2016 Annual Report
1
First National Financial Corporation 2016 Annual Report Performance at a Glance
1
5
In 2016, Mortgages Under Administration (MUA) grew 6% to $99.4 billion,
further solidifying First National’s position as Canada’s largest non-bank
mortgage originator and underwriter.
The number of contributing sources to First National’s revenue, including net
interest — securitized mortgages, mortgage servicing income, mortgage in-
vestment income, and placement fees and gains on deferred placement fees.
$3.28
First National’s 2016 earnings per share in 2016 were 92% ahead of 2015 on
positive core business performance assisted by gains on financial instru-
ments. Excluding gains and losses on financial instruments, Pre-Fair Market
Value EBITDA (a non-GAAP measure of earnings performance) was 21%
higher than in 2015.
$99.4
Billion
1
1
Performance at a Glance
First National’s MUA approaches the $100 billion milestone.
The number of times our Board has increased the common share dividend
since First National’s initial public offering in 2006.
10
The percentage First National paid out of its 2016 earnings to common
shareholders by way of quarterly dividends, when measured against
after-tax Pre-Fair Market Value Earnings.
56%
The cumulative yield from dividends, distributions and capital appreciation
earned by a shareholder between First National’s initial public offering in
June 2006 and December 31, 2016.
419%
The after-tax Pre-Fair Market Value return on shareholders’ equity in 2016
again demonstrated the efficiency of First National’s business model.
47%
2
2
First National Financial Corporation 2016 Annual Report Corporate Profile
First National Financial Corporation (TSX:FN, TSX:FN.PR.A, TSX:FN.PR.B) is the parent
company of First National Financial LP, a Canadian-based originator, underwriter and
servicer of predominantly prime residential (single-family and multi-unit) and commercial
mortgages. With approximately $100 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.
Our Management Team
From left to right
Rick Votano, Vice President, Information Technology
Lisa White, Senior 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, Senior Vice President and General Counsel
3
Letter from the CEO
Letter from the CEO
Fellow Shareholders:
First National marked its 10th year as a public com-
pany in 2016 with record financial performance and
value creation.
Driven by the efficiency of our non-bank business
model, the support of our mortgage broker partners
and the ever-responsive customer service of our
dedicated employees, we made the most of strong
market conditions.
On the strength of revenue growth of 15%, net income
was $201.8 million or 84% ahead of 2015. On a per
share basis, earnings were $3.28.
Some of this growth was due to the change in gains
and losses on financial instruments which can be
large during periods of capital market volatility.
Management believes such amounts are not truly
indicative of the Company’s performance and ac-
cordingly, excludes the impact of these amounts by
calculating the non-GAAP supplemental measure,
Pre-FMV EBITDA. This metric grew 21% in 2016 to
$253.5 million. Our Board uses this measure when
assessing our dividend payout ratio and in tracking
the effectiveness of our business model.
Because of strong Pre-FMV EBITDA results in 2015
and 2016, which produced an after-tax return on
shareholders’ equity of 47%, and strong cash flow,
our Board announced two increases to the common
share dividend in the last twelve months. In the first
quarter of 2016 the annual dividend was increased
to $1.70 per share from $1.55. Then, with 2016’s per-
formance in the books, the dividend was increased
again to $1.85 per share beginning with the dividend
to be paid in April 2017, 9% higher than the previous
rate. In aggregate terms, First National paid a record
$99 million in common share dividends in 2016.
We are proud of the Company’s track record of grow-
ing the dividend. This latest increase, our 10th since
2006, should bring total common share dividends and
distributions to almost $1 billion by year-end 2017. On
a per share basis, that means we've paid $15 in common
share dividends and distributions on a stock that went
public at $10. This demonstrates the Company’s ability
to produce cash flow from earnings.
Toward $100 Billion
Most of our earnings are derived from Mortgages
Under Administration (MUA), which has two com-
ponents: our servicing portfolio and our portfolio
of mortgages pledged under securitization. Both
portfolios grew in 2016 — the former by 5% and
the latter by 8% — bringing MUA to a record $99.4
billion at year-end, up 6% from 2015. In context, First
National’s MUA has grown every year since our found-
ing in 1988, has doubled in size in the past seven
years and should soon surpass $100 billion.
New mortgage originations and mortgage renewals
both contribute to MUA. In 2016, First National
added to its status as Canada’s largest non-bank
originator and underwriter of mortgages and largest
CMHC multi-residential lender with total new mortgage
originations of $17.2 billion.
In 2016, the Company’s new single-family mortgage
originations were $12.4 billion. This was 4% lower
than in 2015 due primarily to lower housing market
activity in Alberta and other oil-dependent provinces
as the downturn in the energy sector continued. Our
Calgary office origination volumes were 22% lower.
On the other hand, single family mortgage renewals
increased 7% nationally to $4.6 billion in 2016. Renewal
volumes are driven by the timing of the original orig-
ination and the maturity profile, but when we renew
a mortgage, we consider it a very visible sign of
customer satisfaction.
4
First National Financial Corporation 2016 Annual Report That said, we remain focused on our core competency
of underwriting mortgage credit. We have always
underwritten to the high standards that the Office of
the Superintendent of Financial Institutions ("OSFI")
demands of Canada’s large national banks. It is
what makes our mortgages attractive investments for
our funding partners, which include some of Canada’s
largest financial institutions. We also continue to set
the bar high for customer service.
Our very clear objective is to respond to 90% of all
mortgage applications in under four hours, a tough
challenge in a busy marketplace but one that our mort-
gage broker partners appreciate. And we do not take
an undisciplined approach to pricing, believing that our
competitiveness rests as much on good service and
good products as it does on good prices.
The fact that our employees win business and keep
business while working within these parameters
demonstrates how special they are. We consider
them to be the best in the industry.
Mortgage Brokers
Mortgage brokers play a key role in Canada’s housing
market and in our business. They stimulate competition
among lenders and in this way, serve the borrowing
public, but also First National by keeping us at the
top of our game.
We are long term supporters of the channel, and of
the many individual brokers who share business op-
portunities with us. We show that support by making
investments in educational programs and lending our
market insights to make their businesses better.
New commercial segment originations, which include
insured multi-residential mortgages, were $4.8 billion,
9% higher than in 2015, while renewals in the segment
amounted to $974 million, 6% higher than in 2015.
This was a particularly active year in commercial real
estate markets in Canada and First National captured
a strong share of higher available volumes.
The positive year-over-year impact of portfolio growth
was evident in net interest from securitized mortgages
(up 9%), placement fees (up 7%), mortgage servicing
income (up 12%), mortgage investment income (up 9%),
and gains on deferred placement fees (up 47%). All in
all, a strong year for First National.
People Performance
Numbers don’t lie, but they also don’t tell the whole
story. In First National’s case, the main characters
in the story of 2016 are our employees. Once again,
they distinguished themselves by using their knowl-
edge and expertise to help our customers achieve
their real estate ownership goals. Sometimes, this
involved developing creative financing solutions.
Other times, it was providing advice in a timely fash-
ion that mattered. But every time, it was about being
responsive.
First National was founded by two entrepreneurs
and today, by keeping our reporting structure flat,
encouraging problem solving and creating a culture
of continuous improvement, we are now a company
of almost 1,000 entrepreneurs.
Our entrepreneurial culture can be seen in large-scale
strategies — such as the 2015 start-up of our
third-party underwriting and fulfillment processing
services business which delivered excellent results in
2016 — and in small but valued innovations such as
the recent creation of the FN Portal. This secure web-
based platform keeps us connected to our funding
partners by enabling faster and easier access to
detailed information from First National on lending
opportunities in the pipeline and mortgage servicing
documentation — all without paper. The FN Portal
added to our suite of proven technology that includes
MERLIN for mortgage brokers and My Mortgage for
borrowers, both of which remain essential parts of
our rapid response service capabilities.
5
Letter from the CEO
Third, OSFI implemented new minimum capital
adequacy standards for mortgage default insurers,
having determined there are greater risks related
to conventional loans between 65% and 80% loan
to value. As a result, premiums for such insurance
have increased by over 200%. The higher cost of
insurance will have a direct impact on net interest
margin on securitized mortgages for any conven-
tional mortgage the Company elects to insure and
securitize.
Beyond these changes, we must consider the recent
implementation of a foreign ownership tax in British
Columbia. This tax appears to have contributed to
slower home buying activity in recent months. As
First National originates about 20% of its single-family
mortgages from its Vancouver office, a reduction in
housing sales could have a negative impact in 2017.
Additionally, while the price of oil has moved up in re-
cent months, we expect the housing market in Calgary
will remain under pressure in 2017.
