cash flows from operating,
investing and financing activities. The Company’s
method of calculating Pre-FMV EBITDA may differ
from other issuers and, accordingly, Pre-FMV EBITDA
may not be comparable to measures used by other
issuers.
($000’s)
QUARTER ENDED
YEAR ENDED
FOR THE PERIOD
Revenue
Income before income taxes
Pre-FMV EBITDA (1)
AT PERIOD END
Total assets
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
250,008
56,384
58,527
198,254
23,206
43,229
915,315
148,676
209,933
803,107
140,305
183,130
27,926,732
25,953,914
27,926,732
25,953,914
Mortgages under administration
93,829,513
85,889,561
93,829,513
85,889,561
Note:
(1)This non-IFRS measure adjusts income before income taxes by adding back expenses for amortization of
intangible and capital assets but it also eliminates the impact of changes in fair value by adding back losses
on the valuation of financial instruments and deducting gains on the valuation of financial instruments.
Since going public in 2006, First National has been
considered a high-yielding dividend paying company.
Over this period, the Company has paid almost
$800 million of dividends/distributions to common
shareholders/unitholders. With a large MUA which
generates continuing income and cash flow and a
business model which is designed to make efficient
use of capital, the Company has been able to pay
distributions to its shareholders which represent a
relatively large ratio of its earnings.
The Company calculates the dividend payout ratio
as dividends declared on common shares over net
income attributable to common shareholders. This
measure is useful to shareholders as it indicates the
percentage of earnings which have been paid out in
dividends. Similar to the performance measure for
earnings, the Company also calculates the dividend
payout ratio on a basis using after tax Pre-FMV
EBITDA.
20
Management’s Discussion and Analysis
Determination of Common Share Dividend Payout Ratio
($000’s)
QUARTER ENDED
YEAR ENDED
December
31, 2015
December
31, 2014
December
30, 2015
December
31, 2014
FOR THE PERIOD
Net income attributable to common shareholders
$ 39,387
$ 16,018
$ 102,468
$ 97,060
Dividends paid or declared on common shares
22,988
22,488
90,451
88,952
Common Share Dividend Payout Ratio
After tax Pre-FMV Dividend Payout Ratio (1)
58%
59%
140%
76%
88%
64%
92%
72%
Note:
This non-IFRS measure adjusts the net income used in the calculation of the dividend payout ratio to after
tax Pre-FMV earnings so as to eliminate the impact of changes in fair value by adding back losses on the val-
uation of financial instruments and deducting gains on the valuation of financial instruments. The Company
uses its aggregate effective tax rate to tax affect the impact of the valuation of financial instruments on this
ratio.
For the year ended December 31, 2015, the common
share payout ratio was 88% compared to 92% in
2014. In both 2015 and 2014, the Company recorded
large losses on account of the fair value of financial
instruments. These amounts are largely recorded in
a period in which yields on Government of Canada
bond yields changed; however, the offsetting eco-
nomic impact is reflected in wider spreads on the
mortgages pledged for securitization and will be
generally realized in net interest margin over the
terms of the mortgages. If the gains and losses on
financial instruments in both years are excluded
from the above calculations, the dividend payout
ratio for 2015 would have been 64% compared to
72% in 2014.
The Company also paid $4.65 million of dividends
on its preferred shares in 2015 and 2014.
Revenues and Funding Sources
Mortgage Origination
The Company derives a significant 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 con-
duit may be the most cost-effective means for the
Company to fund individual mortgages. In general,
originations are allocated from one funding source
to another depending on market conditions and
strategic considerations related to maintaining
diversified funding sources. The Company retains
servicing rights on virtually all of the mortgages it
originates, which provide the Company with ser-
vicing fees to complement revenue earned through
originations. For the year ended December 31, 2015,
new origination volume increased from $16.2 billion
to $17.3 billion, or about 7%, compared to 2014.
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
21
First National Financial Corporation – 2015 Annual Report
“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.”
not meet the requirements for sale recognition and
instead are accounted for as secured financings.
These mortgages remain as mortgage assets of
the Company for the full term and are funded with
securitization-related debt. Of the Company’s $22.5
billion of new originations and renewals for the year
ended December 31, 2015, $8.4 billion was originat-
ed for its own securitization programs.
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 $22.5 billion of
new originations and renewals in 2015, $13.5 billion
was placed with institutional investors.
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 pres-
ent 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 gen-
erated through its mortgage origination activities
on behalf of a wide range of institutional investors.
Mortgage servicing and administration is a key com-
ponent of the Company’s overall business strategy
and a significant source of continuing income and
cash flow. In addition to pure servicing revenues,
fees related to mortgage administration are earned
by the Company throughout the mortgage term.
Another aspect of servicing is the administration
of funds held in trust, including borrowers’ prop-
erty tax escrows, reserve escrows and mortgage
payments. As acknowledged in the Company’s
agreements, any interest earned on these funds
accrues to the Company as partial compensation for
administration services provided. The Company has
negotiated favourable interest rates on these funds
with the chartered banks that maintain the deposit
accounts, which has resulted in significant additional
servicing revenue.
In addition to the interest income earned on se-
curitized 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.
The Company provides underwriting and fulfilment
processing services to a mortgage originator using
the mortgage broker distribution channel. The
Company earns a fee based on the dollar value of
funded mortgages. These fees are recognized at the
time a mortgage funds and is included in “Mortgage
servicing income” in the consolidated statement of
comprehensive income.
22
Management’s Discussion and Analysis Results of Operations
The following table shows the volume of mortgages originated by First National and mortgages under
administration for the periods indicated:
($ millions)
MORTGAGE ORIGINATIONS BY SEGMENT
New Single-family residential
New Multi-unit and commercial
Sub-total
Single-family residential renewals
Multi-unit and commercial renewals
Total origination and renewals
MORTGAGE ORIGINATIONS BY FUNDING
SOURCE
Institutional investors – new residential
Institutional investors – renew residential
Institutional investors – multi/commercial
NHA-MBS/ CMB/ ABCP securitization
Internal Company resources /CMBS
Total
MORTGAGES UNDER ADMINISTRATION
QUARTER ENDED
YEAR ENDED
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
2,921
1,266
4,187
1,246
321
5,754
2,224
436
856
2,122
116
5,754
2,860
1,195
4,055
823
328
5,206
1,434
372
1,091
2,095
214
5,206
12,880
4,420
17,300
4,287
923
22,510
8,350
1,827
3,327
8,433
573
12,525
3,701
16,226
3,365
1,306
20,897
6,323
1,700
3,343
8,942
589
22,510
20,897
Single-family residential
Multi-unit residential and commercial
73,312
20,518
66,992
18,898
73,312
20,518
66,992
18,898
Total
$ 93,830
$ 85,890
$ 93,830
$ 85,890
Total new mortgage origination volumes increased
in 2015 compared to 2014 by 7%. Single-family
volumes increased by 3% and commercial segment
volumes increased by 19% year over year as demand
for housing and commercial real estate continued
and the Company increased its share in the mort-
gage broker channel. The growth rate was mitigated
by lower volumes originated from the Company’s
Calgary office. These volumes were lower by 11%
year over year as the turmoil associated with the
rapid decline in the price of oil slowed the housing
market in Alberta and Saskatchewan. When combined
with renewals, total production increased from $20.9
billion in 2014 to $22.5 billion in 2015, or by 8%. The
low interest rate environment which existed for
most of 2014 continued in 2015, highlighted by the
Bank of Canada’s two reductions to its overnight
rate. Low mortgage rates, which stimulate increased
real estate transactions, together with the Compa-
ny’s expertise in mortgage underwriting, drove high-
er origination volumes. Origination for direct secu-
ritization into NHA-MBS, CMB and ABCP programs
remained a large part of the Company’s strategy
with volumes of $8.4 billion in 2015, lower than the
23
First National Financial Corporation – 2015 Annual Report Mortgage Servicing Income
Mortgage servicing income increased 26% to $117.1
million from $93.1 million. This increase was due
to revenue earned on the new underwriting and
fulfillment processing services business which the
Company launched in January 2015. Without this
revenue, mortgage servicing income grew at a rate
lower than the MUA growth of 9% as a result of the
decline in the average per unit servicing fee. The
decline is a consequence of lower fees charged to
some of the largest residential investors which com-
menced in late 2013.
Mortgage Investment Income
Mortgage investment income decreased 8% to $52.8
million from $57.1 million. A portion of the decrease
relates to a $2.5 million provision for loan loss on its
portfolio of mortgage and loan investments which
the Company has determined is required on four
non-performing commercial mortgages. In 2014, the
Company did not accrue any provision for loss. The
decrease is also due to the Company’s securitiza-
tion program. As the Company elects to securitize,
it funds mortgages accumulated for securitization
and earns the mortgage interest rate income in the
warehousing period prior to securitization. Generally
mortgage rates have fallen between 2014 and 2015.
Prevailing interest rates on five year closed mort-
gages were about 3.50% in mid-2014 compared to
2.65% in mid-2015. This decreases revenue on such
mortgages. The decrease has been offset partially by
greater revenue on the Company’s performing mort-
gage and loan investments which have grown by
over $15 million between December 2014 and 2015.
$8.9 billion originated in the 2014 year. The Com-
pany used more institutional placements in 2015 as
demand from investors increased and securitization
markets exhibited increased volatility with the recent
economic uncertainty.
Net Interest - Securitized Mortgages
Comparing the year ended December 31, 2015 to
the year ended December 31, 2014, “net interest –
securitized mortgages” increased by 14% to $132.2
million from $115.5 million. The increase was due to
a larger portfolio of securitized mortgages together
with wider weighted-average spreads on the portfo-
lio year over year. The portfolio of mortgages funded
through securitization increased by 10% from $22.3
billion as at December 31, 2014 to $24.5 billion as
at December 31, 2015. Although mortgage spreads
have only recently widened, in 2014 and 2015 the
Company experienced large losses on account of
the financial instruments. These losses primarily
comprise losses on short bonds used by the Com-
pany for its hedging program. As described below,
the typical offset to these losses is wider mortgage
spreads, which the Company earns in net interest on
securitized mortgages over their terms. The result of
these wider spreads can now be seen in the Company’s
net interest – securitized mortgages revenue. Net in-
terest is also affected by the amortization of deferred
origination and other costs that are capitalized on
securitized mortgages.
Placement Fees
Placement fee revenue increased by 30% to $165.7
million from $127.1 million in 2014. New residential
origination volume for institutional customers, ex-
cluding renewals, increased from $6.32 billion in 2014
to $8.35 billion in 2015 or by 32%. The year-over-year
change was also affected by renewal related place-
ment fees and commercial segment fees, both of
which grew but not as much as fees related to new
single-family origination.
Gains on Deferred Placement Fees
Gains on deferred placement fees revenue increased
6% to $11.1 million from $10.5 million. The gains relate
to multi-unit residential mortgages originated and
sold to institutional NHA-MBS issuers. Although vol-
umes for these transactions decreased by 8% from
2014 to 2015, spreads on these transactions widened
so that the Company realized higher per unit gains.
24
Management’s Discussion and Analysis Realized and Unrealized Gains (Losses) on
Financial Instruments
For First National, this financial statement line item
typically consists of two components: (1) gains and
losses related to the Company’s economic hedging
activities, and (2) gains and losses related to hold-
ing term assets derived using discounted cash flow
methodology. Much like the short bonds that the
Company uses for hedging, the term assets are
affected by changes in credit markets and Gov-
ernment 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:
($000’s)
Losses on short bonds used for the economic hedging
program
Gains (losses) on mortgages held at fair value
Losses on interest rate swaps
Gains on deferred placement fees receivable
Other gains (losses)
QUARTER ENDED
YEAR ENDED
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
(734)
1,050
(13)
16
11
(16,550)
(35,076)
(41,486)
(1,447)
18,642
15,733
(173)
(36,457)
(9,396)
226
(44)
724
24
307
(74)
Total losses on financial instruments
330
(17,988)
(52,143)
(34,916)
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 2015,
the Company recorded losses on these hedges
of $35.1 million (2014 – $41.5 million). While these
losses decreased the net income earned in 2015, the
gross spread on the related portfolio of securitized
mortgages going forward will be proportionally
wider as the Company issues securitization-related
debt at lower relative interest rates than it would
have prior to the movement in bond yields. In order
to adequately hedge its interest rate exposure, the
Company had more than $740 million of bonds sold
short as at December 31, 2015.
For 2015, negative economic news during the year
meant 5-year bond yields decreased by about
0.60% in the year. 2014 also featured poor global
economic sentiment and 5-year bond yields also fell
by about 0.60%. For the Company, this meant the
value of holding short bond positions as a hedge
against its mortgages pending securitization de-
creased in both 2015 and 2014. Accordingly, the
Company recorded significant net losses related to
the valuation of these financial instruments in 2015
and 2014.
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 as-
sociated with fixed rate mortgages originated for
its own securitization programs. For accounting
purposes, these do not qualify as interest rate
hedges as the bonds used are not derivatives but
cash-based financial instruments. These gains or
losses are recorded in the period in which the bond
yields change; however, the offsetting economic
gains or losses are not recorded in the same period.
Instead, the resulting economic gain (or loss) will
be reflected primarily in wider or narrower spreads
25
First National Financial Corporation – 2015 Annual Report The portion of the Company’s mortgages, which is
held at fair value (primarily those funded through
ABCP), was affected positively by the change in
bond yields; however, these gains were offset by the
widening of mortgage funding credit spreads expe-
rienced which negatively impacted these mortgages
to a greater extent in 2015 than in the prior year such
that these mortgages gained only $18.6 million of
value (2014 - $15.7 million). The valuation of interest
rate swaps, which were used to manage the interest
rate exposure from fixed-rate mortgages in the
ABCP portfolio, was negatively affected in both
years by lower bond yields such that unrealized
losses of $36.5 million (2014 - $9.4 million) were
recorded.
Brokerage Fees Expense
Brokerage fees expense increased 39% to $107.0
million from $77.1 million. This increase is explained
almost entirely by higher origination volumes of
single-family mortgages for institutional investors,
which increased by 32%. The expense also increased
because of higher per unit broker fees and the costs
of portfolio insurance, which both increased between
2% and 3% from 2014.
Salaries and Benefits Expense
Salaries and benefits expense increased 25% to $84.8
million from $67.6 million. The increase is due primar-
ily to an increase in headcount and higher employee
costs associated with the new third party underwriting
business. The Company hired 117 employees during
the fourth quarter of 2014 and the first half of 2015
for this business. Accordingly, the Company had
about $8.8 million of direct salary-related expenses
for this division in 2015 compared to $0.9 million in
2014. The increase is also the result of higher employee
costs associated with commercial segment origina-
tion. The Company compensates its commercial sales
staff with commissions based on the profitability
of originated mortgages. Commercial origination,
excluding renewals, increased by 19% from 2014 and
the related compensation to sales staff increased by
$3.1 million year over year. As at December 31, 2015,
the Company had 915 employees, compared to 770
as at December 31, 2014. The growth in head count,
excluding employees working in the third-party
underwriting and fulfillment services business, was
7%. This growth largely reflected the need to meet
the administrative demand associated with increased
MUA, which grew by 9% year over year. Management
salaries were paid to the two senior executives
(Co-founders) who together control about 77% of
the Company’s common shares. The current period
expense is a result of the compensation arrange-
ment executed on the closing of the initial public
offering (“IPO”).