As we head into a new year with new
challenges and gear up to surpass the
$100 billion MUA milestone, our ability
to be opportunistic and to problem
solve for our customers will be more
important than ever.
Assessing New Rules
The past few years have seen unprecedented growth
in Canadian real estate and mortgage markets. The
combination of relatively stable employment levels,
population growth, foreign investment, historically
low interest rates and limited housing stock in many
large cities has led to escalating demand and higher
home prices.
To counterbalance debt-related risk in the Canadian fi-
nancial system, the Department of Finance introduced
several measures that are expected to moderate
housing market activity levels in 2017. These changes,
described in detail in our Management’s Discussion
and Analysis, will create challenges for borrowers and
lenders, including First National. As these changes are
relatively new, it is difficult to gauge their exact impact
at this moment. However, our initial assessment is
as follows.
First, we believe the recent introduction of a stress
test for borrowers of five-year, fixed rate, high-ratio
mortgages could slow market activity by 5 to 10%
compared to 2016 levels. While this is not overly
significant (unless you are a buyer in that category),
it will reduce single family origination opportunities
and volumes in 2017.
Second, the new rule that eliminates insurability on
conventional single family refinance transactions could
significantly reduce the volume of conventional
mortgages that are insurable and available for secu-
ritization in our NHA MBS and CMB programs. These
mortgages can be underwritten on a conventional
basis for our institutional funding partners, but
placement is generally not as profitable as securiti-
zation. As well, the introduction of these rules will
almost certainly result in a reduction in the overall
availability of insured mortgages, leading to increased
competition, tighter spreads, higher origination costs
and compressed net securitization margins.
6
First National Financial Corporation 2016 Annual Report Mortgages Under Administration
($ Billions)
100
80
60
40
20
0
6%
Year-Over-Year
Growth
2015 to 2016
2011
2012
2013 2014 2015 2016
C
B
A
Mortgages Under
Administration
(as at December 31, 2016)
A
B
81%
13%
C
6%
Insured
Multi-unit Residential
and Commercial
Conventional Single
Family Residential
D
C
A
15%
Year-Over-Year
Growth in 2016
B
Revenue Sources
Prior To Fair
Value Gains /
Losses
(for the year ended December 31, 2016)
A
B
C
D
Institutional Placements
37%
27% Net Interest –
Securitized Mortgages
25% Mortgage Servicing
Investment Income
11%
C
B
21%
Year-Over-Year
Growth in 2016
A
Funding Sources
(for the year ended December 31, 2016)
A
B
C
75%
23%
2%
Institutional Investors
Securitization
Internal
Revenue
($ Millions)
1200
1000
800
600
400
200
0
2011
2012
2013
2014 2015
2016
PRE-FMV EBITDA
($ Millions)
300
250
200
150
100
50
0
2011
2012 2013
2014 2015
2016
7
Letter from the CEO
While it would be easy to come to a negative
conclusion about 2017’s prospects, it is important
to consider four offsetting factors:
• The underlying drivers of the housing market —
employment, interest rates, population growth
and limited housing stock — that made 2016 a
strong year are unchanged.
Looking Forward
In a market dominated by large banks, First National’s
success is rooted in its ability to recognize opportunity
and move more quickly than its competitors in seizing
it. This asset is not listed on our balance sheet, but its
value is exhibited in every mortgage transaction we
complete.
• Despite our size, First National provides financing
for only about 5% of all single-family mortgages
in Canada, so there is room to grow.
As we head into a new year with new challenges and
gear up to surpass the $100 billion MUA milestone,
our ability to be opportunistic and to problem solve
for our customers will be more important than ever.
• Commercial real estate activity, which was strong
in 2016, is expected to remain that way in 2017,
providing opportunity for growth.
• First National earns most of its income and cash
flow from its portfolios of serviced mortgages
and mortgages pledged under securitization, so
MUA at record levels provides us with a strong
foundation for the future.
Overall, the First National business model, the diversity
of our mortgage markets and broad funding sources
make us confident that we can respond effectively
to these challenges — without changing our core
strategies.
I have the utmost confidence in First National’s ability
to perform. We have an experienced Board and man-
agement group, a highly resourceful team of employees
and a proven technology backbone in place to serve
our stakeholders efficiently and effectively. We look
forward to putting our advantages to work again
this year.
In closing, I thank our customers, shareholders and
funding partners for your trust and our employees
for your enthusiasm and commitment.
Yours sincerely,
Stephen Smith
Chairman and Chief Executive Officer
8
First National Financial Corporation 2016 Annual Report 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 begin-
ning of a mutually beneficial long-term partnership 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
approach 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.
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 approach is “pragmatically
entrepreneurial.”
To be the kind of organization that is known for a
consistently superior level of mortgage broker service,
First National is structured to encourage collabora-
tion and fast decision making across underwriting,
funding and account management teams and em-
ploys its 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 market
today and it is a 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 borrowers.
By hosting seminars and workshops attended by
hundreds of mortgage brokers in 2016, First National
plays a constructive role in helping these independent
professionals enhance their skills and grow their
books of business.
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.
For single family borrowers, having First National as
a partner means working with a non-bank mortgage
lender with a decidedly non-bank attitude. While we
follow disciplined and specified processes to arrive
9
Our Difference
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 technology
to enhance the borrower experience. Called My
Mortgage, our online portal gives borrowers anywhere,
anytime access to critical details including 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 dif-
ference 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 transaction, but
the vision and objectives of the owners.
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.
What’s more, our commercial team is entrepreneurial
— just like the borrowers they serve — this gives us
the expertise and confidence to find innovative financ-
ing 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 retail, medical
and other types of offices, self-storage, light industri-
al, 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
First National Financial Corporation 2016 Annual Report Management’s Discussion
and Analysis
The following management’s discussion and analysis
(“MD&A”) of financial condition and results of
operations is prepared as of February 28, 2017.
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, 2016. The audited consolidated financial
statements of the Company have been prepared in
accordance with International Financial Reporting
Standards (“IFRS”).
This MD&A contains forward-looking information.
Please see “Forward-Looking Information” for a
discussion of the risks, uncertainties and assumptions
relating to these statements. The selected financial
information and discussion that follows also refer to
certain measures to assist in assessing financial
performance. These other measures such as “Pre-
FMV EBITDA” and “After tax Pre-FMV Dividend
Payout Ratio” should not be construed as alter-
natives to net income or loss or other comparable
measures determined in accordance with IFRS as
an indicator of performance or as a measure of li-
quidity and cash flow. These measures do not have
standard meanings prescribed by IFRS and there-
fore may not be comparable to similar measures
presented by other issuers.
Unless otherwise noted, tabular amounts are in
thousands of Canadian dollars.
Additional information relating to the Company is
available in First National Financial Corporation’s
profile on the System for Electronic Data Analysis
and Retrieval (“SEDAR”) website at www.sedar.com.
11 Management’s Discussion and Analysis
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
almost $100 billion in mortgages under adminis-
tration (“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.
First National consolidates its interest in First
National Mortgage Investment Fund (the “Fund”).
Although the Company only owns about 21% of the
units issued by the Fund, because of its status as
sole seller to the Fund and its rights as promoter,
the application of IFRS suggests that First Nation-
al exercises control over the Fund. The Fund was
created to obtain economic exposure to a diversi-
fied portfolio of primarily commercial mezzanine
mortgages. Through the Fund’s consolidation, the
Company has effectively taken on a portfolio of
about $42 million (December 31, 2015 - $47 million)
of mortgages. Because of the Company’s small
proportionate interest in the Fund’s units, it has also
recorded a $28 million (December 31, 2015 - $33 mil-
lion) non-controlling interest in equity which offsets
these assets.
2016 Results Summary
Management is pleased with the results of 2016,
as First National’s long-term strategies produced
record profitability. The Company also continued
to grow its MUA, despite a small decrease in origina-
tions, and build the value of its portfolio of securitized
mortgages.
• MUA grew to $99.4 billion at December 31, 2016
from $93.8 billion at December 31, 2015, an
increase of 6%; the growth from September 30,
2016, when MUA was $98.6 billion, represented
an annualized increase of 3%;
12
First National Financial Corporation 2016 Annual Report The change increased revenue by $79.9 million year
over year. Excluding these gains and losses, reve-
nue grew by 6% as Interest revenue — securitized
mortgages, and mortgage servicing grew with
higher MUA;
• Income before income taxes increased from
$148.7 million in 2015 to $274.1 million in 2016.