Interest Expense
Interest expense decreased 1% to $35.9 million
from $36.3 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 used the senior unsecured note together
with a $1 billion credit facility with a syndicate of
banks and 30-day repurchase facilities to fund the
mortgages during this period. The overall interest
expense has decreased from the prior period due
to falling interest rates as the prime lending rate of
most banks was lowered from 3.0% to 2.70% during
the year as a result of the cuts made by the Bank of
Canada during 2015.
Other Operating and Amortization of
Intangibles Expenses
Other operating and amortization of intangibles
expenses increased 7% to $50.2 million from $47.1
million. The amortization of intangible assets rec-
ognized on the IPO was $5.0 million in each of 2015
and 2014. Other operating expenses increased by
$4.3 million related to the costs of running the new
third party underwriting department which launched
in 2015. These expenses and general growth in
operating costs associated with a larger MUA were
offset by $3.6 million of lower hedge costs. These
are costs the Company incurs to operate its eco-
nomic hedging program. The costs are lower as a
consequence of lower bond yields which generally
decrease the costs of carrying the instruments used
in the program.
Income before Income Taxes and Pre-FMV
EBITDA
Income before income taxes increased 6% to
$148.7 million from $140.3 million. There was an
increase despite changes in the capital markets,
which negatively affected the Company’s interest
rate hedges and the carrying values of certain mort-
gage assets in both 2015 and 2014. Income before
income taxes was comparatively lower in 2015 than
26
Management’s Discussion and Analysis 2014 by $17.2 million because of the unfavourable
change in losses on financial instruments. Pre-FMV
EBITDA, which eliminates the impact of gains and
losses on financial instruments, increased 15% to
$209.9 million from $183.1 million. The increase
was due primarily to: 1) the Company’s decision
to place more of its origination with institutional
customers; and 2) the transition to profitability in its
new underwriting and fulfillment services business.
The Company earned more placement fees which
translated to increased earnings as there is a fixed
cost of operating the origination departments. With
respect to the new third party underwriting services
business, the third quarter confirmed the successful
implementation of the Company’s business model.
With strong seasonal origination for this business in
the third and fourth quarter of 2015, the Company
surpassed break even volumes and the division con-
tributed earnings to overall corporate profitability.
In 2014, the start-up losses related to this business
represented drag on the Company’s consolidated
earnings.
Provision for Income Taxes
The provision for taxes increased by 9% to $39.2
million from $35.8 million. The provision is higher
due to the higher income earned in 2015 compared
to the income recorded in 2014.
Operating Segment Review
The Company aggregates its business from two segments for financial reporting purposes: (i) Residential
(which includes single-family residential mortgages); and (ii) Commercial (which includes multi-unit residential
and commercial mortgages), as summarized below:
Operating Business Segments
($000’s except percent amounts)
QUARTER ENDED
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
Originations and renewals
17,167,524
15,889,345
5,343,080
5,007,918
RESIDENTIAL
COMMERCIAL
Percentage change
Revenue
Percentage change
Income before income taxes
Percentage change
PERIOD ENDED
Identifiable assets
8.0%
706,040
16.0%
100,455
5.0%
608,471
95,631
6.7%
209,275
7.5%
48,221
7.9%
194,636
44,674
December
31, 2015
December
31, 2014
December
31, 2015
December
31, 2014
22,276,053
21,112,421
5,620,903
4,811,717
Mortgages under administration
73,311,858
66,991,706
20,517,771
18,897,855
Residential Segment
Overall residential origination including renewals
increased by 8% between 2015 and 2014 while
residential revenues increased by about 16%. Part of
the change in revenue is due to the change in gains
and losses on financial instruments. Excluding these
changes, revenue increased by 19% as the Compa-
ny’s new third party underwriting and fulfillment
began producing revenue in 2015. The increase in
normalized revenue also includes growth in gross
revenue from the securitization program. The net
change in gains and losses on financial instruments
of $22 million also affected net income before
27
First National Financial Corporation – 2015 Annual Report income taxes. Without the impact of this fair value
change, net income before income taxes for the
residential segment would have increased by 22%
year over year, indicative of revenue growth and
increased profitability from the Company’s renewal
pipeline. Together with the profits earned by the
third party underwriting services business, income
grew faster than revenue. Identifiable assets in-
creased from December 31, 2014, as the Company
added about $1.7 billion of net single-family mort-
gages to mortgages pledged under securitization.
This increase was offset by a decrease of almost
$600 billion of government bonds purchased under
resale agreements for hedging purposes as the
Company elected to place more of its origination
with institutional customers and accordingly, re-
duced its short bond position.
Commercial Segment
2015 commercial revenues increased by about 8%
from 2014, but increased by 5% if the impact of
changes in gains and losses on the fair value of
financial instruments are excluded. This difference
is due largely to the provision for loss of $2.5 million
which reduced mortgage investment income and
falling interest rates which reduced gross securitiza-
tion interest, mortgage interest earned on mortgages
on the balance sheet and interest earned on funds held
in trust. Although higher net revenue from the securi-
tized mortgage portfolio in the Company’s commercial
segment and better spreads on deferred placement
fees contributed to increase profits, without fair
value amounts, net income before tax decreased by
3% year over year. This is the result of the provision
for loss and more origination being securitized by
the Company directly. This increases salary costs to
in-house sales staff but produces very little prof-
it in the year of securitization. Identifiable assets
increased since December 31, 2014, as the Company
added about $500 million of net commercial mort-
gages to mortgages pledged under securitization
and increased the amount of government bonds
purchased for hedging purposes by about $200
million.
Liquidity and Capital Resources
The Company’s fundamental liquidity strategy has
been to invest in prime Canadian mortgages. Manage-
ment’s belief has always been that these mortgages
are considered “AAA” by investors and will always
be well bid and highly liquid. This strategy proved
effective during the turmoil 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 demonstrated,
First National had little trouble finding investors
to purchase its mortgage origination at profitable
margins. Originating prime mortgages also allows
the Company to securitize in the capital markets;
however, this activity requires significant cash
resources to purchase and hold mortgages prior to
arranging for term debt through the securitization
markets. For this purpose, the Company uses the
combination of the $175 million unsecured notes and
the Company’s revolving bank credit facility. This
aggregate indebtedness is typically used to fund: (1)
mortgages accumulated for sale or securitization, (2)
the origination costs associated with securitization,
and (3) mortgage and loan investments. The Com-
pany has a credit facility with a syndicate of eleven
financial institutions for a total credit of $1 billion.
This facility was extended in May 2015 for a five-year
term maturing in May 2020. Bank indebtedness may
also include borrowings obtained through overdraft
facilities. At December 31, 2015, the Company
entered into repurchase transactions with financial
institutions to borrow $806 million related to $822
million of mortgages held in “mortgages accumulated
for sale or securitization” on the balance sheet.
At December 31, 2015, outstanding bank indebtedness
(excluding bank indebtedness at the Fund level) was
$576.9 million (December 31, 2014 - $601.9 million).
Together with the unsecured notes of $175 million
(December 31, 2014 – debenture of $175 million), this
“combined debt” was used to fund $675.3 million
(December 31, 2014 - $690.2 million) of mortgages
accumulated for sale or securitization. At December
31, 2015, the Company’s other interest-yielding assets
included: (1) deferred placement fees receivable of
$38.2 million (December 31, 2014 – $34.6 million)
and (2) mortgage and loan investments of $246.0
million (December 31, 2014 - $230.4 million). The
difference between “combined debt” and the mort-
gages accumulated for sale or securitization funded
by it, which the Company considers a proxy for true
leverage, has decreased between December 31, 2014
and December 31, 2015, and now stands at $76.0
million (December 31, 2014 – $86.7 million). This
represents a debt-to-equity ratio of approximately
28
Management’s Discussion and Analysis 0.18 to 1, which the Company believes is conserva-
tive. This ratio decreased from December 31, 2014
when it was 0.21 to 1 as, generally, the Company rein-
vested retained earnings to reduce debt.
The Company funds a large portion of its mortgage
originations for institutional placement on the same
day as the advance of the related mortgage. The re-
maining originations are funded by the Company on
behalf of institutional investors or pending securiti-
zation on the day of the advance of the mortgage.
On specified days, sometimes daily, the Company
aggregates all mortgages warehoused to date for
an institutional investor and transacts a settlement
with that institutional investor. A similar process
occurs prior to arranging for term funding through
securitization. The Company uses a portion of the
committed credit facility with the banking syndicate
to fund the mortgages during this warehouse 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 mortgages,
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 finance a portion of the Company’s
deferred placement fees receivable and the origina-
tion costs associated with securitization as well as
other miscellaneous longer-term financing needs.
The Company uses ABCP as an efficient source of
funding primarily for short term insured mortgages.
In the May 2013 federal budget, the government
announced it was going to take steps to limit the
securitization of government insured mortgages to
CMHC sponsored programs. As ABCP is not spon-
sored by CMHC, such a limitation would impact the
Company. Almost two years after the announce-
ment, legislation was passed and detailed transition
information was published. With the change in the
federal government, the legislation was reconfirmed
in February 2016 with some delayed application
dates. Generally, the regulations make mortgage
default insurance invalid for single-family mortgages
sold to non-CMHC sponsored securitizations after
June 30, 2016. Accordingly, existing single-family
“The Company’s fundamental liquidity
strategy has been to invest in prime Ca-
nadian mortgages. Management’s belief
has always been that these mortgages
are considered “AAA” by investors and
will always be well bid and highly liquid.”
mortgages in ABCP conduits as at June 30, 2016
can be funded by ABCP until their maturity, not
to exceed 5 years. There is still discussion in the
industry concerning the legislation; however if
implemented as currently described, the new leg-
islation would mean that the Company must find
other funding sources for the insured mortgages it
has historically funded with ABCP. The Company
is considering various alternatives including whole
loan sales and selling short term NHA-MBS pools to
ABCP conduits. The Company may also adjust its
renewal offering to provide incentives to borrow-
ers to select five year terms as opposed to shorter
terms. These alternatives may not be as economical
to the Company as ABCP. A portion of the Compa-
ny’s capital has been employed to support its ABCP
and NHA-MBS programs, primarily to provide credit
enhancements as required by rating agencies. The
most significant portion of cash collateral is the
investment made on behalf of the Company’s ABCP
programs. As at December 31, 2015, the investment
in cash collateral was $29.2 million (December 31,
2014 - $19.0 million).
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 quar-
terly 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 legisla-
tion, all dividends (and deemed dividends) paid by
the Company to Canadian residents on both com-
mon and preference shares after December 31, 2010,
are designated as “eligible dividends”.
29
First National Financial Corporation – 2015 Annual Report 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 place-
ment 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 financial
assets measured at “fair value through profit or loss”
such that changes in market value are recorded
in the consolidated statement of comprehensive
income. Effectively, these assets are treated much
like bonds earning the Company a coupon at the
discount rates used by the Company. The discount
rates used represent the interest rate associated
with a risk-free bond of the same duration plus a
premium for the risk/uncertainty of the asset’s resid-
ual cash flows. As rates in the bond market change,
the carrying values of these assets will change.
These changes may be significant (favourable and
unfavourable) from quarter to quarter. The Com-
pany enters into fixed-for-float swaps to manage
the interest rate exposure of fixed mortgages sold
to ABCP conduits. These instruments will also be
treated as fair value through profit or loss. While
the Company has attempted to exactly match the
principal balances of the fixed mortgages over the
next five-year period to the notional swap values for
the same period, there will be differences in these
amounts. Any favourable or unfavourable amounts
will be recorded in the consolidated statement of
comprehensive income each quarter.
The Company believes its hedging policies are
suitably designed such that the interest rate risk of
holding mortgages prior to securitization is miti-
gated. 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 synthetic bond for-
wards (consisting of bonds sold short and bonds
purchased under resale agreements) to manage
interest rate exposure between the time a mortgage
rate is committed to the borrower and the time the
mortgage is transferred to the securitization vehicle
and the matched term debt is arranged. As interest
rates change, the value of these short bonds will vary
inversely with the value of the related mortgages.
As interest rates increase, a gain will be recorded
on the bonds, which should be offset by a tighter
interest rate spread between the interest rates on
mortgages and the securitization debt. This spread
will be earned over the term of the related mortgag-
es. 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 stan-
dard maximum rate hold period available for the
mortgages). As at December 31, 2015, the Company
had $413 million of notional forward bond positions
related to its single-family programs. For multi-unit
residential and commercial mortgages, the Compa-
ny assumes all mortgages committed will fund and
hedges each mortgage individually. This includes
mortgages committed for the CMB program as well
as mortgages for transfer to the Company’s other
securitization vehicles. As at December 31, 2015, the
Company had entered into $332 million of 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, 2015 to December 31, 2015 was a
$35.1 million loss. This amount has been included in
revenue in the statement of comprehensive income.
The Company is party to two interest rate swaps
that economically hedge the interest rate exposure
related to certain mortgages held on the balance
sheet that the Company has originated as replace-
ment assets for its CMB activities. As at December
31, 2015, the aggregate notional value of these swaps
was $26.8 million. During the year the value of these
swaps did not change significantly. The swaps mature
between December 2016 and June 2021.
30
Management’s Discussion and Analysis As at December 31, 2015, the Company had various
exposures to changing credit spreads. In particular,
in mortgages accumulated for sale or securitization,
there were almost $1.5 billion of mortgages that
are susceptible to some degree of changing credit
spreads.
Capital Expenditures
A significant portion of First National’s business
model consists of the origination and placement or
securitization of financial assets. Generally, placement
activities do not require much capital investment
as the Company acts primarily in the capacity of a
broker. On the other hand, the undertaking of securiti-
zation transactions may require significant amounts of
the Company’s own capital. This capital is provided in
the form of cash collateral, credit enhancements, and
the upfront funding of broker fees and other origi-
nation costs. These are described more fully in the
“Liquidity and Capital Resources” section above. For
fixed assets, the business requires capital expendi-
tures on technology (both software and hardware),
leasehold improvements and office furniture. During
the year ended December 31, 2015, the Company
purchased new computers and office and commu-
nications equipment. In the long term, the Company
expects capital expenditures on fixed assets will be
approximately $4.0 million annually.
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 illustrat-
ed 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 profitable to the
Company when sold to a bank-sponsored CMBS
conduit. Unfortunately for the Company, when
these mortgages funded, the CMBS market had
shut down. The alternative to this channel was more
expensive as credit spreads elsewhere in the mar-
ketplace for this type of mortgage had widened. The
Company adjusted for market-suggested increases
in credit spreads in 2007 and 2008, adjusting the
value of the mortgages downward. In 2009, the
economic environment remained weak but did not
worsen from what it was at the end of 2008. Overall
credit spreads stopped widening such that the Com-
pany 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 effective economic
interest rate hedges, the Company’s exposure to
credit spreads remained. This risk is inherent in the
Company’s business model and cannot be economi-
cally hedged.
The same exposure to risk is inherent in the Com-
pany’s securitization through ABCP. The Company
is exposed to the risk that 30-day ABCP rates are
greater than 30-day BA rates. Prior to the financial
crisis, the Company considered this a low risk given
the quality of the assets securitized, the amount of
credit enhancements provided by the Company and
the strong covenant of the bank-sponsored conduits
with which the Company transacted. In 2008, 30-
day ABCP traded at approximately 1.10 percentage
points over BAs; but by the end of March 2011 and
continuing until the current period, 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 profitability of the NHA-
MBS program and significant increases in gains on
deferred placement fees from the sale of prime
insured mortgages.
31
First National Financial Corporation – 2015 Annual Report Summary of Contractual Obligations
The Company’s long-term obligations include five-
to 10-year premises leases for its six offices across
Canada, and its obligations for the ongoing servicing
of mortgages sold to securitization conduits and
mortgages related to purchased servicing rights.
The Company sells its mortgages to securitization
conduits on a fully-serviced basis, and is responsi-
ble for the collection of the principal and interest
payments on behalf of the conduits, including the
management and collection of mortgages in arrears.
($000’s)
PAYMENTS DUE BY PERIOD
Lease Obligations
Total
21,232
0-1 Years
1-3 Years
4-5 Years
After 5 Years
6,192
11,511
2,920
609
Critical Accounting Policies and
Estimates
The Company prepares its financial statements in
accordance with IFRS, which requires management
to make estimates, judgments and assumptions
that management believes are reasonable based
upon the information available. These estimates,
judgments and assumptions affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements, and the reported amounts of
revenue and expenses during the reporting period.
Management bases its estimates on historical expe-
rience and other assumptions that it believes to be
reasonable under the circumstances. Management
also evaluates its estimates on an ongoing basis.
The significant accounting policies of First National
are described in Note 2 to the Company’s annual
consolidated financial statements as at December
31, 2015. The policies which First National believes
are the most critical to aid in fully understanding
and evaluating its reported financial results include
the determination of the gains on deferred place-
ment fees and the impact of fair value accounting
on financial instruments.
The Company uses estimates in valuing its gain or
loss on the sale of its mortgages placed with institu-
tions earning a deferred placement fee. Under IFRS,
valuing a gain on deferred placement fees requires
the use of estimates to determine the fair value of
the retained interest (derived from the present value
of expected future cash flows) in the mortgages.
These retained interests are reflected on the
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 pres-
ent value future expected cash flows. The annual rate
of unscheduled principal payments is determined
by reviewing portfolio prepayment experience on a
monthly basis. The Company uses different rates for
its various programs, which average approximately 11%
for single-family mortgages. The Company assumes
there is virtually no prepayment on multi-unit residen-
tial fixed rate mortgages.
On a quarterly basis, the Company reviews the
estimates used to ensure their appropriateness and
monitors the performance statistics of the relevant
mortgage portfolios to adjust and improve these
estimates. The estimates used reflect the expected
performance of the mortgage portfolio over the
lives of the mortgages. The assumptions underlying
the estimates used for the year ended December 31,
2015 continue to be consistent with those used for
the year ended December 31, 2014 and the quarters
ended September 30, June 30 and March 31, 2015.
The Company has elected to treat its financial
assets and liabilities, including deferred placement
fees receivable, specific mortgages pledged under
securitization, some mortgage and loan investments
and bonds sold short, at fair value through profit or
loss. Essentially, this policy requires the Company to
record changes in the fair value of these instruments
in the current period’s earnings. The Company’s as-
sets and liabilities are such that the Company must
use valuation techniques based on assumptions that
32
Management’s Discussion and Analysis are not fully supported by observable market prices
or rates in most cases. Much like the valuation of de-
ferred placement fees receivable described above,
the Company’s method of determining the fair value
of its securitized mortgages has a significant impact
on earnings. The Company uses different 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 fixed 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 profit margin for the
risk involved.
Future Accounting Changes
In July 2014, the IASB issued the final version of
IFRS 9—Financial Instrument, replacing IAS 39 and
all previous versions of IFRS 9. This final version of
IFRS 9 includes a logical model for classification and
measurement, a single, forward-looking ‘expected
loss’ impairment model and a substantially-reformed
approach to hedge accounting. Under this standard,
financial assets are classified and measured based
on the business model in which they are held and the
characteristics of their contractual cash flows. The
accounting model for financial liabilities is largely
unchanged from IAS 39 except for the presentation
of the impact of own credit risk on financial liabilities
which will be recognized in OCI, rather than in profit
and loss as under IAS 39. The new general hedge
accounting principles under IFRS 9 are aimed to
align hedge accounting more closely with risk man-
agement. This new standard does not fundamentally
change the types of hedging relationships or the re-
quirement to measure and recognize ineffectiveness;
however it is expected to provide more hedging strat-
egies that are used for risk management to qualify
for hedge accounting and introduce more judgment
to assess the effectiveness of a hedging relationship.
IFRS 9 is mandatorily effective for annual periods
beginning on or after January 1, 2018. The Company
is in process of evaluating the impact of IFRS 9 on
the Company’s financial statements.
In May 2014, the IASB issued IFRS 15 Revenue from
Contracts with Customers, replacing IAS 11 - Con-
struction Contracts, IAS 18 - Revenue, IFRIC 13 -
Customer Loyalty Programs, IFRIC 15 - Agreements
for the Construction of Real Estate, IFRIC 18 -
Transfer of Assets from Customers, and SIC 31 Rev-
enue – Barter Transactions Involving Advertising
Services. The standard contains a single model that
applies to contracts with customers and two ap-
proaches to recognizing revenue: at a point in time
or over time. The model features a contract-based
five-step revenue recognition process to determine
the nature, amount, timing and uncertainty of
revenue and cash flows from the contracts with
customers.
IFRS 15 is effective for fiscal years ending on or after
December 31, 2018. The Company intends to adopt
IFRS 15 in its financial statements for the annual
period beginning on January 1, 2018 and is currently
analyzing the impact on the Company’s financial
statements.
In January 2016, the IASB issued IFRS 16 - Leases,
replacing IAS 17 - Leases. IFRS 16 requires lessees
to recognize assets and liabilities for most leases in-
stead of previous categories of finance leases, which
are reported on the balance sheet, or operating
leases, which are disclosed only in the notes to the
financial statements, under IAS 17. IFRS 16 is effec-
tive for annual periods beginning on or after January
1, 2019. Early adoption is permitted for companies
that also adopt IFRS 15. The Company is currently as-
sessing the impact of this standard on the Company’s
consolidated financial statements.
Disclosure Controls and Internal
Controls over Financial Reporting
The Company’s disclosure controls and procedures
are designed to provide reasonable assurance that
information required to be disclosed by the Com-
pany in reports filed under Canadian securities laws
is recorded, processed, summarized and reported
within the time periods specified under those laws,
and include controls and procedures that are de-
signed to ensure that information is accumulated and
communicated to management, including the Chief
Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
33
First National Financial Corporation – 2015 Annual Report As of December 31, 2015, management evaluated,
under the supervision of and with the participation
of the Chief Executive Officer and Chief Financial
Officer, the effectiveness of the Company’s disclosure
controls and procedures. Based on this evaluation,
management concluded that the Company’s disclo-
sure controls and procedures, as defined by National
Instrument 52-109, Certification of Disclosure in Issu-
ers’ Annual and Interim Filings, were effective as of
December 31, 2015.
Management is responsible for establishing and
maintaining adequate internal control over financial
reporting. Internal control over financial reporting is
designed to provide reasonable assurance regarding
the reliability of financial reporting and the prepa-
ration of financial statements for external purposes
in accordance with reporting standards; however,
because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements on a timely basis.
Management evaluated, under the supervision of
and with the participation of the Chief Executive
Officer and Chief Financial Officer, the effectiveness
of the Company’s internal control over financial
reporting based on the criteria set forth in Internal
Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) and, based on that
evaluation, concluded that the Company’s internal
control over financial reporting was effective as of
December 31, 2015 and that no material weaknesses
have been identified in the Company’s internal con-
trol over financial reporting as of December 31, 2015.
No changes were made in the Company’s internal
controls over financial reporting during the year
ended December 31, 2015 that have materially
affected, or are reasonably likely to materially af-
fect, the Company’s internal controls over financial
reporting.
Risks and Uncertainties Affecting
the Business
The business, financial condition and results of op-
erations of the Company are subject to a number of
risks and uncertainties, and are affected by a num-
ber of factors outside the control of management
of the Company. In addition to the risks addressed
elsewhere in this discussion and the financial
statements, these risks include: 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, legislation and
government regulation (including the policies set for
mortgage default insurance companies), competition,
reliance on mortgage insurers, reliance on key
personnel and the ability to attract and retain em-
ployees and executives, conduct and compensation
of independent mortgage brokers, failure or unavail-
ability of computer and data processing systems and
software, insufficient insurance coverage, change
in or loss of ratings, impact of natural disasters and
other events, and environmental liability. 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 fluctuate with FN-
FLP’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
find funding through various channels to earn ongoing
servicing or spread income. For the single-family
residential segment, the Company relies on indepen-
dent mortgage brokers for origination and several
large institutional investors for sources of funding.
These relationships are critical to the Company’s
success. For a more complete discussion of the risks
affecting the Company, reference should be made
to the Company’s Annual Information Form.
Forward-Looking Information
Forward-looking information is included in this
MD&A. In some cases, forward-looking information
can be identified by the use of terms such as ‘‘may’’,
‘‘will”, ‘‘should’’, ‘‘expect’’, ‘‘plan’’, ‘‘anticipate’’, ‘‘be-
lieve’’, ‘‘intend’’, ‘‘estimate’’, ‘‘predict’’, ‘‘potential’’,
‘‘continue’’ or other similar expressions concerning
34
Management’s Discussion and Analysis matters that are not historical facts. Forward-looking
information may relate to management’s future
outlook and anticipated events or results, and may
include statements or information regarding the future
financial position, business strategy and strategic
goals, product development activities, projected
costs and capital expenditures, financial results, risk
management strategies, hedging activities, geo-
graphic expansion, licensing plans, taxes and other
plans and objectives of or involving the Company.
Particularly, information regarding growth objectives,
any increase in mortgages under administration,
future use of securitization vehicles, industry trends
and future revenues is forward-looking information.
Forward-looking information is based on certain
factors and assumptions regarding, among other
things, interest rate changes and responses to such
changes, the demand for institutionally placed and
securitized mortgages, the status of the applicable
regulatory regime, and the use of mortgage brokers
for single-family residential mortgages. This forward-
looking information should not be read as providing
guarantees of future performance or results, and will
not necessarily be an accurate indication of whether
or not, or the times by which, those results will be
achieved. While management considers these
assumptions to be reasonable based on information
currently available 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 differ materially from what
management currently expects. These factors include
reliance on sources of funding, concentration of insti-
tutional investors, reliance on independent mortgage
brokers, and changes in interest rates as outlined under
‘‘Risk and Uncertainties Affecting the Business’’.
In evaluating this information, the reader should
specifically consider various factors, including the
risks outlined under ‘‘Risk and Uncertainties Affecting
the Business’’, which may cause actual events or
results to differ materially from any forward-looking
information.
The forward-looking information contained in this
discussion represents management’s expectations as
of February 23, 2016, 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 other-
wise, except as required under applicable securities
regulations.
Outlook
Management is very pleased with both the MUA and
origination growth in 2015. With higher origination
levels and renewal volume, the Company was able
to increase the volume it placed with institutional
investors, and only reduce slightly the amount it
retained for its securitization activities. Management
is particularly pleased with the results from its under-
writing and fulfillment processing services business
which transitioned to profitability in the third
quarter thanks to strong seasonal volumes and the
execution of its business plan.
Looking forward, the Company expects the low
interest rate environment, which was reinforced with
January and July 2015 Bank of Canada rate cuts, to
continue into 2016. Low rates will keep mortgage
affordability at favourable levels and mitigate
refinancing risk. The Company will focus on the
significant value of renewal opportunities and its
partnerships with institutional customers in order
to maximize profitability. Management expects the
Company to continue to generate cash flow from
its $25 billion portfolio of mortgages pledged under
securitization and $69 billion servicing portfolio that
will maximize financial performance. First National
also expects the underwriting and fulfillment pro-
cessing services business to continue to add to
earnings as mortgages processed increase in
response to the Company’s superior service levels
to the mortgage broker distribution channel.
35
First National Financial Corporation – 2015 Annual Report MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL
REPORTING
We have also disclosed in the MD&A any change in
our internal control over financial reporting that
occurred during the year that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
The Board of Directors ensures that management fulfills
its responsibility for financial reporting and internal con-
trol. The consolidated financial statements have been
reviewed by the Audit Committee and approved by
the Board of Directors. Ernst & Young LLP, the in-
dependent auditors appointed by the shareholders,
perform an annual audit of the Company’s consoli-
dated financial statements and provide their report
which follows.
Stephen Smith
Chairman and Chief Executive Officer
Robert Inglis
Chief Financial Officer
February 23, 2016
The management of First National Financial Corpora-
tion (the “Company”) is responsible for the integ-
rity, consistency and reliability of the consolidated
financial statements and Management’s Discussion
and Analysis (“MD&A”). The consolidated financial
statements have been prepared by management in
accordance with International Financial Reporting
Standards.
We certify that we have reviewed the consolidated
financial statements and information contained in
the MD&A, and, based on our knowledge, they do
not contain any untrue statement of a material fact
or omit to state a material fact required to be stated
or that is necessary to make a statement not mis-
leading in light of the circumstances under which
it was made, with respect to the period covered by
the statements and the annual report. Based on our
knowledge, the consolidated financial statements
together with MD&A and other financial information
included in the annual report fairly present in all
material respects the financial condition, results of
operations and cash flows of the Company as of the
dates and for the periods presented. The preparation
of consolidated financial statements involves trans-
actions affecting the current period which cannot be
finalized with certainty until future periods. Estimates
and assumptions are based on historical experience
and current conditions, and are believed to be rea-
sonable.
We are responsible for establishing and maintain-
ing internal control over financial reporting for the
Company. We have designed such internal control
over financial reporting, or caused it to be designed
under our supervision, to provide reasonable assur-
ance regarding the reliability of financial reporting and
the preparation of consolidated financial statements
for external purposes. We evaluated, or caused to be
evaluated under our supervision, the effectiveness of
the Company’s internal control over financial report-
ing at the financial year end and the Company has
disclosed in its annual MD&A our conclusion about
the effectiveness of internal control over financial
reporting at the financial year-end based
on that evaluation.
36
Management’s Responsibility for Financial Reporting
INDEPENDENT AUDITORS’ REPORT
In making those risk assessments, the auditors
consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated
financial statements in order to design audit pro-
cedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of
accounting estimates made by management, as well
as evaluating the overall presentation of the consoli-
dated financial statements.
We believe that the audit evidence we have obtained
in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial
position of First National Financial Corporation as at
December 31, 2015 and 2014, and its financial perfor-
mance and its cash flows for the years then ended
in accordance with International Financial Reporting
Standards.
Toronto, Canada
February 23, 2016
Chartered Professional Accountants
Licensed Public Accountants
To the Shareholders of First National
Financial Corporation
We have audited the accompanying consolidated
financial statements of First National Financial Corpo-
ration, which comprise the consolidated statements
of financial position as at December 31, 2015 and 2014,
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 financial
statements in accordance with International Fi-
nancial Reporting Standards, and for such internal
control as management determines is necessary
to enable the preparation of consolidated financial
statements that are free from material misstatement,
whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these
consolidated financial statements based on our
audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards.
Those standards require that we comply with ethical
requirements and plan and perform the audits to
obtain reasonable assurance about whether the con-
solidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain
audit evidence about the amounts and disclosures
in the consolidated financial statements. The proce-
dures selected depend on the auditors’ judgment,
including the assessment of the risks of material
misstatement of the consolidated financial state-
ments, whether due to fraud or error.