This measure increased largely because of changes
in the capital markets, which had a significant
effect on the Company’s interest rate hedges
in both 2016 and 2015. The Company recorded
losses of $52.1 million on financial instruments in
2015 in contrast to gains on financial instruments
of $27.8 million in 2016. The net change in these
amounts between 2016 and 2015 increased in-
come before income taxes between the years by
$79.9 million; and
• Without the impact of gains and losses on finan-
cial instruments, the Company’s earnings before
income taxes, depreciation and amortization
(“Pre-FMV EBITDA”) for the year increased by
21%, from $209.9 million in 2015 to $253.5 million
in 2016. The increase was due to higher earnings
in net placement fees together with continued
growth in the servicing and securitization divisions.
Based on 2016 results and the outlook for future
years, First National announced that its Board of
Directors approved an increase in the dividend on
its common shares. Effective with the dividend to be
paid on April 17, 2017, the annual dividend rate will
be increased from $1.70 per share to $1.85 per share,
an increase of almost 9%.
Outstanding Securities
of the Corporation
At December 31, 2016 and February 28, 2017, the Cor-
poration had 59,967,429 common shares, 2,887,147
Class A preference shares, Series 1, 1,112,853 Class A
preference shares, Series 2, and 175,000 April 2020
notes outstanding.
Effective with the dividend to be paid
on April 17, 2017, the annual dividend
rate will be increased from $1.70 per
share to $1.85 per share, an increase of
almost 9%.
• The Canadian single-family real estate market
remained strong for most of 2016 despite the
continued oil-related slowdown evident in western
Canada, a new tax regime in British Columbia and
tighter mortgage insurance rules announced in early
October 2016. Total new single-family mortgage
origination was $12.4 billion in 2016 compared to
$12.9 billion in 2015. The primary reason for the
change was a 22% decline in origination from First
National’s Calgary office. In 2016, the Company
also faced increased competition from other
lenders, particularly smaller originators. This factor
also contributed, to a lesser extent, to lower orig-
inations as First National remained focused on
profitability and did not endeavour to increase
volume at the expense of earnings. The commercial
segment had a strong year, increasing origination
volumes to $4.8 billion in 2016 from $4.4 billion in
2015. The Company attributes this positive perfor-
mance to its expanded presence in the conventional
mortgage market. Overall origination decreased
by less than 1% year over year;
• The Company took advantage of opportuni-
ties in the year to renew almost $4.6 billion of
single-family mortgages. In 2015, the Company
renewed $4.3 billion of single-family mortgages.
The growth is attributable to more mortgages
up for renewal than in the prior year. For the
commercial segment, renewals increased to $1.0
billion from $0.9 billion, in line with the increase
in new commercial mortgage origination;
• Revenue for 2016 increased to over $1.0 billion
from $915.3 million in 2015. The increase of 15%
is largely attributable to gains on financial instru-
ments recorded in 2016 as opposed to losses on
financial instruments incurred in 2015.
13 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
2016
Fourth Quarter
$290,754
Third Quarter
$273,754
Second Quarter
$253,915
First Quarter
$231,395
2015
Fourth Quarter
$250,008
Third Quarter
$246,641
Second Quarter
$251,206
First Quarter
$167,460
$71,797
$51,440
$41,251
$37,341
$41,084
$29,308
$42,538
($3,499)
$61,064
$67,469
$68,187
$56,819
$58,527
$60,955
$52,012
$38,439
$1.18
$30,394,465
$0.84
$30,527,361
$0.67
$31,011,683
$0.59
$28,194,301
$0.66
$27,926,732
$0.46
$27,624,359
$0.68
$27,585,945
($0.09)
$26,638,048
(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.
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. The gross in-
terest 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 not changed
significantly in the last two years, the Company has
steadily increased MUA and its portfolio of securitized
mortgages over the last 24 months. Net income is
partially dependent on conditions in the debt markets,
which affect the value of gains and losses on financial
instruments arising from the Company’s interest rate
hedging program. 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.
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 has grown steadily. The table above shows
a trend of growing income reflecting typical Canadian
seasonality: slower first and fourth quarters and stron-
ger mid-year quarters. In the first quarter of 2015, the
surprise cut in the Bank of Canada’s overnight rate on
January 21, 2015, had a large, unfavourable effect on
the Company’s net income due to the resultant large
losses on the fair value of financial instruments as
bond yields fell. Although not as large, the third quar-
ter of 2015 also suffered because of such losses. Both
the fourth quarter of 2015 and the first quarter of 2016
did not have significant fair value losses and are more
consistent with normalized operations of the Company.
The fourth quarter of 2016 featured large fair values
gains as bond prices decreased as a result of expec-
tations from the results of the US election. This had
a large impact on net income. Without these gains,
Pre-FMV EBITDA still grew at a healthy 4% compared
to the fourth quarter of 2015. With a growing base of
income from the securitization portfolio and third-par-
ty servicing, the Company is able to grow earnings
organically.
14
First National Financial Corporation 2016 Annual Report Selected Annual Financial Information and
Reconciliation to Pre-FMV EBITDA
($000s, except per share amounts)
FOR THE YEAR ENDED DECEMBER 31,
Income Statement Highlights
Revenue
Interest expense - securitized mortgages
Brokerage fees
2016
2015
2014
1,049,818
915,315
803,107
(495,681)
(488,659)
(434,726)
(103,719)
(107,045)
(77,105)
Salaries, interest and other operating expenses
(169,129)
(161,821)
(143,062)
Add (deduct): realized and unrealized (gains) losses on financial instruments
(27,750)
52,143
34,916
Pre-FMV EBITDA(1)
Amortization of capital assets
Amortization of intangible assets
253,539
209,933
183,130
(4,660)
(4,114)
(2,909)
(2,500)
(5,000)
(5,000)
Add (deduct): realized and unrealized gains (losses) on financial instruments
27,750
(52,143)
(34,916)
Provision for income taxes
Net income
Common share dividends declared
Per Share Highlights
Net income per common share
Dividends per common share
AT YEAR END
Balance Sheet Highlights
Total assets
Total long-term financial liabilities
(72,300)
(39,245)
(35,840)
201,829
109,431
104,465
98,946
90,451
88,952
3.28
1.65
1.71
1.51
1.62
1.48
30,394,465 27,926,732
25,953,914
174,556
174,420
176,418
Notes:
(1) Pre-FMV EBITDA is not a recognized earnings measure under IFRS and does not have a standardized meaning prescribed by IFRS. There-
fore, 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 per-
formance or as an alternative to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows.
15 Management’s Discussion and Analysis
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 technolo-
gy, the Company believes it is the leading non-bank
mortgage lender in the industry. Growth has been
achieved while maintaining a relatively conserva-
tive 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 brokers
and borrowers, lowering costs and rationalizing
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 throughout
the term of the related mortgage. Through this rela-
tionship, the Company can negotiate new transactions
and pursue marketing initiatives. Management believes
this strategy will provide long-term profitability and sus-
tainable 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 ad-
ministration;
• Growth in the origination of mortgages;
• Raising capital for operations; and
• Employing innovative securitization transactions
to minimize funding costs.
Growth in Portfolio of Mortgages
under Administration
Management considers the growth in MUA to be a
key element of the Company’s performance. The
portfolio grows in two ways: through mortgages
originated by the Company and through third-party
mortgage servicing contracts. Mortgage originations
not only drive revenues from placement and interest
from securitized mortgages, but perhaps more
importantly, longer-term value from servicing fees,
mortgage administration fees, renewals and the
growth of the customer base for marketing initia-
tives. As at December 31, 2016, MUA totalled $99.4
billion, up from $93.8 billion at December 31, 2015,
an increase of 6%. This compares to $98.6 billion
at September 30, 2016, representing an annualized
increase of 3%.
Growth in Origination
of Mortgages
Direct Origination by the Company
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. With the combination
of decreased origination of 22% out of its Calgary
office and a more competitive market for prime
mortgages from smaller lenders, the Company’s sin-
gle-family origination decreased in 2016 by 4%. The
commercial segment had a strong year as volume
increased 9% over 2015. Together, overall origina-
tion for 2016 decreased only marginally or by less
than 1% year over year.
16
First National Financial Corporation 2016 Annual Report Preferred Share Issuance
On February 24, 2016, the Company announced
that it would not exercise its right to redeem the
4,000,000 Class A Series 1 preference shares issued
in 2011. It also advised shareholders of their rights
under the shares which allow for a one-for-one con-
version from Series 1, shares which have a fixed rate
dividend into Series 2, shares which have a floating
rate dividend. Pursuant to these rights, a portion
of Series 1 shareholders elected to convert 1,112,853
of the Series 1 shares into Series 2 shares. Accord-
ingly, effective April 1, 2016, 1,112,853 Series 1 shares
converted to Series 2 shares leaving 2,887,147 Series
1 shares outstanding. The Series 1 shares will contin-
ue to trade as FN.PR.A on the TSX, while the Series
2 shares began trading as FN.PR.B on April 1, 2016.