37
First National Financial Corporation – 2015 Annual Report CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION
As at December 31
ASSETS
Restricted cash
Cash held as collateral for securitization
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
Purchased mortgage servicing rights
Mortgage and loan investments
Income taxes recoverable
Other assets
Total assets
LIABILITIES AND EQUITY
Liabilities
Bank indebtedness
Obligations related to securities and mortgages
sold under repurchase agreements
Accounts payable and accrued liabilities
Securities sold under repurchase agreements
and sold short
Debt related to securitized and participation mortgages
Debenture loan payable
Senior unsecured notes
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:
(in thousands of Canadian dollars)
Notes
2015
2014
3
3
15
5
3
4
8
6
19
7
10
16
17
15
11
13
13
19
19
18
18
$ 497,904
29,157
73,785
$ 496,733
18,973
71,160
974,062
1,497,413
24,524,061
38,164
1,316
246,011
—
44,859
$ 27,926,732
1,331,615
1,369,778
22,337,378
34,644
2,230
230,388
10,539
50,476
$ 25,953,914
582,973
609,870
805,850
125,024
660,360
94,524
971,606
24,743,727
—
174,420
10,202
55,400
$ 27,469,202
122,671
97,394
204,686
424,751
32,779
457,530
$ 27,926,732
1,330,699
22,573,362
176,418
—
—
57,400
$ 25,502,633
122,671
97,394
192,669
412,734
38,547
451,281
$ 25,953,914
John Brough
Robert Mitchell
38
Consolidated Statements of Financial Position
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Years ended December 31
(in thousands of Canadian dollars, except earnings per share)
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
Notes
2015
2014
3
4
620,822
550,216
(488,659)
(434,726)
132,163
115,490
165,708
127,129
11,051
10,520
52,818
57,076
117,059
93,082
Realized and unrealized losses on financial instruments
20
(52,143)
(34,916)
EXPENSES
Brokerage fees
Salaries and benefits
Interest
Other operating
Amortization of intangible assets
Income before income taxes
Income tax expense
426,656
368,381
107,045
77,105
84,821
67,551
35,944
36,275
45,170
42,145
5,000
5,000
277,980
228,076
148,676
140,305
19
39,245
35,840
Net income and comprehensive income for the year
$ 109,431
$ 104,465
Net income and comprehensive income attributable to:
Shareholders
Non-controlling interests
Earnings per share
Basic
See accompanying notes
107,118
101,710
2,313
2,755
109,431
104,465
18
$ 1.71
$ 1.62
39
First National Financial Corporation – 2015 Annual Report CONSOLIDATED STATEMENTS OF
CHANGES IN EQUITY
Years ended December 31
(in thousands of Canadian dollars)
Common
shares
Preferred
shares
Retained
earnings
Non-controlling
interest
Total equity
Balance as at January 1, 2015
$ 122,671
$ 97,394
$ 192,669
$ 38,547
$ 451,281
Comprehensive income
Dividends paid or declared
Redemption by
non-controlling interests
—
—
—
—
—
—
107,118
2,313
109,431
(95,101)
(2,306)
(97,407)
—
(5,775)
(5,775)
Balance as at December 31, 2015
$ 122,671
$ 97,394
$ 204,686
$ 32,779
$ 457,530
Common
shares
Preferred
shares
Retained
earnings
Non-controlling
interest
Total equity
Balance as at January 1, 2014
$ 122,671
$ 97,394
$ 184,561
$ 45,285
$ 449,911
Comprehensive income
Dividends paid or declared
Redemption by
non-controlling interests
—
—
—
—
—
—
$ 101,710
$ 2,755
$ 104,465
(93,602)
(2,714)
(96,316)
—
(6,779)
(6,779)
Balance as at December 31, 2014
$ 122,671
$ 97,394
$ 192,669
$ 38,547
$ 451,281
See accompanying notes
40
Consolidated Statements of Changes In Equity
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Years ended December 31
OPERATING ACTIVITIES
Net income for the year
Add (deduct) items not affecting cash
Deferred income tax expense
Non-cash portion of gains on deferred placement fees
Increase in restricted cash
Net investment in mortgages pledged under securitization
Net increase in debt related to securitized mortgages
Provision for loan loss
Amortization of deferred placement fees receivable
Amortization of purchased mortgage servicing rights
Amortization of property, plant and equipment
Amortization of intangible assets
Unrealized losses on financial instruments
Net change in non-cash working capital balances related to operations
Cash provided by (used in) operating activities
INVESTING ACTIVITIES
Additions to property, plant and equipment
Repayment (investment) of cash held as collateral for securitization
Investment in mortgage and loan investments
Repayment of mortgage and loan investments
Cash used in investing activities
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
Repayment of debenture loan
Issuance of senior unsecured notes
Redemption by non-controlling interests
Cash provided by (used in) financing activities
Net decrease (increase) in bank indebtedness during the year
Bank indebtedness, beginning of year
Bank indebtedness, end of year
Supplemental cash flow information
Interest received
Interest paid
Income taxes paid
See accompanying notes
(in thousands of Canadian dollars)
2015
2014
$ 109,431
$ 104,465
(2,000)
(10,716)
(1,171)
(2,168,041)
2,167,386
2,500
7,920
914
4,114
5,000
15,067
$ 130,404
$ (116,987)
$ 13,417
(3,497)
(10,184)
(183,272)
165,149
(31,804)
6,200
(9,785)
(65,622)
(4,670,001)
4,683,052
—
9,028
849
2,909
5,000
8,590
$ 74,685
$ (305,361)
$ (230,676)
(8,348)
5,831
(179,726)
133,922
(48,321)
(97,188)
(95,853)
145,490
2,979
357,553
(357,093)
(175,000)
174,318
(5,775)
45,284
26,897
(609,870)
51,068
6,007
(276,172)
265,340
—
—
(6,779)
(56,389)
(335,386)
(274,484)
$ (582,973)
$ (609,870)
743,160
505,500
20,504
655,018
449,287
44,386
41
First National Financial Corporation – 2015 Annual Report NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 1.
General Organization And Business
of First National Financial Corporation
The consolidated financial statements were autho-
rized for issue by the Board of Directors on February
23, 2016.
First National Financial Corporation (the “Corpo-
ration” or “Company”) is the parent company of
First National Financial LP (“FNFLP”), a Canadi-
an-based originator, underwriter and servicer of
predominantly prime residential (single family and
multiunit) and commercial mortgages. With almost
$94 billion in mortgages under administration as at
December 31, 2015, FNFLP is an originator and un-
derwriter of mortgages and a significant participant
in the mortgage broker distribution channel.
The Corporation is incorporated under the laws of
the Province of Ontario, Canada and has its regis-
tered office and principal place of business located
at 100 University Avenue, Toronto, Ontario. The
Corporation’s common and preferred shares are
listed on the Toronto Stock Exchange under the
symbols FN and FN.PR.A, respectively.
Note 2.
Significant Accounting
Policies
(a) Basis of preparation
The consolidated financial statements have been
prepared in accordance with International Financial
Reporting Standards (“IFRS”). The consolidated
financial statements have been prepared on a
historical cost basis, except for derivative financial
instruments and financial assets and financial liabil-
ities that are recorded at fair value through profit
or loss (“FVTPL”) and measured at fair value. The
carrying values of recognized assets and liabilities
that are hedged items in fair value hedges, and
otherwise carried at amortized cost, are adjusted to
record changes in fair value attributable to the risks
that are being hedged. The consolidated financial
statements are presented in Canadian dollars and
all values are rounded to the nearest thousand ex-
cept when otherwise indicated.
(b) Basis of consolidation
The consolidated financial statements comprise the
financial 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 coownership interests in mort-
gage assets funded with Asset-Backed Commercial
Paper (“ABCP”), First National Asset Management
Inc., First National Mortgage Corporation, First Na-
tional Mortgage Investment Fund (the “Fund”), and
FN Mortgage Investment Trust (the “Trust”).
The Fund and the Trust were created in 2012 as
special purpose vehicles (“SPE”) to obtain exposure
to a diversified portfolio of high yielding mortgages.
While the Company has legal ownership of approxi-
mately 18% 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 deter-
mined that it has de facto control of the both the
Fund and the Trust, and therefore, has consolidated
the operations and net assets of the Fund and the
Trust. Noncontrolling interests in the Fund and the
Trust are shown as a separate component of equity
on the consolidated statements of financial position
to distinguish them from the equity of the Compa-
ny’s shareholders. The net income attributable to
non-controlling interests is also separately disclosed
on the consolidated statements of comprehensive
income.
The Company did not consolidate, in its financial
statements, an SPE over which the Company
does not have control. The SPE is sponsored by a
third-party financial institution and acquires assets
from various sellers including mortgages from the
Company. The Company earns interest income from
the retained interest related to these mortgages. As
at December 31, 2015, the Company recorded, on
its consolidated statements of financial position, its
portion of assets of an SPE amounting to $165 million
42
Notes to Consolidated Financial Statements (ii) a significant portion, but not all, of the risks and
rewards have been transferred. The asset is
derecognized entirely if the transferee has the
ability to sell the financial asset; otherwise the
asset continues to be recognized to the extent
of the Company’s continuing involvement.
Where (i) or (ii) above applies to a fully proportionate
share of all or specifically identified cash flows, the
relevant accounting treatment is applied to that
proportion of the mortgage.
For securitized mortgages that do not meet the cri-
teria 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 capi-
talized origination fees. Interest expense—securitized
mortgages represents financing costs to fund these
mortgages, net of the amortization of debt discounts
and premiums.
Capitalized origination fees and debt discounts or
premiums are amortized on an effective yield basis
over the term of the related mortgages or debt.
Derecognition
A financial asset is derecognized when:
• The right to receive cash flows from the asset has
expired; or
• The Company has transferred its rights to receive
cash flows from the assets or has assumed an
obligation to pay the cash flows, received in full
without material delay to a third party under a
“pass-through” arrangement; and either (a) the
Company has transferred substantially all the risks
and rewards of the asset or (b) the Company has
neither transferred nor retained substantially all of
the risks and rewards of the asset, but has trans-
ferred control of the asset.
(2014 – $242 million). The Company also recorded, on
its consolidated statements of comprehensive income,
interest revenue – securitized mortgages of $6.4 mil-
lion (2014 – $8.6 million) and interest expense – secu-
ritized mortgages of $5.0 million (2014 – $6.7 million).
The consolidated financial statements have been
prepared using consistent accounting policies for like
transactions and other events in similar circumstances.
All intercompany balances and revenue and expenses
have been eliminated on consolidation.
(c) Use of estimates
The preparation of consolidated financial statements
in conformity with IFRS requires management to
make estimates and assumptions that affect the
reported amounts of assets and liabilities, including
contingencies, at the date of the consolidated
financial statements and the reported amounts of
revenue and expenses during the reporting period.
Actual results may differ from those estimates. Major
areas requiring use of estimates by management are
those that require reporting of financial assets and
financial liabilities at fair value.
(d) Significant accounting policies
Revenue recognition
The Company earns revenue from placement, securiti-
zation and servicing activities related to its mortgage
business. The majority of originated mortgages are
sold to institutional investors through the placement
of mortgages or funded through securitization
conduits. The Company retains servicing rights on
substantially all of the mortgages it originates, providing
the Company with servicing fees.
Interest revenue and expense from mortgages
pledged under securitization
The Company enters into securitization transactions
to fund a portion of its originated mortgages. Upon
transfer of these mortgages to securitization vehi-
cles, the Company receives cash proceeds from the
transaction. These proceeds are accounted for as debt
related to securitized mortgages and the Company
continues to hold the mortgages on its consolidated
statements of financial position, unless:
(i) substantially all of the risks and rewards as-
sociated with the financial instruments have
been transferred, in which case the assets are
derecognized in full; or
43
First National Financial Corporation – 2015 Annual Report When the Company has transferred its rights to
receive cash flows from an asset or has entered into a
pass-through arrangement, and has neither transferred
nor retained substantially all of the risks and rewards of
the asset nor transferred control of the asset, the asset
is recognized to the extent of the Company’s continuing
involvement in the asset. In that case, the Company
also recognizes an associated liability.
Placement fees and deferred placement fees
receivable
The Company enters into placement agreements with
institutional investors to purchase the mortgages it
originates. When mortgages are placed with institu-
tional investors, the Company transfers the contractual
right to receive mortgage cash flows to the investors.
Because it has transferred substantially all the risks and
rewards of these mortgages, it has derecognized these
assets. The Company retains a residual interest rep-
resenting the rights and obligations associated with
servicing the mortgages. 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 flows, calculated using
management’s best estimates of key assumptions
related to expected prepayment rates and discount
rates commensurate with the risks involved.
Mortgage servicing income
The Company services substantially all of the mort-
gages 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 admin-
istered for investors or third parties, the Company rec-
ognizes servicing income when services are rendered.
For mortgages placed under deferred placement
arrangements, the Company retains the rights and
obligations to service the mortgages. The deferred
placement fees receivable is the present value of the
excess retained cash flows over normal servicing fee
rates and is reported as deferred placement revenue
at the time of placement. Servicing income related
to mortgages placed with institutional investors is
recognized in income over the life of the servicing
obligation as payments are received from mortgagors.
Interest income earned by the Company from holding
cash in trust related to servicing activities is classified
as mortgage servicing income. The amortization of
any servicing liabilities is also recorded as mortgage
servicing income.
Commencing in 2015, the Company provides un-
derwriting and fulfillment processing services for
mortgages originated by a large Canadian bank
through its mortgage broker distribution channel.
The Company recognizes servicing income when
the services are rendered and the underwritten
mortgages are funded.
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 are primarily fees paid to external
mortgage brokers. Brokerage fees relating to the
mortgages recorded at fair value are expensed as
incurred, and those relating to mortgages recorded
at amortized cost are deferred and amortized over
the term of the mortgages.
Financial assets and financial liabilities
The Company classifies its financial assets as either
at FVTPL or loans and receivables. Financial liabili-
ties are classified as either at FVTPL or at amortized
cost. Management determines the classification of
financial assets and financial liabilities at initial rec-
ognition.
Financial assets and financial liabilities at FVTPL
Financial instruments are classified in this category
if they are held for trading or if they are designat-
ed by management as FVTPL at inception. Finan-
cial instruments are classified as FVTPL if they are
44
Notes to Consolidated Financial Statements acquired principally for the purpose of selling in the
short term. Financial assets and financial liabilities
may be designated at FVTPL when:
and losses arising from changes in fair value are rec-
ognized directly in realized and unrealized losses on
financial instruments in the consolidated statements
of comprehensive income.
(i)
the designation eliminates or significantly reduces
a measurement or recognition inconsistency
that would otherwise arise from measuring
assets or liabilities or recognizing the gains and
losses on them on a different basis; or
(ii) a group of financial assets and/or financial liabil-
ities is managed and its performance evaluated
on a fair value basis.
The Company has elected to measure certain of its
assets at FVTPL. The most significant of these as-
sets include a portion of mortgages pledged under
securitization and funded with ABCP related debt,
certain mortgages funded with MBS debt, deferred
placement fees receivable, and mortgages held by
the Trust. The mortgages funded with MBS debt
were previously funded by ABCP debt and as such
have retained their classification as FVTPL (together
with other mortgages measured at fair value in
mortgages pledged under securitization, “FVTPL
mortgages”). For the portion of mortgages pledged
under securitization and funded with ABCP related
debt, the Company has entered into swaps to con-
vert the mortgages from fixed rate to floating rate
in order to match the mortgages with the 30day
floating rate funding provided by the ABCP notes.
The swaps are derivatives and are required by IFRS
to be accounted for at fair value. This value can
change significantly with the passage of time as the
interest rate environment changes. In order to avoid
a significant accounting mismatch, the Company has
measured the swapped mortgages at fair value as
well so that the asset and related swap liability values
will move inversely as interest rates change. The cash
flows related to deferred placement fees receivable
are typically received over five-to-ten-year terms.
These cash flows are subject to prepayment volatility
as the mortgages underlying the deferred place-
ment fees receivable can experience unscheduled
prepayments. As well, the Company pledges these
assets under its bank credit facility. Accordingly, the
Company asserts that it manages these assets on a
fair value basis.
Financial assets and financial liabilities at FVTPL are
initially recognized at fair value. Subsequent gains
Held-for-trading non-derivative financial assets can
only be transferred out of the held at FVTPL category
in the following circumstances: to the available-for-sale
category, where, in rare circumstances, they are no
longer held for the purpose of selling or repurchasing
in the near term; or to the loans and receivables
category, where they are no longer held for the
purpose of selling or repurchasing in the near term
and they would have met the definition of a loan
and receivable at the date of reclassification and
the Company has the intent and ability to hold the
assets for the foreseeable future or until maturity.
Loans and receivables
Loans and receivables are non-derivative financial
assets with fixed or determinable payments that are
not quoted in an active market and it is expected that
substantially all of the initial investment will be recov-
ered, other than in the case of credit deterioration.
Loans and receivables are initially recognized at cost,
including direct and incremental transaction costs.
They are subsequently valued at amortized cost.
Derivative financial instruments
Derivatives are categorized as trading unless they
are designated as hedging instruments. Derivative
contracts are initially recognized at fair value on the
date on which a derivative contract is entered into
and are subsequently remeasured at their fair value
with the changes in fair value recognized in income
as they occur. Positive values are recorded as assets
in accounts receivable and sundry and negative values
are recorded as liabilities in accounts payable and
accrued liabilities.
The Company enters into interest rate swaps primarily
to manage its interest rate exposures associated
with funding fixed-rate mortgages with floating rate
debt. These contracts are negotiated overthecounter.
Interest rate swaps require the periodic exchange of
payments without the exchange of the notional prin-
cipal amount on which the payments are based. The
Company’s policy is not to utilize derivative financial
instruments for trading or speculative purposes.
45
First National Financial Corporation – 2015 Annual Report Mortgages pledged under securitization
Mortgages pledged under securitization are mort-
gages that the Company has originated and funded
with debt raised through the securitization markets.
The Company has a continuous involvement in these
mortgages, including the right to receive future
cash flows arising from these mortgages. Mortgages
pledged under securitization (except for mortgages
designated as FVTPL) have been classified as loans
and receivables and are measured at their amortized
cost using the effective yield method. Origination
costs, such as brokerage fees and bulk insurance
premiums that are directly attributable to the ac-
quisition of such assets, are deferred and amortized
over the term of the mortgages on an effective yield
basis. Certain mortgages (primarily those funded
under bank-sponsored ABCP programs) are classified
as FVTPL and recorded at fair value.
Debt related to securitized and participation
mortgages
Debt related to securitized mortgages represents
obligations related to the financing of mortgages
pledged under securitization. This debt is mea-
sured at its amortized cost using the effective yield
method. Any discount/premium and issuance costs
on raising these debts that is directly attributable to
obtaining such liabilities is deferred and amortized
over the term of the debt obligations.
Debt related to participation mortgages represents
obligations related to the financing of a portion of
commercial mortgages included in mortgage and
loan investments. These mortgages are subject
to participation agreements with other financial
institutions such that the Company’s investment is
subordinate to the other institutions’ 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 statements of financial position with an
offsetting debt. This debt is recorded at face value
and measured at its amortized cost.
Mortgages accumulated for sale or
securitization
Mortgages accumulated for sale are mortgages
funded for the purpose of placing with investors
and are classified as FVTPL and are recorded at fair
value. These mortgages are held for terms usually
not exceeding 90 days.
Mortgages accumulated for securitization are mort-
gages funded pending securitization in the Company’s
various programs and are classified as loans and
receivables. These mortgages are recorded at
amortized cost.
Securities sold short and securities
purchased under resale agreements
Securities sold short consist typically of the short
sale of a government of Canada bond. Bonds
purchased under resale agreements consist of the
purchase of a bond with the commitment from the
Company to resell the bond to the original seller
at a specified price. The Company uses the com-
bination 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 subse-
quent periods.
Bonds sold short are classified as FVTPL and are
recorded at fair value. The effective yield payable on
bonds sold short is recorded as hedge expense in
other operating expenses. Bonds purchased under
resale agreements are carried at cost plus accrued
interest, which approximates their market value. The
difference between the cost of the purchase and the
predetermined proceeds to be received on a resale
agreement is recorded over the term of the hedged
mortgages as an offset to hedge expense. Transactions
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 se-
curitization 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.
46
Notes to Consolidated Financial Statements Mortgage and loan investments
Mortgage and loan investments are classified as loans
and receivables, except for mortgages held by the
Trust which are measured at FVTPL. Mortgages and
loan investments are classified as loans and receiv-
able, 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 such loan losses is estab-
lished 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 consist of broker relationships
which arose in connection with the Initial Public Of-
fering (“IPO”) in 2006. Intangible assets are subject
to annual impairment review if there are events or
changes in circumstances that indicate the carrying
amount may not be recoverable.
Intangible assets with finite useful lives are amor-
tized on a straightline basis over their estimated
useful lives. The broker relationships are amortized
on a straight-line basis over 10 years.
Goodwill
Goodwill represents the price paid for the Corpora-
tion’s business in excess of the fair value of the net
tangible assets and identifiable intangible assets
acquired in connection with the IPO. Goodwill is
reviewed annually for impairment or more frequently
when an event or change in circumstances indicates
that the asset might be impaired.
Property, plant and equipment
Property, plant and equipment are recorded at cost,
less accumulated amortization, at the following annual
rates and bases:
Computer equipment
30% declining balance
Office equipment
20% declining balance
Leasehold improvements
Computer software
straight-line over the term of
the lease
30% declining balance except
for a computer license, which
is straight-line over 10 years
Property, plant and equipment are subject to an
impairment review if there are events or changes
in circumstances that indicate the carrying amount
may not be recoverable.
Purchased mortgage servicing rights
The Company purchases the rights to service
mortgages from third parties. Purchased mortgage
servicing rights are initially recorded at cost and
charged to income over the life of the underlying
mortgage servicing obligation. The fair value of such
rights is determined on a periodic basis to assess
the continued recoverability of the unamortized
cost in relation to estimated future cash flows asso-
ciated with the underlying serviced assets. Any loss
arising from an excess of the unamortized cost over
the fair value is immediately recorded as a charge to
income.
Restricted cash
Restricted cash represents principal and interest col-
lected on mortgages pledged under securitization
that is held in trust until the repayment of debt
related to these mortgages is made in a subsequent
period.
Bank indebtedness
Bank indebtedness consists of bank indebtedness
net of cash balances with banks.
Cash held as collateral for securitization
Cash held as collateral for securitization represents
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.
Servicing liability
The Company places mortgages with third-party
institutional clients, and retains the rights and
obligations to service these mortgages. When the
service related fees are paid upfront by a third
party, the Company records a servicing liability for
the additional future servicing cost as compared to
the market rate, and a corresponding reduction of
placement fees at the time of sales. The Company
determines the present value of servicing liability
based on the net present value of the future expect-
ed cost of servicing these mortgages.
47
First National Financial Corporation – 2015 Annual Report This is similar to the method the Company uses to
calculate deferred placement fees. Since quoted
prices are generally not available for retained inter-
ests, the Company estimates its value based on the
net present value of future expected cash flows, cal-
culated using management’s best estimates of key
assumptions related to expected prepayment rates
and discount rates commensurate with the risks
involved. The Company earns the related servicing
fees over the term of the mortgages on an effective
yield basis.
Income taxes
The Company accounts for income taxes in accordance
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 sub-
stantively enacted as at the dates of the consolidated
statements of financial position. The income tax pro-
vision consists of current income taxes and deferred
income taxes. Current and deferred taxes relating to
items in the Company’s equity are recorded directly
against equity.
Current income taxes are amounts expected to be
payable or recoverable as the result of operations in
the current year and any adjustment to tax payable/
recoverable recorded in previous years.
Deferred income taxes arise on temporary differences
between the carrying amounts of assets and lia-
bilities on the consolidated statements of financial
position and their tax bases. Deferred tax liabilities
are generally recognized for all taxable temporary
differences and deferred tax assets are recognized
to the extent that future realization of the tax
benefit is probable. Deferred taxes are calculated
using the tax rates expected to apply in the periods
in which the assets will be realized or the liabilities
settled. Deferred tax assets and liabilities are offset
when they arise in the same tax reporting group and
relate to income taxes levied by the same taxation
authority, and when a legal right to offset exists in
the entity.
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 aver-
age number of common shares outstanding during
the year.
Note 3.
Mortgages Pledged Under
Securitization
The Company securitizes residential and commercial
mortgages in order to raise debt to fund these mort-
gages. Most of these securitizations consist of the
transfer of fixed and floating rate mortgages into
securitization programs, such as ABCP, NHA-MBS,
and the Canada Mortgage Bonds (“CMB”) program.
In these securitizations, the Company transfers the
assets to SPEs for cash, and incurs interest-bearing
obligations typically matched to the term of the
mortgages. These securitizations do not qualify for
derecognition, although the SPEs and other securi-
tization vehicles have no recourse to the Company’s
other assets for failure of the mortgages to make
payments when due.
As part of the ABCP transactions, the Company pro-
vides 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, 2015, the cash held as collateral
for securitization was $29,157 (2014 – $18,973).
48
Notes to Consolidated Financial Statements The following table compares the carrying amount of mortgages pledged for securitization and the
associated debt:
Securitized mortgages at face value
$ 24,346,182
$ 24,787,631
2015
Carrying amount of
securitized mortgages
Carrying amount of
associated liabilities
Mark-to-market adjustment
Capitalized origination costs
Debt discounts
Add
Principal portion of payments held in restricted cash
Participation debt
39,914
137,965
—
—
—
(64,566)
24,524,061
24,723,065
452,226
—
—
20,662
$ 24,976,287
$ 24,743,727
2014
Carrying amount of
securitized mortgages
Carrying amount of
associated liabilities
Securitized mortgages at face value
$ 22,170,195
$ 22,612,160
Mark-to-market adjustment
Capitalized origination costs
Debt discounts
Add
Principal portion of payments held in restricted cash
Participation debt
41,859
125,324
—
—
—
(56,481)
22,337,378
22,555,679
455,003
—
—
17,683
$ 22,792,381
$ 22,573,362
The principal portion of payments held in restricted
cash represents payments on account of mortgages
pledged under securitization which has been received
at year end but has not yet been applied to reduce
the associated debt. This cash is applied to pay
down the debt in the month subsequent to collection.
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.
49
First National Financial Corporation – 2015 Annual Report The changes in capitalized origination costs for the years ended December 31 are summarized as follows:
Opening balance, January 1
Add: new origination costs capitalized in the year
Less: amortization in the year
Ending balance, December 31
2015
$ 125,324
72,668
(60,027)
$ 137,965
2014
80,995
86,449
(42,120)
$ 125,324
During the year ended December 31, 2015, the Com-
pany invested in mortgages that were transferred into
the securitization vehicles with principal balances as of
December 31, 2015 of $5,845,336 (2014 – $7,094,528).
The following table summarizes the mortgages
pledged under securitization that are past due as at
December 31:
As at December 31, 2015, mortgages pledged
under securitization include $24,331,318 (2014 –
$21,985,346) of insured mortgages and $14,864
(2014 – $184,849) of uninsured mortgages.
The contractual maturity profile of the mortgages
pledged under securitization programs is summa-
rized as follows:
Arrears days
31 to 60
61 to 90
Greater than 90
2015
2014
$ 46,977 $ 71,170
8,480
11,353
36,891
53,389
$ 92,348
135,912
2016
2017
2018
2019
2020 and thereafter
$ 2,752,474
3,403,238
4,046,268
5,993,129
8,151,073
$ 24,346,182
Mortgages pledged under securitization have
been classified as loans and receivables, except
for approximately $3.4 billion (2014 – $3.4 billon)
of mortgages measured at FVTPL. The mortgages
classified as loans and receivables are carried at par
plus unamortized origination costs.
Within mortgages pledged under securitization,
the Company’s exposure to credit loss is limited to
uninsured mortgages with principal balances total-
ling $14,864 (2014 – $184,849), before consideration
of the value of underlying collateral. None of these
mortgages have principal and interest payments in
arrears as at December 31, 2015 (2014 – $1,436). All
such mortgages are conventional prime single-family
mortgages, with an 80% or less loan to value, and
verified borrower income. Accordingly, the Com-
pany considers there to be a very small risk of loss,
and no provision for credit loss has been recorded
related to these mortgages.
50
Notes to Consolidated Financial Statements The Company uses various assumptions to value
FVTPL mortgages, which are set out in the tables
below, including the rate of unscheduled prepayment.
Accordingly, FVTPL mortgages are subject to
measurement uncertainty. The effect of variations
between actual experience and assumptions will be
recorded in future statements of comprehensive in-
come. 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:
FVTPL 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
FVTPL 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
2015
Commercial
mortgages
Residential
mortgages
$ 116,878
$ 3,344,045
28
0.3%
—
—
1.8%
$ 516
$ 1,026
23
11.4%
$408
$812
1.7%
$ 9,079
$ 18,092
2014
Commercial
mortgages
Residential
mortgages
$ 152,542
$ 3,249,160
30
0.4%
$ 1
$ 1
2.2%
$ 819
$ 1,626
23
11.5%
$ 477
$ 951
2.0%
$ 10,152
$ 20,248
(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.
51
First National Financial Corporation – 2015 Annual Report These sensitivities are hypothetical and should be
used with caution. As the figures indicate, changes
in carrying value based on a 10% or 20% variation in
assumptions generally cannot be extrapolated be-
cause the relationship of the change in assumption
to the change in fair value may not be linear.
Also, in these tables, the effect of a variation in a
particular assumption on the fair value is calculated
without changing any other assumption; in reality,
changes in one factor may result in changes in
another (for example, increases in market interest
rates may result in lower prepayments), which might
magnify or counteract the sensitivities.
Note 4.
Deferred Placement Fees
Receivable
The Company enters into transactions with institu-
tional investors to sell primarily fixed-rate mortgages
in which placement fees are received over time as
well as at the time of the mortgage placement. These
mortgages are derecognized when substantially all
of the risks and rewards of ownership are transferred
and the Company has minimal exposure to the vari-
ability of future cash flows from these mortgages. The
investors have no recourse to the Company’s other
assets for failure of mortgagors to pay when due.
During the year ended December 31, 2015,
$1,922,906 (2014 – $2,088,783) of mortgages were
placed with institutional investors, which created
gains on deferred placement fees of $11,051 (2014 –
$10,520). Cash receipts on deferred placement fees
receivable for the year ended December 31, 2015
were $9,835 (2014 – $9,718).