The Series 1 shares provide an annual dividend rate
of 2.79% effective April 1, 2016. Both the Series 1 and
Series 2 shares pay quarterly dividends, subject to
Board of Director approval and are redeemable at
the discretion of the Company such that after the
five-year term ending on March 31, 2021, the Com-
pany can choose to extend the shares for another
five-year term at a fixed spread (2.07%) over the
relevant index (5-year Government of Canada bond
yield for any Series 1 shares or the 90 day T-Bill rate
for any Series 2 shares). While the investors in these
shares have an option on each five-year anniversa-
ry to convert their Series 1 preference shares into
Series 2 preference shares (or vice versa), there is
no provision of redemption rights to these share-
holders. As such, the Company considers these
shares to represent a permanent source of capital
and classifies the shares as equity on its balance
sheet. Management believes this capital has provid-
ed the Company with the opportunity to pursue its
strategy of increased securitization, which requires
upfront investment.
Third Party 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 of-
ferings. In the third quarter of 2015, this business
transitioned to profitability as volumes of mortgages
underwritten increased with the summer season and
operations normalized.
Raising Capital for Operations
Bank Credit Facility
The Company uses a $1 billion revolving line of credit
with a syndicate of banks. This facility enables the
Company to fund the increasing amount of mortgages
accumulated for securitization. The entire facility is
floating rate and matures in May 2020. 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 secu-
ritization purposes; (2) the debt is revolving and can
be used and repaid as the Company requires, providing
more flexibility than the Senior Unsecured Notes, which
are fully drawn during their term; (3) the four-year re-
maining term gives the Company a committed facility
for the medium term; and (4) the cost of borrowing
reflects the Company’s BBB issuer rating.
17 Management’s Discussion and Analysis
In 2015, mortgage spreads quickly widened as a
slowdown in economic growth and the Bank of Can-
ada rate cut reduced bond yields dramatically. While
funding spreads have also moved out, spreads are
wide enough to support the Company’s securitization
program. This trend continued into 2016, as optimism
about the economy was mixed such that spreads re-
mained at levels in excess of 1.8% until the third quar-
ter when increased competition tightened spreads
even further. In 2016, the Company originated and
renewed for securitization purposes approximately
$6.9 billion of single-family mortgages and $0.8 mil-
lion of multi-unit residential mortgages. In the year,
the Company securitized through NHA-MBS approx-
imately $4.5 billion of single-family mortgages and
$0.5 billion of multi-unit residential mortgages.
In August 2013, CMHC announced it would be lim-
iting the amount of guarantees it would provide on
NHA-MBS pools created for sale to the “market”.
CMHC indicated that the amount of guarantees it
was providing for such market 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 pol-
icies to allocate the amount of guarantees to issuers.
The maximum amount allocated under the process
has exceeded First National’s requirements in every
quarter since inception. The process was amended
in July 2016 to combine both NHA and MBS for sale
to the market and to CHT under one allocation. The
available guarantees to be allocated were increased
to accommodate issuance to CHT and continue to
exceed the Company’s current needs.
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 as an administrator since 1995. In Decem-
ber 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 direct and independent access to reliable and
low cost funding.
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 - 2013
2014
2015
2016
Average Five Year Mortgage
Spread for the Period
1.12%
1.50%
2.68%
1.79%
1.57%
1.87%
1.76%
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 2013, li-
quidity issues at financial institutions diminished and
the competition for mortgages increased such that
spreads remained consistently higher than pre-crisis
levels. In 2014, more competitive pressures took
mortgage rates lower and compressed mortgage
spreads to 2007 levels.
18
First National Financial Corporation 2016 Annual Report 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. 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. Because of the effectiveness
of the CMB, many institutions have indicated their
desire to participate. As a result, CHT 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. Beginning
in July 2016, CHT effectively increased the price of
the timely payment guarantees which CMB partici-
pants are required to purchase with the issuance of
each CMB transaction. Although nominally CMB fees
were decreased, the new rules require guarantee
fees to be levied on the creation of NHA MBS pools
being sold to the CMB. Prior to this rule change, the
NHA MBS pools to be sold into the CMB were ex-
empt from such fees. In aggregate, guarantee fees
have increased between 25% and 50% for CMB par-
ticipants. This increase translates to approximately
5 basis points of cost over the term of the securiti-
zation. At the same time, CMHC has also modified
the tiered NHA MBS guarantee fee pricing structure,
increasing the issuance threshold for increased fees
from $6.0 billion to $7.5 billion.
Key Performance Indicators
The principal indicators used to measure the Com-
pany’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 expenditures.
Pre-FMV EBITDA should not be construed as an
alternative to net income determined in accordance
with IFRS or to cash flows from operating, investing
and financing activities. The Company’s method of
calculating Pre-FMV EBITDA may differ from other
issuers and, accordingly, Pre-FMV EBITDA may not be
comparable to measures used by other issuers.
($000s)
For the Period
Revenue
Income before income taxes
Pre-FMV EBITDA(1)
At Period end
Total assets
QUARTER ENDED
YEAR ENDED
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
290,754
250,008
1,049,818
97,697
61,064
56,384
58,527
274,129
253,539
915,315
148,676
209,933
30,394,465
27,926,732
30,394,465
27,926,732
Mortgages under administration
99,391,490
93,829,629
99,391,490
93,829,629
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.
19 Management’s Discussion and Analysis
Since going public in 2006, First National has been
considered a high-yielding dividend paying compa-
ny. Over this period, the Company has paid almost
$900 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 at-
tributable 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.
Determination of Common Share Dividend Payout Ratio
($000s)
For the Period
QUARTER ENDED
YEAR ENDED
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
Net income attributable to common shareholders
Dividends paid or declared on common shares
Common Share Dividend Payout Ratio
After tax Pre-FMV Dividend Payout Ratio(1)
70,639
25,486
36%
60%
39,387
22,988
58%
59%
196,531
98,946
50%
56%
102,468
90,451
88%
64%
Note:
(1)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 valuation 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, 2016, the common
share payout ratio was 50% compared to 88% in
the comparative 2015 year. In 2016, the Company
recorded gains on account of the changes in fair
value of financial instruments. In 2015, the Company
incurred losses on such instruments. Both gains and
losses are recorded in the period in which yields on
Government of Canada bond yields change; however,
the offsetting economic impact is largely reflected
in wider/tighter 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 2016 would have been 56%
compared to 64% in 2015.
The Company also paid $3.21 million of dividends
on its preferred shares in 2016 compared to $4.65
million in 2015.
20
First National Financial Corporation 2016 Annual Report Of the Company’s $22.8 billion of
new originations and renewals in 2016,
$14.6 billion was placed with institutional
investors.
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, 2016,
new origination volume decreased from $17.3 billion
to $17.2 billion, or less than 1%, compared to 2015.
Securitization
The Company securitizes a portion of its origination
through various vehicles, including NHA-MBS, CMB
and Asset-Backed Commercial Paper (“ABCP”).
Although legally these transactions represent sales
of mortgages, for accounting purposes they do
not meet the requirements for 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 $22.8
billion of new originations and renewals for the year
ended December 31, 2016, $7.7 billion was originated
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 $22.8 billion of
new originations and renewals in 2016, $14.6 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 present
value of the excess spread, or (2) an origination fee
based on the outstanding principal amount of the
mortgage. This revenue is received in cash at the time
of placement. In addition, under certain circumstances,
additional revenue from institutional placements and
NHA-MBS may be recognized as “gain on deferred
placement fees” as described above.
Mortgage Servicing and Administration
The Company services virtually all mortgages 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.
21 Management’s Discussion and Analysis
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 securitized
mortgages and deferred placement fees receivable,
the Company also earns interest income on mortgage-
Results of Operations
related assets, including mortgages accumulated
for sale or securitization, mortgage and loan invest-
ments 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.