The Company uses various assumptions to value
the deferred placement fees receivable, which
are set out in the tables below, including the rate
of unscheduled prepayments. Accordingly, the
deferred placement fees receivable are subject to
measurement uncertainty. As at December 31, 2015,
the fair value of deferred placement fees receiv-
able is $38,164 (2014 – $34,644). No assumption
for credit losses was used, commensurate with the
credit quality of the investors. An assumption of no
prepayment speed for the commercial segment was
used, as borrowers cannot refinance for financial
advantage without paying the Company a fee com-
mensurate with its investment in the mortgage. The
effect of variations between actual experience and
assumptions will be recorded in future statements
of comprehensive income. Key economic weight-
ed average assumptions and the sensitivity of the
current carrying value of residual cash flows to
immediate 10% and 20% adverse changes in those
assumptions are summarized as at December 31 as
follows. Note that there is no deferred placement
fee receivable balance outstanding related to the
residential segment as at December 31, 2015.
2015
Commercial mortgages
64
—
—
—
3.5%
$ 339
$ 673
Average life (in months) (1)
Prepayment speed assumption (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Residual cash flows discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
52
Notes to Consolidated Financial Statements Average life (in months) (1)
Prepayment speed assumption (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Residual cash flows discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
2014
Commercial
mortgages
Residential
mortgages
60
—
—
—
4.4%
$ 380
$ 752
26
15.0%
$ 2
$ 5
4.0%
$1
$1
(1)The weighted average life of prepayable assets in periods (for example, months or years) can be calculated
by multiplying the principal collections expected in each future period by the number of periods until that
future period, summing those products, and dividing the sum by the initial principal balance.
These sensitivities are hypothetical and should be
used with caution. As the figures indicate, changes
in carrying value based on a 10% or 20% variation in
assumptions generally cannot be extrapolated be-
cause the relationship of the change in assumption
to the change in fair value may not be linear.
Also, in these tables, the effect of a variation in a
particular assumption on the fair value of the re-
tained interest is calculated without changing any
other assumption; in reality, changes in one factor
may result in changes in another (for example, in-
creases in market interest rates may result in lower
prepayments), which might magnify or counteract
the sensitivities.
The Company estimates that the expected cash
flows from the receipt of payments on the deferred
placement fees receivable will be as follows:
2016
2017
2018
2019
2020 and thereafter
$ 10,278
9,061
7,532
5,315
9,700
$ 41,886
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 institutional
investors.
Mortgages originated for the Company’s own
securitization programs are classified as loans and
receivables and are recorded at amortized cost.
Mortgages funded for placement with institutional
investors are designated as FVTPL, and are recorded
at fair value. The fair values of mortgages classified
as FVTPL approximate their carrying values due to
their shortterm nature. The following table summarizes
the components of mortgages according to their
classification:
Mortgages accumulated for
securitization
Mortgages accumulated for
sale
2015
2014
$ 1,483,836
$ 1,347,712
13,577
22,066
$ 1,497,413 $ 1,369,778
53
First National Financial Corporation – 2015 Annual Report Mortgage and loan investments consist of the
following:
Mortgage loans, classified
as loans and receivables
Mortgage loans,
designated as FVTPL
2015
2014
198,744
175,570
47,267
54,818
246,011
230,388
Mortgage and loan investments classified as loans
and receivables are carried at outstanding principal
balances adjusted for unamortized premiums or dis-
counts and are net of specific provisions for credit
losses, if any.
The following table discloses the composition of the
Company’s portfolio of mortgage and loan invest-
ments by geographic region as at December 31,
2015:
Portfolio balance
Percentage of portfolio
$ 17,683
19,521
50,026
768
444
3,404
214
112,498
440
38,806
1,431
776
7.19 %
7.94
20.33
0.31
0.18
1.38
0.09
45.73
0.18
15.77
0.58
0.32
$ 246,011
100.00 %
The Company’s exposure to credit loss is limited to
$217,205 (2014 – $418,139) in principal balances of
uninsured mortgages within mortgages accumulat-
ed for sale or securitization, before consideration
of the value of underlying collateral. These are
conventional prime single-family mortgages similar
to the mortgages described in note 3. For the same
rationale, the Company has not recorded any provi-
sion for credit loss related to these mortgages.
Note 6.
Mortgage and Loan Investments
As at December 31, 2015, mortgage and loan invest-
ments consist primarily of commercial first and second
mortgages held for various terms, the majority of
which mature within one year.
Province/Territory
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
54
Notes to Consolidated Financial Statements The following table discloses the mortgages that are
past due as at December 31:
Arrears days
31 to 60
61 to 90
2015
2014
$ 3,742
$ 4,596
2,857
—
Greater than 90
42,394
34,453
$ 48,993
$ 39,049
The portfolio contains $19,997 (2014 – $5,050) of
insured mortgages and $226,014 (2014 – $225,338)
of uninsured mortgage and loan investments as at
December 31, 2015. Of the uninsured mortgages,
approximately $49.2 million (2014 – $37.4 million)
have principal balance in arrears. Six of these
mortgages are non-performing and have principal
balances totalling $42,394 as at December 31, 2015
(2014 – seven mortgages, totalling $37,421). The
Company has stopped accruing interest on four of
these mortgages, and has provided an allowance
for potential credit loss of $6,541 as at December 31,
2015 (2014 – $4,041). The Company acknowledges
that there is a higher risk of credit losses on this
portfolio than the other mortgage portfolios on its
consolidated statements of financial position. The
Company believes it has adequately provided for
such losses in the allowance for potential credit loss
disclosed above and considers there to be a lower
risk of credit losses on the performing mortgages,
such that credit losses have been recorded only on
account of non-performing mortgages.
The maturity profile in the table below is based on
the earlier of contractual renewal or maturity dates.
Residential
Commercial
2015
2014
2016
$ 11,250
2017
$ 491
2018
—
154,931
61,383
4,715
$ 166,181
$ 61,874
$ 4,715
2019
2020 and
thereafter
Book value Book value
—
—
—
$ 8,554
$ 20,295
$ 22,784
4,687
225,716
207,604
$ 13,241
$ 246,011
$ 230,388
Interest income for the year was $15,381 (2014 – $13,607) and is included in mortgage investment income on
the consolidated statements of comprehensive income.
7. Other Assets
The components of other assets are as follows as at
December 31:
Property, plant and equipment, net
$ 12,583 $ 13,200
Intangible assets, net
2,500
7,500
2015
2014
Goodwill
29,776
29,776
$ 44,859 $ 50,476
The intangible assets have a remaining amortization
period of less than one year.
For the purpose of testing goodwill for impairment,
the cashgenerating 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 recover-
able amount of the Corporation is calculated by
reference to the Corporation’s market capitalization,
mortgages under administration, origination volume,
and profitability. These factors indicate that the Cor-
poration’s recoverable amount exceeds the carrying
value of its net assets and accordingly, goodwill is
not impaired.
55
First National Financial Corporation – 2015 Annual Report Note 8.
Purchased Mortgage Servicing Rights
Purchased mortgage servicing rights consist of the following components:
Third-party commercial mort-
gage servicing rights
Commercial mortgage-backed
securities primary and master
servicing rights
2015
2014
Cost
Accumulated
amortization
Net book
value
Cost
Accumulated
amortization
Net book
value
$ 3,614
3,374
240
3,614
3,287
327
8,705
$ 12,319
7,629
1,076
8,705
6,802
1,903
11,003
1,316
12,319
10,089
2,230
Amortization charged to income for the year ended December 31, 2015 was $914 (2014 – $849).
Note 9.
Mortgages Under Administration
As at December 31, 2015, the Company had mort-
gages under administration of $93,829,629 (2014
– $85,889,561), including mortgages held on the
Company’s consolidated statements of financial
position. Mortgages under administration are
serviced for financial institutions such as banks,
insurance companies, pension funds, mutual funds,
trust companies, credit unions and securitization
vehicles. As at December 31, 2015, the Company
administered 292,905 mortgages (2014 – 274,674)
for 94 institutional investors (2014 – 92) with an
average remaining term to maturity of 42 months
(2014 – 42 months).
Mortgages under administration are serviced as
follows:
Institutional investors
Mortgages accumulated for sale or securitization and mortgage and loan
investments
Deferred placement investors
Mortgages pledged under securitization
CMBS conduits
2015
2014
$ 59,226,795
$ 53,667,661
1,505,068
6,006,487
1,550,902
5,197,507
24,346,182
22,170,195
2,745,097
3,303,296
$ 93,829,629
$ 85,889,561
56
Notes to Consolidated Financial Statements The Company’s exposure to credit loss is limited to
mortgage and loan investments as described in note
6, securitized mortgages as described in note 3 and
uninsured mortgages held in mortgages accumu-
lated for securitization as described in note 5. As
at December 31, 2015, the Company has included
in accounts receivable and sundry $19,776 (2014 –
$17,462) of uninsured nonperforming mortgages
(net of provisions for credit losses) and outstanding
claims from mortgage default insurers. The Company
incurred actual credit losses, net of recoveries, of
$53 during the year ended December 31, 2015 (2014
– $625).
The Company maintains trust accounts on behalf of
the investors it represents. The Company also holds
municipal tax funds in escrow for mortgagors. Since
the Company does not hold a beneficial interest in
these funds, they are not presented on the consol-
idated statements of financial position. The aggre-
gate of these accounts as at December 31, 2015 was
$651,737 (2014 – $537,524).
Note 10.
Bank Indebtedness
Bank indebtedness includes a revolving credit fa-
cility of $1,000,000 (2014 – $1,000,000) maturing
in May 2020, of which $592,908 (2014 – $609,639)
was drawn as at December 31, 2015 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.
Note 11.
Debt Related to Securitized Aand
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, 2015, debt related to securitized mortgages was
$24,723,065 (2014 – $22,555,679), net of unamor-
tized discounts of $64,566 (2014 – $56,481).
A comparison of the carrying amounts of the pledged
mortgages and the related debt is summarized in
note 3.
As at December 31, 2015, debt related to participation
mortgages was $20,662 (2014 – $17,683).
Debt related to securitized and participation mort-
gages is reduced on a monthly basis when the
principal payments received from the mortgages are
applied. Debt discounts and premiums are amor-
tized over the term of each debt on an effective
yield basis. Debt related to securitization mortgag-
es had a similar contractual maturity profile as the
associated mortgages in mortgages pledged under
securitization.
Note 12.
Swap Contracts
Swaps are over-the-counter contracts in which two
counterparties exchange a series of cash flows based
on agreed upon rates to a notional amount. The
Company uses interest rate swaps to manage interest
rate exposure relating to variability of interest earned
on a portion of mortgages accumulated for sale and
mortgages pledged under securitization held on
the consolidated statements of financial position.
The swap agreements that the Company enter into
are interest rate swaps where two counterparties
exchange a series of payments based on different
interest rates applied to a notional amount in a sin-
gle currency.
57
First National Financial Corporation – 2015 Annual Report The following tables present, by remaining term to maturity, the notional amounts and fair values of the
swap contracts that do not qualify for hedge accounting as at December 31, 2015 and 2014:
Interest rate swap contracts
$ 133,739
$ 2,491,102
$ 10,188
$ 2,684,988
$ (30,244)
Less than 3 years
3 to 5 years 6 to 10 years
Total notional amount
Fair value
2015
Interest rate swap contracts
$ 261,395
$ 2,960,335
$ 11,770
$ 3,233,500
$ (8,148)
Less than 3 years
3 to 5 years 6 to 10 years
Total notional amount
Fair value
2014
Positive fair values of the interest rate swap contracts
are included in accounts receivable and sundry and
negative fair values are included in accounts payable
and accrued liabilities on the consolidated statements
of financial position.
Note 14.
Commitments, guarantees and
contingencies
Note 13.
Senior Unsecured Notes
On April 9, 2015, the Company issued $175 million
of new senior unsecured notes for a five-year term
maturing on April 9, 2020. The notes bear interest at
4.01% payable in equal semi-annual payments com-
mencing October 9, 2015. The net proceeds of the
issuance ($174.3 million, net of financing fees) have
been invested in FNFLP. Effectively, the Company
used the proceeds from the issuance to fund the
maturity of the $175 million 5.07% debentures on
May 7, 2015.
As at December 31, 2015, the Company has the
following operating lease commitments for its office
premises:
2016
2017
2018
2019
2020 and thereafter
$ 6,192
6,344
5,167
1,460
2,069
$ 21,232
Outstanding commitments for future advances on
mortgages with terms of one to 10 years amount-
ed to $849,722 as at December 31, 2015 (2014 –
$889,294). The commitments generally remain open
for a period of up to 90 days. These commitments
have credit and interest rate risk profiles similar
to those mortgages that are currently under ad-
ministration. 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.
58
Notes to Consolidated Financial Statements In the normal course of business, the Company en-
ters into a variety of guarantees. Guarantees include
contracts where the Company may be required to
make payments to a third party, based on chang-
es 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 deter-
mined that the estimated potential loss from these
guarantees is insignificant.
Note 15.
Securities Transactions Under Re-
purchase And Resale Agreements
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
specific mortgages included in mortgages accumulated
for sale or securitization. The current contracts are with
financial institutions, are based on bankers’ acceptance
rates and mature on or before January 31, 2016.
(b) Capital stock
Note 17.
Accounts Payable and Accrued
Liabilities
The major components of accounts payable and
accrued liabilities are as follows as at December 31:
Accounts payable
36,634
37,558
2015
2014
Accrued interest on
securitization debt
Servicing liability
Swaps
39,021
38,380
19,125
9,006
30,244
9,580
125,024
94,524
Accrued interest on securitization debt is the interest
due on securitization related debt due subsequent to
year end.
Note 18.
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
Balance, December 31, 2015 and 2014
# 59,967,429
$ 122,671
# 4,000,000
$ 97,394
Common shares
Preferred shares
59
First National Financial Corporation – 2015 Annual Report (c) Preferred shares
On January 25, 2011, the Company issued 4 million
Class A Series 1 Preferred Shares at a price of
$25.00 per share for gross proceeds of $100,000
before issue expenses.
Holders of the Class A Series 1 Preferred Shares are
entitled to receive a cumulative quarterly fixed div-
idend yielding 4.65% annually for the initial period
ending March 31, 2016. Thereafter, the dividend
rate may be reset every five years at a rate equal
to the fiveyear 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, floating rate Class A Preferred Shares,
Series 2 (“Series 2 Preferred Shares”), subject to cer-
tain conditions, on March 31, 2016 and on March 31
every five years thereafter. Holders of the Series 2
Preferred Shares will be entitled to receive cumula-
tive quarterly floating dividends at a rate equal to
the threemonth Government of Canada treasury bill
yield plus 2.07% as and when declared by the Board
of Directors.
Preferred shares do not have voting rights. The par
value per preferred share is $25.
(d) Earnings per share
Net income 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
Note 19.