The following table shows the volume of mortgages originated by First National and mortgages under ad-
ministration 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
Single-family residential
Multi-unit residential and commercial
QUARTER ENDED
YEAR ENDED
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
2,700
1,398
4,098
1,058
349
5,505
1,707
656
1,469
1,580
93
5,505
2,921
1,266
4,187
1,246
321
5,754
2,224
436
856
2,122
116
5,754
12,424
4,811
17,235
4,553
974
22,762
7,701
2,148
4,717
7,682
514
12,880
4,420
17,300
4,287
923
22,510
8,350
1,827
3,327
8,433
573
22,762
22,510
77,152
22,239
73,312
20,518
77,152
22,239
73,312
20,518
Total
$ 99,391
$ 93,830
$ 99,391
$ 93,830
22
First National Financial Corporation 2016 Annual Report Total new mortgage origination volumes decreased in
2016 compared to 2015 by less than 1%. Single-family
volumes decreased by 4% and commercial segment
volumes increased by 9% year over year as demand
for housing and commercial real estate continued
but was mitigated by regional disparities. Most of the
decrease in the single-family segment is due to 22%
lower volumes from the Company’s Calgary office
where the decline in the price of oil slowed the hous-
ing market in Alberta and Saskatchewan. In the other
parts of Canada, the Company’s volumes were flat to
2015 or increased by as much as 6%. When combined
with renewals, total production increased from $22.5
billion in 2015 to $22.7 billion in 2016, or by 1%. The
low interest rate environment which existed for most
of 2015 continued in 2016. Low mortgage rates, which
stimulate increased real estate transactions, together
with the Company’s expertise in mortgage under-
writing, drove origination volumes. Origination for
direct securitization into NHA-MBS, CMB and ABCP
programs remained a large part of the Company’s
strategy with volumes of $7.7 billion in 2016, lower
than the $8.4 billion originated in the 2015 year. The
Company used more institutional placements than in
2015 as demand from investors increased and securiti-
zation markets exhibited increased volatility as a result
of economic uncertainty during 2016.
Net Interest - Securitized Mortgages
Comparing the year ended December 31, 2016 to
the year ended December 31, 2015, “net interest –
securitized mortgages” increased by 9% to $144.3
million from $132.2 million. The increase was due to
a larger portfolio of securitized mortgages offset by
a slightly tighter weighted-average spreads on the
portfolio year over year. The portfolio of mortgages
funded through securitization increased by 7% from
$24.5 billion as at December 31, 2015 to $26.1 billion
as at December 31, 2016. Net interest is also affected
by the amortization of deferred origination and other
costs that are capitalized on securitized mortgages.
The charge for this amortization has increased with
higher per unit broker fees.
Placement Fees
Placement fee revenue increased by 7% to $176.9
million from $165.7 million in 2015. New residential
origination volume for institutional customers,
excluding renewals, decreased from $8.3 billion in
2015 to $7.7 billion in 2016 or by 8%. In both 2016
and 2015, the Company funded large amounts of
single-family mortgages which were initially funded
for the Company’s own securitization programs but
ultimately were sold to institutional customers. In 2015,
these transactions provided the Company with place-
ment fees per unit that were marginally higher than
average placement fee. In 2016, the Company was
able to earn higher fees per unit as capital market con-
ditions were more favourable. The Company earned
an estimated $13.6 million in additional placement
fees in 2016 compared to the value of the placements
in 2015. In 2016, the Company increased commercial
segment fees by about $6.6 million in comparison to
2015 from higher origination volume.
Gains on Deferred Placement Fees
Gains on deferred placement fees revenue increased
47% to $16.3 million from $11.1 million. The gains relate
to multi-unit residential mortgages originated and
sold to institutional NHA-MBS issuers. Volumes for
these transactions increased by 15% from 2015 to
2016, and spreads on these transactions widened so
that the Company realized higher per unit gains.
Mortgage Servicing Income
Mortgage servicing income increased 12% to $131.4
million from $117.1 million. This increase was due to
revenue earned on the underwriting and fulfillment
processing services business which the Company
launched in January 2015. Without this revenue,
mortgage servicing income grew in line with the
MUA growth of 6%.
Mortgage Investment Income
Mortgage investment income increased 9% to $57.5
million from $52.8 million. The increase is due largely
to the Company’s securitization program. As the
Company elects to securitize, it warehouses mort-
gages until securitization and earns interest at the
face rate of the mortgage in the warehousing peri-
od. The amount of mortgages accumulated for sale
has increased by 23% from $1.5 billion at the end
of December 2015 to $1.8 billion at the end of 2016.
This growth has been offset by falling mortgage
rates. Prevailing interest rates on five year closed
mortgages were about 2.99% to begin 2015 com-
pared to rate of approximately 2.50% offered for
much of 2016. A loan loss provision of $3.5 million
(2015 - $2.5 million) on four non-performing related
commercial mortgages, reduced mortgage invest-
ment income in both years.
23 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 hedg-
ing activities, and (2) gains and losses related to
holding 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 Govern-
ment of Canada bond yields (which form the risk-
free benchmarks used to estimate the fair value of
the Company’s deferred placement fees receivable,
and mortgages designated as held for trading). The
following table summarizes these gains and losses
by category in the periods indicated:
Summary of realized and unrealized gains (losses)
on financial instruments
($000s)
Gains (losses) on short bonds used for the economic
hedging program
Gains (losses) on mortgages held at fair value
Gains (losses) on interest rate swaps
Gains (losses) on deferred placement fees receivable
Other gains (losses)
Total gains (losses) on financial instruments
QUARTER ENDED
YEAR ENDED
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
27,371
(14,900)
26,446
(667)
(382)
37,868
(734)
1,050
(13)
15
12
10,897
(35,076)
(4,597)
18,642
21,915
(465)
—
(36,457)
724
24
330
27,750
(52,143)
As 2016 began, economic sentiment was muted and
5-year bond prices increased which meant generally
the Company recorded losses on its hedging program.
This was the case for most of the year until the
American election in November. With the election of
the Republican candidate and promises of increased
economic stimulus, the bond market moved dramati-
cally and bond prices decreased significantly. The
result was First National’s short bond position, which
is used to economically hedge mortgages, had a
large increase in value in the fourth quarter. This
change was so large that it swung the Company’s
overall position to a gain for the year. This is in
contrast to 2015 which featured large losses on
the Company’s short bond position as bond prices
increased throughout that period. Accordingly, the
Company recorded a large net loss in 2015 compared
to the gains described for 2016.
The Company uses short Government of Canada
bonds (including CHT-issued bonds) together with
repurchase agreements to create synthetic forward
interest rate contracts to hedge the interest rate
risk associated with fixed rate mortgages originated
for its own securitization programs. For account-
ing 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
prices 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 on the mortgages pledged for securiti-
zation and will be realized in net interest margin
over the terms of the mortgages and the related
debts. In 2016, the Company recorded gains on
these instruments of $10.9 million (2015 – loss of
$35.1 million). While the 2016 gains increased the
net income earned in the year, the gross spread
on the related portfolio of securitized mortgages
going forward will be proportionally tighter as
the Company issues securitization-related debt at
higher 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 almost $1.2 billion of bonds sold
short as at December 31, 2016.
24
First National Financial Corporation 2016 Annual Report The portion of the Company’s mortgages which is
held at fair value (primarily those funded through
ABCP), was also affected by the large change in
bond prices in the fourth quarter of 2016. The higher
bond yields reduce the relative value of these mort-
gages. However, this mortgage portfolio is much
smaller than the Company’s short bond position,
such that the negative impact to earnings is less
significant. The mortgages were positively affected
by the moderate tightening of mortgage funding
credit spreads experienced in the last quarter of
2016. In 2015 these credit spreads widened to offset
the large positive impact of lower bond yields on
such mortgages. Altogether these mortgages lost
$4.6 million of fair value in 2016 (2015 - $18.6 million
gain). The valuation of interest rate swaps, which are
used primarily to manage the interest rate exposure
from fixed-rate mortgages in the ABCP portfolio,
was positively affected in 2016 by changing bond
yields such that unrealized gains of $21.9 million
were earned in 2016 (2015 - $36.5 million loss).
Brokerage Fees Expense
Brokerage fees expense decreased 3% to $103.7 mil-
lion from $107.0 million. This decrease is explained
almost entirely by lower origination volumes of
single-family mortgages for institutional investors,
which decreased by 8%. This decrease was offset
by higher per unit broker fees which increased by
about 2% between the years and increased costs
of portfolio insurance.
Salaries and Benefits Expense
Salaries and benefits expense increased by 3% to
$87.7 million from $84.8 million. Salaries were higher
as overall headcount increased from 915 employees to
949 as at 2016 year end. The growth in head count was
3% and includes employees working in the third-party
underwriting and fulfillment services business which
continued to grow but at more modest rates than
in 2015 during business start-up. This growth also
reflects the need to meet the administrative demand
associated with increased MUA, which grew by 6%
year over year. Management salaries were paid to
the two senior executives (Co-founders) who to-
gether control about 74% of the Company’s common
shares. The current period expense is a result of the
compensation arrangement executed on the closing
of the initial public offering (“IPO”).
Interest Expense
Interest expense increased 7% to $38.3 million
from $35.9 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 increased from the prior period due to
higher balances of mortgages accumulated for sale
or securitization which required greater use of the
Company’s credit facilities.
Other Operating and Amortization of
Intangibles Expenses
Other operating and amortization of intangibles
expenses increased by less than 1% to $50.3 million
from $50.2 million. The amortization of intangible
assets recognized on the IPO had been $5.0 million
per year until mid-2016 when they became fully
amortized. Accordingly in 2016 the amortization ex-
pense was $2.5 million for the year compared to $5.0
million in 2015. Other operating expenses increased
by $2.6 million related to general increases in line
with MUA growth of 6% including increased expenses
related to the Company’s NHA MBS program.
Income before Income Taxes and
Pre-FMV EBITDA
Income before income taxes increased 84% to
$274.1 million from $148.7 million. This change was
primarily the result of changing capital markets,
which affected the Company’s economic interest rate
hedges. In 2016, interest rates rose which resulted
in the Company earning $27.8 million in gains on
account of the fair value of financial instruments. In
2015, interest rates fell, such that the Company in-
curred fair value losses of $52.1 million. The change
in these amounts accounts for $79.9 million of the
increase in income before income taxes. Pre-FMV
EBITDA, which eliminates the impact of gains and
losses on financial instruments, increased 21% to
$253.5 million from $209.9 million. The increase was
due primarily to: 1) higher net interest from securi-
tized mortgages as the Company benefited from a
large portfolio built over the past ten years;
25 Management’s Discussion and Analysis
2) growth in placement fees and 3) profits from
mortgage servicing. In 2016, the Company continued
to earn growing returns from its $26 billion portfolio
of mortgages pledged under securitization and its
$74 billion MUA serviced for institutional customers.
Together with the growth in deferred placement fees
and net mortgage investment income, the Company
was able to obtain double digit growth in earnings
performance.
Operating Segment Review
Provision for Income Taxes
The provision for taxes increased by 84% to $72.3
million from $39.2 million. The provision is higher
due to the higher net income before income taxes
earned in 2016. The overall effective tax rate is con-
sistent between the years.
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 residen-
tial and commercial mortgages), as summarized below:
Operating Business Segments
FOR THE YEAR ENDED
RESIDENTIAL
COMMERCIAL
($000s except percent amounts)
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
Originations and renewals
16,976,808
17,167,524
5,785,378
5,343,080
Percentage change
Revenue
Percentage change
Income before income taxes
Percentage change
AS AT
(1%)
820,029
16%
210,995
110%
706,040
229,789
209,275
8%
100,455
10%
63,134
31%
48,221
December
31, 2016
December
31, 2015
December
31, 2016
December
31, 2015
Identifiable assets
24,718,010
22,276,053
5,646,679
5,620,903
Mortgages Under Administration
77,152,605
73,311,858
22,238,885
20,517,771
Residential Segment
Overall residential origination including renewals
decreased by 1% between 2016 and 2015, while
residential revenues increased by about 16%. A
large part of the change in revenue is due to the
change in gains and losses on financial instruments.
Excluding these changes, revenue increased by 5%
as increased revenue from mortgage servicing and
mortgage investment income augmented higher
placement fees as per unit prices increased on trans-
actions with institutional investors. The increase in
normalized revenue also includes growth in gross
revenue from the third party underwriting business.
The net change in gains and losses on financial
instruments for the residential segment of $78.3 million
also affected net income before income taxes. With-
out the impact of this fair value change, net income
before income taxes for the residential segment would
have increased by 22% year over year. This growth is
indicative of the revenue growth and increased prof-
itability from the Company’s renewal pipeline which
affects net margins from securitization and
26
First National Financial Corporation 2016 Annual Report
placement transactions. Identifiable assets increased
from December 31, 2015, as the Company increased
the amount of mortgages accumulated for sale or
securitization by more than $370 million, increased
government bonds purchased under resale agree-
ments for hedging purposes by about $610 million
and increased securitization based assets by about
$1.4 billion. These increases are all a consequence
of the Company’s strategy to invest in increased
mortgage commitments for its own securitization
programs.
Commercial Segment
2016 commercial revenues increased by about
10% compared to 2015, but increased by 9% if the
impacts of changes in gains and losses on the fair
value of financial instruments are excluded. This
growth is largely due to higher interest revenue on
securitized mortgages which has grown by almost
$8 million year over year and higher placement
fees as the Company has increased origination and
placed a larger portion of mortgages in this seg-
ment with institutional investors. Excluding fair value
losses, net income before tax increased by 26%
year over year as the value of the higher placement
fees flowed through to the bottom line. Identifiable
assets increased from those at December 31, 2015,
as the Company increased the amount of mortgag-
es pledged for securitization by $320 million and
reduced government bonds purchased under resale
agreements for hedging purposes by about
$270 million.
Liquidity and Capital Resources
The Company’s fundamental liquidity strategy
has been to invest in prime Canadian mortgages.
Management’s belief has always been that these
mortgages are considered “AAA” by investors and
should always be well bid and highly liquid. This
strategy proved effective during the turmoil experi-
enced in 2007 through 2009, when capital markets
retreated and only the highest-quality assets were
bid. As the Company’s results in those years demon-
strated, 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 mar-
kets; 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 facili-
ty. This aggregate indebtedness is typically used
to fund: (1) mortgages accumulated for sale or
securitization, (2) the origination costs associat-
ed with securitization, and (3) mortgage and loan
investments. The Company has a credit facility
with a syndicate of eleven financial institutions for
a total credit of $1 billion. This facility was extend-
ed 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, 2016, the Company entered into
repurchase transactions with financial institutions
to borrow $1.0 billion related to $1.0 billion of
mortgages held in “mortgages accumulated for
sale or securitization” on the balance sheet.
At December 31, 2016, outstanding bank indebted-
ness (excluding indebtedness at the Fund level) was
$622.9 million (December 31, 2015 - $576.9 million).
Together with the unsecured notes of $175 million
(December 31, 2015 – $175 million), this “combined
debt” was used to fund $800.3 million (December
31, 2015 - $675.3 million) of mortgages accumulated
for sale or securitization. At December 31, 2016, the
Company’s other interest-yielding assets included:
(1) deferred placement fees receivable of $43.9
million (December 31, 2015 – $38.2 million) and (2)
mortgage and loan investments of $255.2 million
(December 31, 2015 - $246.0 million). The difference
between “combined debt” and the mortgages accu-
mulated for sale or securitization funded by it, which
the Company considers a proxy for “true leverage”,
has decreased between December 31, 2015 and De-
cember 31, 2016, such that there is no true leverage
at December 31, 2016 (December 31, 2015 – $76.0
million). This ratio decreased from December 31,
2015 when it was 0.18 to 1 as, generally, the Company
has used retained earnings to reduce debt, particularly
in the fourth quarter of 2016 when the Company earned
large gains on financial instruments. The Company
believes the low ratio demonstrates the conservative
nature of the Company’s indebtedness.
The Company funds a portion of its mortgage origi-
nations for institutional placement on the same day
as the advance of the related mortgage.
27 Management’s Discussion and Analysis
The remaining originations are funded by the
Company on behalf of institutional investors or
pending securitization on the day of the advance
of the mortgage. On specified days, 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
financing solutions. The banking syndicate has
provided credit facilities to partially fund these
investments. As these investments return cash, it
will be used to pay down this bank indebtedness.
The syndicate has also provided credit to finance a
portion of the Company’s deferred placement fees
receivable and the origination costs associated with
securitization as well as other miscellaneous longer-
term financing needs.
The Company has used ABCP as an efficient source
of funding primarily for short term insured mortgag-
es. 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 December
31, 2016. Accordingly, existing single-family mortgag-
es in ABCP conduits as at December 31, 2016 can be
funded by ABCP until their maturity, not to exceed 5
years. There is still discussion in the industry con-
cerning the legislation; however if implemented as
currently described, the new legislation would mean
that the Company must find other funding sources
The Company’s fundamental liquidity
strategy has been to invest in prime
Canadian mortgages. Management’s
belief has always been that these mort-
gages are considered “AAA” by investors
and will always be well bid and highly
liquid.
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 borrowers to select five year
terms as opposed to shorter terms. These alterna-
tives may not be as economical to the Company
as ABCP. A portion of the Company’s capital has
been employed to support its ABCP and NHA-MBS
programs, primarily to provide credit enhancements
as required by rating agencies. The most significant
portion of cash collateral is the investment made on
behalf of the Company’s ABCP programs. As at De-
cember 31, 2016, the investment in cash collateral was
$22.9 million (December 31, 2015 - $29.2 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". 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 Company has elected
to pay any tax under Part VI.1 of the Income Tax Act,
such that corporate holders of the shares will not
be required to pay tax under Part VI.1 of the Income
Tax Act on dividends received on such shares.