Income Taxes
The major components of deferred tax expense
(recovery) for the years ended December 31 con-
sists of the following:
2015
$ 107,118
(4,650)
$ 102,468
2014
$ 101,710
(4,650)
$ 97,060
59,967,429
59,967,429
$ 1.71
$ 1.62
The major components of current income tax ex-
pense (recovery) for the years ended December 31
consists of the following:
2015
2014
Income taxes relating to the prior
year
2015
2014
(55)
(560)
Related to origination and reversal of
timing differences
(2,000)
6,200
Income taxes relating to the year
41,300 30,200
41,245
29,640
60
Notes to Consolidated Financial Statements The effective income tax rate reported in the consolidated statements of comprehensive income varies from
the Canadian tax rate of 26.44% for the year ended December 31, 2015 (2014 – 26.37%) 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 differences
Differences in current and future tax rates
Other
Income tax expense
2015
26.44 %
2014
26.37 %
$ 148,676
$140,305
39,310
36,998
(55)
(785)
266
467
42
(560)
(998)
277
(15)
138
$ 39,245
$ 35,840
Significant components of the Company’s deferred tax liabilities for the years ended December 31 are as
follows:
Deferred placement fees receivable
Capitalized broker fees
Carrying values of mortgages pledged under securitization in excess of tax
values
Intangible assets
Unamortized discount on debt related to securitized mortgages
Cumulative eligible capital property
Losses on interest rate swaps
Servicing liability
Loan loss reserves not deducted for tax purposes
Share and debenture issuance costs
Other
Deferred tax liabilities
2015
$ 10,136
36,643
10,601
664
17,149
(5,282)
(9,329)
(5,079)
(1,264)
(13)
1,174
2014
$ 9,136
33,048
11,038
1,978
14,894
(5,639)
(5,316)
(2,375)
(684)
(216)
1,536
$ 55,400
$ 57,400
61
First National Financial Corporation – 2015 Annual Report The movement in significant components of the Company’s deferred tax liabilities and assets for the years
ended December 31, 2015 and 2014 are as follows:
As at January
1, 2015
Recognized in income
As at December
31, 2015
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
Total deferred income tax liabilities
DEFERRED INCOME TAX ASSETS
Cumulative eligible capital property
Servicing liability
Loan loss reserves not deducted for tax
purposes
Losses on interest rate swaps
Share and debenture issuance costs
Total deferred income tax assets
Net deferred income tax liabilities
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
Total deferred income tax liabilities
DEFERRED INCOME TAX ASSETS
Cumulative eligible capital property
Servicing liability
Loan loss reserves not deducted for tax pur-
poses
Losses on interest rate swaps
Debenture issuance costs
Share issuance costs
Total deferred income tax assets
Net deferred income tax liabilities
$ 9,136
33,048
11,038
1,978
14,894
1,536
$ 71,630
(5,639)
(2,375)
(684)
(5,316)
(216)
$ (14,230)
$ 57,400
$ 1,000
3,595
(437)
(1,314)
2,255
(362)
$ 4,737
357
(2,704)
(580)
(4,013)
203
$ (6,737)
$ (2,000)
$ 10,136
36,643
10,601
664
17,149
1,174
$ 76,367
(5,282)
(5,079)
(1,264)
(9,329)
(13)
$ (20,967)
$ 55,400
As at January
1, 2014
Recognized in income
As at December
31, 2014
$ 8,855
21,358
10,009
978
3,296
12,436
1,665
$ 58,597
(6,063)
—
(845)
—
(67)
(422)
$ (7,397)
$ 51,200
$ 281
11,690
1,029
(978)
(1,318)
2,458
(129)
$ 13,033
424
(2,375)
161
(5,316)
49
224
$ (6,833)
$ 6,200
$ 9,136
33,048
11,038
—
1,978
14,894
1,536
$ 71,630
(5,639)
(2,375)
(684)
(5,316)
(18)
(198)
$ (14,230)
$ 57,400
The calculation of taxable income of the Company is based on estimates and the interpretation of complex tax
legislation. In the event that the tax authorities take a different view from management, the Company may be
required to change its provision for income taxes or deferred tax balances and the change could be significant.
62
Notes to Consolidated Financial Statements Note 20.
Financial Instruments And Risk
Management
Risk management
The various risks to which the Company is exposed
and the Company’s policies and processes to mea-
sure and manage them individually are set out below:
Interest rate risk
Interest rate risk arises when changes in interest rates
will affect the fair value of financial instruments.
The Company uses various strategies to reduce
interest rate risk. The Company’s risk management
objective is to maintain interest rate spreads from
the point that a mortgage commitment is issued to
the transfer of the mortgage to the related securi-
tization 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 synthetic bond forwards (consisting of bonds
sold short and bonds purchased under resale agree-
ments) to manage interest rate exposure between
the time a mortgage rate is committed to the bor-
rower and the time the mortgage is sold to a secu-
ritization vehicle and the underlying cost of funding
is fixed. As interest rates change, the values of these
interest rate dependent financial instruments vary
inversely with the values of the mortgage contracts.
As interest rates increase, a gain will be recorded
on the economic hedge which will be offset by the
reduced future spread on mortgages pledged under
securitization as the mortgage rate committed to
the borrower is fixed at the point of commitment.
For single-family mortgages, only a portion of the
commitments issued by the Company eventually
fund. The Company must assign a probability of
funding to each mortgage in the pipeline and esti-
mate 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 table below provides the financial impact that
an immediate and sustained 100 basis point and
200 basis point increase and decrease in short-term
interest rates would have had on the net income of
the Company in 2015 and 2014.
100 BASIS POINT SHIFT
Impact on net income and equity attributable
to shareholders
200 BASIS POINT SHIFT
Impact on net income and equity attributable
to shareholders
(1)Interest rate is not decreased below 0%.
Decrease in interest rate(1)
Increase in interest rate
2015
2014
2015
2014
$ 3,001
$ 2,205
$ (1,308)
$ (2,205)
10,649
9,448
(2,615)
(4,410)
63
First National Financial Corporation – 2015 Annual Report Credit risk
Credit risk is the risk of loss associated with a counter-
party’s inability or unwillingness to fulfill its payment
obligations. The Company’s credit risk is mainly lending
related in the form of mortgage default. The Company
uses stringent underwriting criteria and experienced
adjudicators to mitigate this risk. The Company’s
approach to managing credit risk is based on the
consistent application of a detailed set of credit
policies and prudent arrears management. As at
December 31, 2015, 99.9% (2014 – 99.2%) 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 securi-
tization.
The maximum credit exposures of the financial
assets are their carrying values as reflected on the
consolidated statements of financial position. The
Company does not have significant concentration of
credit risk within any particular geographic region or
group of customers.
The Company is at risk that the underlying mortgag-
es default and the servicing cash flows cease. The
large portfolio of individual mortgages that under-
lies these assets is diverse in terms of geographical
location, borrower exposure and the underlying type
of real estate. This diversity and the priority rank-
ing of the Company’s rights mitigate the potential
size of any single credit loss. Securities purchased
under resale agreements are transacted with large
regulated Canadian institutions such that the risk of
credit loss is very remote. Securities transacted are
all Government of Canada bonds and, as such, have
virtually no risk of credit loss.
Liquidity risk and capital resources
Liquidity risk is the risk that the Company will be unable
to meet its financial obligations as they come due.
The Company’s liquidity strategy has been to use
bank credit to fund working capital requirements
and to use cash flow from operations to fund longer-
term assets. The Company’s credit facilities are typically
drawn to fund: (i) mortgages accumulated for sale
or securitization, (ii) origination costs associated
with mortgages pledged under securitization, (iii)
cash held as collateral for securitization, (iv) costs
associated with deferred placement fees receivable
64
and (v) mortgage and loan investments. The Com-
pany has a credit facility with a syndicate of eleven
financial institutions, which provides for a total of
$1,000,000 in financing. Bank indebtedness also
includes borrowings obtained through outstanding
cheques and overdraft facilities.
The Company finances the majority of its mortgages
with debt derived from the securitization markets,
primarily NHA-MBS, ABCP and CMB. Debt related to
NHA-MBS and ABCP securitizations reset monthly
such that the receipts of principal on the mortgag-
es are used to pay down the related debt within a
30day period. Accordingly, these sources of financ-
ing amortize at the same rate as the mortgages
pledged thereunder, providing an almost perfectly
matched asset and liability relationship.
Market risk
Market risk is the risk of loss that may arise from
changes in market factors such as interest rates and
credit spreads. The level of market risk to which the
Company is exposed varies depending on market
conditions, expectations of future interest rates and
credit spreads.
Customer concentration risk
Placement fees and mortgage servicing income
from one Canadian financial institution represent
approximately 13.7% (2014 – 11.4%) of the Company’s
total revenue.
Fair value measurement
The Company uses the following hierarchy for de-
termining and disclosing the fair value of financial
instruments recorded at fair value in the consolidat-
ed statements of financial position:
Level 1 – quoted market price observed in active
markets for identical instruments;
Level 2 – quoted market price observed in active
markets for similar instruments or other
valuation techniques for which all sig-
nificant inputs are based on observable
market data; and
Level 3 – valuation techniques in which one or more
significant inputs are unobservable.
Notes to Consolidated Financial Statements Valuation methods and assumptions
The Company uses valuation techniques to estimate
fair values, including reference to thirdparty valuation
service providers using proprietary pricing models
and internal valuation models such as discounted
cash flow analysis. The valuation methods and key
assumptions used in determining fair values for the
financial assets and financial liabilities are as follows:
(e)Other financial assets and financial liabilities
The fair value of mortgage and loan investments
classified as loans and receivables, mortgages
accumulated for sale or securitization, cash held as
collateral for securitization, restricted cash and bank
indebtedness correspond to the respective out-
standing amounts due to their short-term maturity
profiles.
Carrying value and fair value of selected financial
instruments
The fair value of the financial assets and financial
liabilities of the Company approximates its carrying
value, except for mortgages pledged under securi-
tization, which has a carrying value of $24,524,061
(2014 – $22,337,378) and a fair value of $24,996,681
(2014 – $22,734,523), debt related to securitized
and participation mortgages, which has a carrying
value of $24,743,727 (2014 – $22,573,362), and a
fair value of $25,035,142 (2014 – $22,802,804), and
senior unsecured notes, which has a carrying value
of $174,420 (December 31, 2014 – nil), and a fair val-
ue of $177,233 (December 31, 2014 – nil). These fair
values are estimated using valuation techniques in
which one or more significant inputs are unobserv-
able (Level 3).
(a) FVTPL mortgages in mortgages under securiti-
zation and certain mortgage and loan investments
The fair value of these mortgages is determined
by discounting projected cash flows using market
industry pricing practices. Discount rates used are
determined by comparison to similar term loans
made to borrowers with similar credit. This meth-
odology will reflect changes in interest rates which
have occurred since the mortgages were originated.
Impaired mortgages are recorded at net realizable
value. Refer to note 3 “Mortgages pledged under
securitization” for the key assumptions used and
sensitivity analysis.
(b) Deferred placement fees receivable
The fair value of deferred placement fees receivable
is determined by internal valuation models using
market data inputs, where possible. The fair value is
determined by discounting the expected future cash
flows related to the placed mortgages at market
interest rates. The expected future cash flows are
estimated based on certain assumptions which are
not supported by observable market data. Refer to
note 4 “Deferred placement fees receivable” for the
key assumptions used and sensitivity analysis.
(c) Securities owned and sold short
The fair values of securities owned and sold short
used by the Company to hedge its interest rate ex-
posure are determined by quoted prices.
(d) Servicing liability
The fair value of the servicing liability is determined
by internal valuation models using market data in-
puts, where possible. The fair value is determined by
discounting the expected future cost related to the
servicing of explicit mortgages at market interest
rates. The expected future cash flows are estimated
based on certain assumptions which are not sup-
ported by observable market data.
65
First National Financial Corporation – 2015 Annual Report The following tables represent the Company’s financial instruments measured at fair value on a recurring
basis as at December 31:
FINANCIAL ASSETS
Mortgages accumulated for sale
$ —
$ 13,577
$ —
$ 13,577
2015
Level 1
Level 2
Level 3
Total
FVTPL mortgages
Deferred placement fees receivable
Mortgage and loan investments
Total financial assets
FINANCIAL LIABILITIES
—
—
—
—
—
—
3,460,924
3,460,924
38,164
47,267
38,164
47,267
$ —
$ 13,577
$ 3,546,355
$ 3,559,932
Securities sold under repurchase agreements and
sold short
Interest rate swaps
Total financial liabilities
971,606
—
—
30,244
—
—
971,606
30,244
$ 971,606
$ 30,244
$ —
$ 1,001,850
FINANCIAL ASSETS
Mortgages accumulated for sale
$ —
$ 22,066
$—
$ 22,066
2014
Level 1
Level 2
Level 3
Total
FVTPL mortgages
Deferred placement fees receivable
Mortgage and loan investments
Interest rate swaps
Total financial assets
FINANCIAL LIABILITIES
—
—
—
—
—
—
—
1,432
3,983,793
3,983,793
34,644
54,818
—
34,644
54,818
1,432
$ —
$ 23,498
$ 4,073,255
$ 4,096,753
Securities sold under repurchase agreements and
sold short
$ 1,330,699
—
—
$ —
9,580
176,418
$ —
$ 1,330,699
—
—
9,580
176,418
$ 1,330,699
$ 185,998
$ —
$ 1,516,697
Interest rate swaps
Debenture loan payable
Total financial liabilities
66
Notes to Consolidated Financial Statements In estimating the fair value of financial assets and
financial liabilities using valuation techniques or pricing
models, certain assumptions are used, including
those that are not fully supported by observable
market prices or rates (Level 3). The amount of the
change in fair value recognized by the Company in
net income for the year ended December 31, 2015
that was estimated using a valuation technique based
on assumptions that are not fully supported by ob-
servable market prices or rates was approximately
a gain of $19,366 (2014 – $16,040). Although the
Company’s management believes that the estimated
fair values are appropriate as at the date of the con-
solidated statements of financial position, those fair
values may differ if other reasonably possible alterna-
tive assumptions are used.
Transfers between levels in the fair value hierarchy
are deemed to have occurred at the beginning of
the period in which the transfer occurred. Transfers
between levels can occur as a result of additional
or new information regarding valuation inputs and
changes in their observability. During the year,
the Company did not have any transfers between
levels.
The following table presents changes in the fair
values, including realized losses of $37,076 (2014 –
$26,326) of the Company’s financial assets and fi-
nancial liabilities for the years ended December 31,
2015 and 2014, all of which have been classified as
FVTPL:
FVTPL mortgages
Deferred placement fees receivable
Securities owned and sold short
Interest rate swaps
2015
$ 18,642
724
(35,076)
(36,433)
(52,143)
2014
$ 15,733
307
(41,486)
(9,470)
(34,916)
The Company does not have any assets or liabilities that are measured at fair value on a nonrecurring basis.
Movement in Level 3 financial instruments measured at fair value
The following tables show the movement in Level 3 financial instruments in the fair value hierarchy for the
years ended December 31, 2015 and 2014. The Company classifies financial instruments to Level 3 when
there is reliance on at least one significant unobservable input in the valuation models.
Fair value as at
January 1, 2015
Investments
Unrealized gain
recorded
in income
Payment and
amortization
Fair value as at
December 31,
2015
FINANCIAL ASSETS
FVTPL mortgages
$ 3,983,793
$ 2,383,054
$ 18,642
$ (2,924,565)
$ 3,460,924
Deferred placement
fees receivable
Mortgage and loan
investments
34,644
10,716
724
(7,920)
38,164
54,818
25,215
—
(32,766)
47,267
$ 4,073,255
$ 2,418,985
$ 19,366
$ (2,965,251)
$ 3,546,355
67
First National Financial Corporation – 2015 Annual Report Fair value as at
January 1, 2014
Investments
Unrealized gain
recorded in
income
Payment and
amortization
Fair value as at
December 31, 2014
FINANCIAL ASSETS
FVTPL mortgages
$ 3,969,524
$ 3,110,849
$ 15,733
$ (3,112,313)
$ 3,983,793
Deferred placement fees
receivable
Mortgage and loan
investments
33,580
9,785
68,954
—
307
—
(9,028)
(14,136)
34,644
54,818
$ 4,072,058
$ 3,120,634
$ 16,040
$ (3,135,477)
$ 4,073,255
Note 21.
Capital Management
Note 22.
Earnings By Business Segment
The Company operates principally in two business
segments, Residential and Commercial. These seg-
ments are organized by mortgage type and contain
revenue and expenses related to origination, un-
derwriting, securitization and servicing activities.
Identifiable assets are those used in the operations
of the segments.
The Company’s objective is to maintain a strong
capital base so as to maintain investor, creditor and
market confidence and sustain future development
of the business. Management defines capital as
the Company’s equity and retained earnings. The
Company has a minimum capital requirement as
stipulated by its bank credit facility. The agreement
limits the debt under bank indebtedness together
with the unsecured notes to four times FNFLP’s
equity. As at December 31, 2015, the ratio was 1.64:1
(2014 – 1.85:1).
The Company was in compliance with the bank
covenant throughout the year.
68
Notes to Consolidated Financial Statements 2015
Residential
Commercial
Total
REVENUE
Interest revenue – securitized mortgages
477,552
143,270
620,822
Interest expense – securitized mortgages
(373,030)
(115,629)
(488,659)
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income
Realized and unrealized losses on financial instruments
EXPENSES
Amortization
Interest
Other operating
104,522
244,323
33,176
(49,011)
27,641
49,495
19,642
(3,132)
132,163
293,818
52,818
(52,143)
$ 333,010
$ 93,646
$ 426,656
6,374
30,797
195,384
232,555
2,740
5,147
37,538
45,425
9,114
35,944
232,922
277,980
Income before income taxes
$ 100,455
$ 48,221
$ 148,676
Identifiable assets
Goodwill
Total assets
Capital expenditures
22,276,053
5,620,903
27,896,956
—
—
29,776
$ 22,276,125
$ 5,620,903
$ 27,926,732
$ 2,449
$ 1,048
$ 3,497
69
First National Financial Corporation – 2015 Annual Report REVENUE
Interest revenue – securitized mortgages
$ 413,629
$ 136,587
$ 550,216
Interest expense – securitized mortgages
(322,930)
(111,796)
(434,726)
2014
Residential
Commercial
Total
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income
Realized and unrealized losses on financial instruments
EXPENSES
Amortization
Interest
Other operating
Income before income taxes
Identifiable assets
Goodwill
Total assets
Capital expenditures
90,699
185,195
36,198
(26,551)
24,791
45,536
20,878
(8,365)
115,490
230,731
57,076
(34,916)
$ 285,541
$ 82,840
$ 368,381
5,257
33,795
150,858
189,910
$ 95,631
21,112,421
—
2,652
2,480
33,034
38,166
7,909
36,275
183,892
228,076
$ 44,674
$ 140,305
4,811,717
25,924,138
—
29,776
$ 21,112,421
$ 4,811,717
$ 25,953,914
$ 5,845
$ 2,503
$ 8,348
Note 23.
Related Party And Other
Transactions
The Company has referred several commercial mez-
zanine mortgage opportunities to various businesses
controlled by a senior executive and shareholder of
the Company. The Company services these mortgages
during their terms at market commercial servicing
rates. The mortgages, which are administered by the
Company, have a balance of $36,624 as at December
31, 2015 (2014 – $24,765). Three of the mortgages are
secured by real estate in which the Company is also
a mortgage lender. For one of the mortgages, the
Company’s interests are ranked subordinately to the
interests held by the controlled business.
A senior executive and shareholder of the Company
has a significant investment in a mortgage default
insurance company. In the ordinary course of business,
the insurance company provides insurance policies to
the Company’s borrowers at market rates. In addition,
the insurance company has also provided the Com-
pany with portfolio insurance at market premiums.
The total bulk insurance premium paid in 2015 was
$2,366 (2014 – $2,494), 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, 2015, the portfolio had a balance of
$4.1 million (2014 – $8.7 million).
Management compensation
During the year ended December 31, 2015, the
Company paid a total annual compensation of
$3,882 (2014 – $3,757) to six senior managers. Se-
nior managers are defined as those persons having
authority and responsibility for planning, directing
and controlling the activities of the Company.
70
Notes to Consolidated Financial Statements approaches to recognizing revenue: at a point in time
or over time. The model features a contract-based
five-step revenue recognition process to determine
the nature, amount, timing and uncertainty of revenue
and cash flows from the contracts with customers.
In September 2015, the IASB amended IFRS 15 by
deferring its effective date for one year to fiscal years
beginning on or after January 1, 2018. The Company
intends to adopt IFRS 15 in its consolidated financial
statements for the annual period beginning on Janu-
ary 1, 2018 and is currently analyzing the impact on the
Company’s consolidated financial statements.
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 – Leases,
replacing IAS 17 – Leases. IFRS 16 requires lessees
to recognize assets and liabilities for most leases in-
stead of previous categories of finance leases, which
are reported on the balance sheet, or operating
leases, which are disclosed only in the notes to the
financial statements, under IAS 17. IFRS 16 is effective
for annual periods beginning on or after January 1,
2019. Early adoption is permitted for companies that
also adopt IFRS 15. The Company is currently assess-
ing the impact of this standard on the Company’s
consolidated financial statements.
Note 25.
Comparative Consolidated
Financial Statements
The comparative audited consolidated financial
statements have been restated from statements
previously presented to conform to the presentation
of the 2015 audited consolidated financial statements.
Note 24.
Future Accounting Changes
The following accounting pronouncements issued
by the IASB, although not yet effective, may have a
future impact on the Company:
IFRS 9 – Financial Instruments
In July 2014, the International Accounting Standard
Board (“IASB”) issued the final version of IFRS 9
Financial Instruments, replacing IAS 39 and all pre-
vious versions of IFRS 9. This final version of IFRS
9 includes a model for classification and measure-
ment, a single, forward-looking “expected loss”
impairment model and a substantially-reformed
approach to hedge accounting. Under this standard,
financial assets are classified and measured based
on the business model in which they are held and
the characteristics of their contractual cash flows.
The accounting model for financial liabilities is
largely unchanged from IAS 39 except for the
presentation of the impact of own credit risk on
financial liabilities which will be recognized in other
comprehensive income, rather than in profit and loss
as under IAS 39. The new general hedge accounting
principles under IFRS 9 are aimed to align hedge
accounting more closely with risk management. This
new standard does not fundamentally change the
types of hedging relationships or the requirement to
measure and recognize ineffectiveness; however, it
is expected to provide more hedging strategies that
are used for risk management to qualify for hedge
accounting and introduce more judgment to assess
the effectiveness of a hedging relationship.
IFRS 9 is mandatorily effective for annual periods
beginning on or after January 1, 2018. The Company
is in the process of evaluating the impact of IFRS 9
on the Company’s consolidated financial statements.
IFRS 15 – Revenue from Contracts with
Customers
In May 2014, the IASB issued IFRS 15 – Revenue
from Contracts with Customers, replacing IAS 11
– Construction Contracts, IAS 18 – Revenue, IFRIC
13 – Customer Loyalty Programs, IFRIC 15 – Agree-
ments for the Construction of Real Estate, IFRIC
18 – Transfer of Assets from Customers, and SIC 31
Revenue – Barter Transactions Involving Advertis-
ing Services. The standard contains a single model
that applies to contracts with customers and two
71
First National Financial Corporation – 2015 Annual Report 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.
Audit Committee
The Audit Committee’s responsibilities include:
• Management of the relationship with the external
auditor including the oversight and supervision of
the audit of the Company’s financial statements;
• Oversight and supervision of the quality and
integrity of the Company’s financial statements,
and;
• Oversight and supervision of the adequacy of
the Company’s internal accounting controls and
procedures, as well as its financial reporting prac-
tices.
The Audit Committee consists of three independent
directors, all of whom are considered financially
literate for the purposes of the Canadian Securities
Administrators’ Multilateral Instrument 52-110 –
Audit Committees.
Committee Members
John Brough (Chair), Peter Copestake and
Robert Mitchell
Sound corporate governance is fundamental to
maintaining the confidence of investors and
increasing shareholder value. As such, First National
is committed to the highest standards of integrity,
transparency, compliance and discipline.
These standards define the relationships among
all of our stakeholders – Board, management and
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 manage-
ment 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 reflect recommended
practices in governance and disclosure. These in-
clude a Disclosure Policy, a Code of Business Ethics
and Conduct, a Whistleblower Policy and an Insider
Trading Policy. As a public company, First National’s
Board continues to update, develop and implement
appropriate governance policies and practices as it
sees fit.
Committees
The Board of Directors has established an Audit
Committee and a Compensation, Governance and
Nominating Committee to assist in the efficient
functioning of the Company’s corporate governance
strategy.
72
Corporate Governance
Compensation, Governance and
Nominating Committee
The Compensation, Governance and Nominating
Committee’s responsibilities include:
• Reviewing and approving the compensation of
the Company’s senior executive officers;
• Periodically assessing and making recommenda-
tions on the Company’s approach to governance
issues;
• Assisting in the development of governance
polices, practices and procedures for approval by
the Board of Directors;
• Review of conflicts of interest and transactions
involving related parties of the Company
• Periodically reviewing the composition and effec-
tiveness of the Board of Directors and;
• Adopting and periodically reviewing and updating
the Company’s Disclosure Policy.
The Compensation, Governance and Nominating
Committee consists of three directors, all of whom
are independent for the purposes of the Canadian
Securities Administrators’ Multilateral Instrument 58-
101 – Disclosure of Corporate Governance Practices.
Committee Members
Peter Copestake (Chair), Duncan Jackman and
Barbara Palk
BOARD MEMBERS
Collectively, the Board of Directors
has extensive experience in mort-
gage lending, real estate, strategic
planning, governance and finance.
The Board consists of seven mem-
bers, five of whom are independent.
Stephen Smith
is Chairman and Chief Executive Officer of the Cor-
poration, President of First National and co-founder
of First National. Mr. Smith, one of Canada’s leading
financial services entrepreneurs, is the Chairman,
Chief Executive Officer and Co-Founder of First
National Financial Corporation. He has been an inno-
vator in the development and utilization of various
securitization techniques to finance mortgage assets
as well as a leader in the development and application
of information technology in the mortgage industry.
Mr. Smith is Chairman of Canada Guaranty Mortgage
Insurance Company, which he owns in partnership
with Ontario Teachers’ Pension Plan. He is the largest
shareholder in Equitable Bank, one of Canada’s
leading alternative lenders and the country’s ninth
largest bank. Mr. Smith is a member of the Board of
Governors of the Royal Ontario Museum, the Board of
Directors of the C.D. Howe Institute and the Empire
Life Insurance Company. He is also Chairman of His-
torica Canada, producer of the Heritage Minutes and
publisher of The Canadian Encyclopaedia. In 2012,
Mr. Smith received the Queen Elizabeth II Diamond
Jubilee Medal for contributions to Canada. In 2015,
Queen’s University announced the naming of the
Stephen J.R. Smith School of Business at Queen’s
University in honour of Mr. Smith and his historic
$50-million donation to the school. Mr. Smith holds a
B.Sc (Hons.) in Electrical Engineering from Queen’s
University and a M.Sc. in Economics from the London
School of Economics.
73
First National Financial Corporation – 2015 Annual Report Moray Tawse
Is Executive Vice President and Secretary of the
Corporation, Executive Vice President of First Na-
tional and co-founder of First National. Mr. Tawse
directs the operations of all of First National’s com-
mercial mortgage origination activities. With over
30 years of experience in the real estate finance in-
dustry, 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.
John Brough
Served as President of both Wittington Properties
Limited (Canada) and Torwest, Inc. (United States)
real estate development companies from 1998 to
2007. From 1974 until 1996 he was with Markborough
Properties, Inc, where he was Senior Vice President
and Chief Financial Officer from 1986 until 1996. Mr.
Brough is a Director of Kinross Gold Corporation,
Silver Wheaton Corp. and Canadian Real Estate
Investment Trust. Mr. Brough has a Bachelor of Arts
(Economics) degree from the University of Toronto,
as well as a Chartered Accountant 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.
Peter Copestake
Serves as the Executive in Residence at the Queen’s
University School of Business and as a corporate
director and business consultant. Over the past 30
years he has held senior financial and 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 Alli-
ance Insurance Company of Canada and Canadian
Derivatives Clearing Corporation. He additionally
serves on the Independent Review Committees at
First Trust Portfolios Canada and at PIMCO Canada
and as Chair of the South East Ontario Medical and
Academic Organization.
Duncan Jackman
Is the Chairman, President and Chief Executive
Officer of E L Financial Corporation Limited, an
investment holding company and has held similar
positions with E-L Financial since 2003. Mr. Jackman
is also the Chairman and President of Economic
Investment Trust Limited and United Corporations
Limited, both closed-end investment corporations,
and has acted in a similar capacity with these corpo-
rations 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 from McGill University.
Robert Mitchell
Has been President of Dixon Mitchell Investment
Counsel Inc., a Vancouver-based investment man-
agement company since 2000. Prior to that, Mr.
Mitchell was Vice President, Investments at Sea-
board Life Insurance Company. Mr. Mitchell is a
director of, and chairs the audit committee for
Discovery Parks Realty Corp. Discovery Parks was
established to support the technology and research
industries in British Columbia through the devel-
opment of its real estate assets. Mr. Mitchell has
an MBA from the University of Western Ontario, a
Bachelor of Commerce (Finance) from the 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 invest-
ment and investment management. She currently
serves on the Boards of TD Asset Management USA
Funds Inc. in New York, Ontario Teachers’ Pension
Plan, Crombie Real Estate Investment Trust and
Queen’s University where she is Chair. Her previous
board experience includes the Canadian Coalition for
Good Governance, whose Governance Committee she
chaired, Greenwood College School, the Investment
Counselling Association of Canada, the Perimeter
Institute, the Shaw Festival and UNICEF Canada.
Ms. Palk is a member of the Institute of Corporate
Directors, a Fellow of the Canadian Securities Insti-
tute 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).
74
Corporate Governance
STAKEHOLDER INFORMATION
Corporate Address
First National Financial Corporation
100 University Avenue
North Tower, Suite 700
Toronto, Ontario M5J 1V6
Phone: 416.593.1100
Fax: 416.593.1900
Annual Meeting
May 3, 2016, 9 a.m. ET
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 and Chief Executive Officer
Moray Tawse
Co-founder and Executive Vice President
Robert Inglis
Chief Financial Officer
Scott McKenzie
Senior Vice President, Residential Mortgages
Jason Ellis
Managing Director, Capital Markets
Rick Votano
Vice President, Information Technology
Legal Counsel
Stikeman Elliott LLP, Toronto, Ontario
Auditors
Ernst & Young LLP, Toronto, Ontario
Investor Relations Contacts
Robert Inglis
Chief Financial Officer
rob.inglis@firstnational.ca
Ernie Stapleton
President, Fundamental
ernie@fundamental.ca
Investor Relations Website
www.firstnational.ca
Registrar and Transfer Agent
Computershare Investor Services Inc.,
Toronto, Ontario
1.800.564.6253
Jeremy Wedgbury
Senior Vice President, Commercial Mortgages
Exchange Listing and Symbols
Lisa White
Vice President, Mortgage Operations
Hilda Wong
Vice President and General Counsel
Common shares: (TSX) FN
Preferred shares: (TSX) FN.PR.A
75
First National Financial Corporation – 2015 Annual Report Vancouver
Calgary
Toronto
Montreal
Halifax
firstnational.ca