28
First National Financial Corporation 2016 Annual Report 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 mortgag-
es and the securitization debt. This spread will be
earned over the term of the related mortgages. For
single-family mortgages, primarily mortgages for the
Company’s own securitization programs, only some
of the mortgage commitments issued by the Com-
pany eventually fund. The Company must assign
a probability of funding to each mortgage in the
pipeline and estimate how that probability changes
as mortgages move through the various stages of
the pipeline. The amount that is actually hedged is
the expected value of mortgages funding within the
next 120 days (120 days being the standard maximum
rate hold period available for the mortgages). As
at December 31, 2016, the Company had more
than $1.0 billion 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, 2016,
the Company had entered into $115.7 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 per-
taining to the period January 1, 2016 to December
31, 2016 was a $10.9 million gain. This amount has
been included in revenue in the statement of com-
prehensive income.
The Company is party to three interest rate swaps,
two of which were entered into in the third quarter
of 2016, that economically hedge the interest rate
exposure related to certain CMB transactions in which
the Company has replacement obligations. As at
December 31, 2016, the aggregate notional value of
these swaps was $10.7 million. During 2016, the value
of these swaps increased by $4.8 million. The swaps
mature between 2021 and December 2026.
As described above, the Company employs various
strategies to reduce interest rate risk. In the normal
course of business, the Company takes some credit
spread risk. This is the risk that the credit spread at
which a mortgage is originated changes between the
date of commitment of that mortgage and the date
of sale or securitization. This can be illustrated by the
Company’s experience with commercial mortgages
originated for the CMBS market in the spring of 2007.
29 Management’s Discussion and Analysis
These mortgages were originated at credit spreads
designed to be profitable to the Company when
sold to a bank-sponsored CMBS conduit. Unfortunately
for the Company, when these mortgages funded, the
CMBS market had shut down. The alternative
to this channel was more expensive as credit
spreads elsewhere in the marketplace for this type
of mortgage had 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 Company applied the same
spreads to these mortgages and the Company did not
record any additional unrealized losses or gains related
to credit spread movement. Despite entering into
effective economic interest rate hedges, the Compa-
ny’s exposure to credit spreads remained. This risk is
inherent in the Company’s business model and cannot
be economically hedged.
The same exposure to risk is inherent in the 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 through the current period, it was priced
at a discount to BAs. At the same time the Compa-
ny 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. As at December 31, 2016,
the Company had various exposures to changing
credit spreads. In particular, in mortgages accumu-
lated for sale or securitization, there were almost
$1.8 billion of mortgages that were 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 securitiza-
tion of financial assets. Generally, placement activities
do not require much capital investment as the Com-
pany acts primarily in the capacity of a broker. On
the other hand, the undertaking of securitization
transactions may require significant amounts of the
Company’s own capital. This capital is provided in
the form of cash collateral, credit enhancements,
and the upfront funding of broker fees and other
origination costs. These are described more fully in
the “Liquidity and Capital Resources” section above.
For fixed assets, the business requires capital expen-
ditures on technology (both software and hardware),
leasehold improvements and office furniture. During
the year ended December 31, 2016, 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 $4.5 million annually.
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 servic-
ing 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.
($000s)
Total
0-1 Years
1-3 Years
4-5 Years
After 5 Years
Lease obligations
18,496
6,965
8,422
2,635
474
PAYMENTS DUE BY PERIOD
30
First National Financial Corporation 2016 Annual Report 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, 2016. 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 mort-
gages. 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 present 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 as-
sumes there is virtually no prepayment on multi-unit
residential fixed rate mortgages.
On a quarterly basis, the Company reviews the
estimates used to ensure their appropriateness and
monitors the performance statistics of the relevant
mortgage portfolios to adjust and improve these
estimates. The estimates used reflect the expected
performance of the mortgage portfolio over the
lives of the mortgages. The assumptions underlying
the estimates used for the quarter ended December
31, 2016 continue to be consistent with those used
for the year ended December 31, 2015 and the quar-
ters ended September 30, 2016, June 30, 2016 and
March 31, 2016.
The Company has elected to treat certain 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 are not fully supported by observable market
prices or rates in most cases. Much like the valuation
of deferred placement fees receivable described
above, the Company’s method of determining the
fair value of its securitized mortgages has a sig-
nificant impact on earnings. The Company uses
different prepayment rates for its various programs,
which average approximately 10% for single-family
mortgages. The Company assumes there is virtually
no prepayment 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
31 Management’s Discussion and Analysis
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
requirement to measure and recognize ineffective-
ness; however it is expected to provide more hedg-
ing 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 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 - Construc-
tion 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 Revenue – Barter
Transactions Involving Advertising Services. The stan-
dard contains a single model that applies to contracts
with customers and two approaches to recognizing
revenue: at a point in time or over time. The model
features a contract-based five-step revenue recogni-
tion 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 instead
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 assessing
the impact of this standard on the Company’s con-
solidated financial statements.
Disclosure Controls and Internal
Controls over Financial Reporting
The Company’s disclosure controls and procedures
are designed to provide reasonable assurance that in-
formation required to be disclosed by the Company in
reports filed under Canadian securities laws is record-
ed, processed, summarized and reported within the
time periods specified under those laws, and include
controls and procedures that are designed to ensure
that information is accumulated and communicated
to management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
As of December 31, 2016, 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 disclosure controls and
procedures, as defined by National Instrument 52-109,
Certification of Disclosure in Issuers’ Annual and Interim
Filings, were effective as of December 31, 2016.
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
32
First National Financial Corporation 2016 Annual Report December 31, 2016 and that no material weaknesses
have been identified in the Company’s internal control
over financial reporting as of December 31, 2016. No
changes were made in the Company’s internal con-
trols over financial reporting during the year ended
December 31, 2016 that have materially affected, or
are reasonably likely to materially affect, 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 number
of factors outside the control of management of the
Company. In addition to the risks addressed else-
where 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, repur-
chase obligations and breach of representations and
warranties on mortgage sales, risk of servicer termi-
nation events and trigger events on cash collateral
and retained interests, reliance on multi-unit residen-
tial and commercial mortgages, general economic
conditions, legislation and government regulation
(including regulations imposed by the Department
of Finance, CMHC and the policies set by and for
mortgage default insurance companies), competi-
tion, 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,
there are risks associated with the structure of the
Company including: those related to the dependence
on FNFLP, leverage and restrictive covenants, divi-
dends which are not guaranteed and could fluctuate
with the Company’s performance, restrictions on
potential growth, the market price of the Company’s
shares, statutory remedies, control of the Company,
and contractual restrictions. The Company is subject
to Canadian federal and provincial income and com-
modity tax laws and pays such taxes as it determines
are compliant with such legislation. Among the risks
of all potential tax matters, there is a risk that tax
legislation changes to the detriment of the Company
or that Canadian tax authorities interpret tax legisla-
tion differently than the Company’s filing positions.
Risk and risk exposure are managed through a com-
bination of insurance, a system of internal controls
and sound operating practices. The Company’s key
business model is to originate primarily prime mort-
gages and find funding through various channels to
earn ongoing servicing or spread income. For the
single-family residential segment, the Company relies
on independent mortgage brokers for origination
and several large institutional investors for sources of
funding. These relationships are critical to the Com-
pany’s success. For a more complete discussion of
the risks affecting the Company, reference should be
made to the Company’s Annual Information Form.
Forward-Looking Information
Forward-looking information is included in this MD&A.
In some cases, forward-looking information can be
identified by the use of terms such as ‘‘may’’, ‘‘will”,
‘‘should’’, ‘‘expect’’, ‘‘plan’’, ‘‘anticipate’’, ‘‘believe’’, ‘‘in-
tend’’, ‘‘estimate’’, ‘‘predict’’, ‘‘potential’’, ‘‘continue’’ or
other similar expressions concerning matters that are
not historical facts. Forward-looking information may
relate to management’s future outlook and anticipated
events or results, and may include statements or infor-
mation regarding the future financial position, business
strategy and strategic goals, product development
activities, projected costs and capital expenditures,
financial results, risk management strategies, hedg-
ing activities, geographic expansion, licensing plans,
taxes and other plans and objectives of or involving
the Company. Particularly, information regarding
growth objectives, any increase in mortgages under
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 appli-
cable 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
33 Management’s Discussion and Analysis
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 incor-
rect. 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 spe-
cifically 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 informa-
tion. The forward-looking information contained in this
discussion represents management’s expectations as
of February 28, 2017, and is subject to change after
such date. However, management and the Company
disclaim any intention or obligation to update or revise
any forward-looking information, whether as a result
of new information, future events or otherwise, except
as required under applicable securities regulations.
Outlook
Management is very pleased with the results of 2016.
With the exception of the Calgary office, which is still
facing the impact of the oil industry slowdown, the
Company was satisfied with single family origination
across the rest of Canada in a highly competitive
market. With growing MUA and commercial origina-
tion, the Company produced record earnings.
In 2017, the Company looks to build on the success
of 2016, although with the announcement of new
rules on mortgage insurance, rising interest rates
and other housing-related legislation, there will be
new challenges to manage.
• As described in the third quarter MD&A, new
mortgage insurance rules increased the “stress
test” for borrowers of five-year fixed rate high ratio
mortgages, requiring them to qualify based on an
interest rate standard determined by the Bank of
Canada. Management feels that while not overly
significant, this will slow the high ratio insured
market activity by some 5–10%, all other factors
being equal;
• The new mortgage rules also eliminate the insur-
ability on refinance transactions of conventional
mortgages. Management believes such transactions
were significant across Canada and this rule change
will reduce mortgages available for securitization
for the Company’s NHA-MBS and CMB programs.
Although these mortgages can be underwritten on
a conventional basis for the Company’s institutional
investors, placement is generally not as profitable
as securitization for First National. As well, the
introduction of these rules may reduce the overall
availability of insured mortgages across the coun-
try and may result in tighter mortgage spreads and
higher origination costs as lenders in the securiti-
zation industry compete for the remaining insured
mortgage volume. Such an outcome would decrease
net securitization margins;
• New capital rules for mortgage portfolio default
insurance were introduced in 2017. One of the
results of these rules is that the insurers have
increased premiums associated with portfolio
insurance by over 200%, effective in the first
quarter of 2017. The higher cost of such insurance
will have a direct impact on net interest margin
on any conventional mortgage that the Company
elects to insure and securitize; and
• Regional issues, particularly in oil-dependent areas
of the country, had a negative effect on 2016 orig-
ination volumes. Recently, real estate companies
have reported slowing sales in British Columbia,
perhaps associated with the foreign ownership
tax. The Company originates about 20% of its single-
family mortgages from its Vancouver office.
Accordingly, slowing sales there or other regional
issues could have a negative impact on origination
volumes in 2017.
In the face of these challenges in the residential mar-
ket for new mortgage originations, the Company will
endeavour to grow its commercial segment business,
focus on the significant value of single family renewal
opportunities and continue to generate cash flow from
its $26 billion portfolio of mortgages pledged under
securitization and $74 billion servicing portfolio.
34
First National Financial Corporation 2016 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 oc-
curred 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 control. The 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 28, 2017
The management of First National Financial Corporation
(the “Company”) is responsible for the integrity,
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 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 misleading 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
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 financial statements
involves transactions 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 reasonable.
We are responsible for establishing and maintaining
internal control over financial reporting for the Com-
pany. We have designed such internal control over
financial reporting, or caused it to be designed under
our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes. We evaluated, or caused to be evaluated
under our supervision, the effectiveness of the Com-
pany’s internal control over financial reporting at the
financial year end and the Company has disclosed
in its annual MD&A our conclusion about the effec-
tiveness of internal control over financial reporting
at the financial year-end based on that evaluation.
35 Management’s Responsibility for Financial Reporting
Independent Auditors’ Report
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, 2016 and
2015, and the consolidated statements of compre-
hensive income, changes in equity and cash flows
for the years then ended, and a summary of significant
accounting policies and other explanatory information.
the auditors consider internal control relevant to
the entity’s preparation and fair presentation of the
consolidated financial statements in order to design
audit procedures that are appropriate in the circum-
stances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s inter-
nal 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 pre-
sentation of the consolidated financial statements.
We believe that the audit evidence we have obtained
in our audits is sufficient and appropriate to provide
a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial
position of First National Financial Corporation as at
December 31, 2016 and 2015, and its financial perfor-
mance and its cash flows for the years then ended
in accordance with International Financial Reporting
Standards.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 28, 2017
Management’s Responsibility
for the Consolidated Financial
Statements
Management is responsible for the preparation and
fair presentation of these consolidated financial
statements in accordance with International Financial
Reporting Standards, and for such internal control
as management determines is necessary to enable
the preparation of consolidated financial statements
that are free from material misstatement, whether
due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian
generally accepted auditing standards. Those standards
require that we comply with ethical requirements
and plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain
audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures
selected depend on the auditors’ judgment, including
the assessment of the risks of material misstatement
of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments,
36
First National Financial Corporation 2016 Annual Report
Consolidated Statements
of Financial Position
in thousands of Canadian dollars
Notes
2016
2015
3
3
15
5
3
4
6
7
9
15
16
14
10
12
18
18
17
17
$ 685,347
$ 497,904
22,877
91,701
1,307,801
1,837,916
29,157
73,785
974,062
1,497,413
26,106,664
24,524,061
43,933
255,230
42,996
38,164
246,011
46,175
$ 30,394,465
27,926,732
628,522
582,973
1,009,572
122,499
1,308,483
805,850
125,024
971,606
26,514,181
24,743,727
174,556
23,255
63,100
174,420
10,202
55,400
$ 29,844,168
27,469,202
122,671
97,394
302,271
522,336
27,961
550,297
122,671
97,394
204,686
424,751
32,779
457,530
$ 30,394,465
27,926,732
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
Mortgage and loan investments
Other assets
Total assets
Liabilities and equity
Liabilities
Bank indebtedness
Obligations related to securities and mortgages sold under
repurchase agreements
Accounts payable and accrued liabilities
Securities sold under repurchase agreements and sold short
Debt related to securitized and participation mortgages
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:
John Brough
Robert Mitchell
37 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
Realized and unrealized gains (losses) on financial instruments
Expenses
Brokerage fees
Salaries and benefits
Interest
Other operating
Amortization of intangible assets
Income before income taxes
Income tax expense
Notes
2016
2015
$ 639,972
$ 620,822
(495,681)
(488,659)
144,291
176,856
16,332
57,480
131,428
27,750
554,137
132,163
165,708
11,051
52,818
117,059
(52,143)
426,656
103,719
107,045
87,744
38,275
47,770
2,500
280,008
274,129
72,300
84,821
35,944
45,170
5,000
277,980
148,676
39,245
3
4
19
18
Net income and comprehensive income for the year
201,829
109,431
Net income and comprehensive income attributable to:
Shareholders
Non-controlling interests
Earnings per share
Basic
See accompanying notes
199,744
2,085
107,118
2,313
201,829
109,431
17
3.28
1.71
38
First National Financial Corporation 2016 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, 2016
$ 122,671
$ 97,394
$ 204,686
$ 32,779
$ 457,530
Comprehensive income
Dividends paid or declared
Redemptions by non-controlling interests
—
—
—
—
—
—
199,744
(102,159)
2,085
201,829
(1,960)
(104,119)
—
(4,943)
(4,943)
Balance as at December 31, 2016
122,671
97,394
302,271
27,961
550,297
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
Redemptions by non-controlling interests
—
—
—
—
—
—
107,118
(95,101)
2,313
109,431
(2,306)
(97,407)
—
(5,775)
(5,775)
Balance as at December 31, 2015
$ 122,671
$ 97,394
$ 204,686
$ 32,779
$ 457,530
See accompanying notes
39 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
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 (gains) on financial instruments
Net change in non-cash working capital balances related to operations
in thousands of Canadian dollars
2016
2015
$ 201,829
$ 109,431
7,700
(15,857)
(187,443)
(2,000)
(10,716)
(1,171)
(1,587,201)
(2,168,041)
1,785,018
2,167,386
3,500
9,623
652
4,660
2,500
(29,907)
$ 195,074
$ (326,084)
2,500
7,920
914
4,114
5,000
15,067
$ 130,404
$ (116,987)
Cash provided by (used in) operating activities
(131,010)
13,417
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
Increase (decrease) 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 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
(4,633)
6,280
(236,784)
224,065
(11,072)
(103,875)
203,722
(14,564)
(333,739)
349,932
—
—
(4,943)
96,533
(45,549)
(582,973)
(628,522)
770,005
512,991
51,548
(3,497)
(10,184)
(183,272)
165,149
(31,804)
(97,188)
145,490
2,979
357,553
(357,093)
(175,000)
174,318
(5,775)
45,284
26,897
(609,870)
(582,973)
743,160
505,500
20,504
40
First National Financial Corporation 2016 Annual Report Notes to Consolidated Financial
Statements
(in thousands of Canadian dollars, unless otherwise indicated)
December 31, 2016 and 2015
Note 1.
General Organization and
Business of First National
Financial Corporation
First National Financial Corporation (the “Corporation”
or “Company”) is the parent company of First
National Financial LP (“FNFLP”), a Canadian-based
originator, underwriter and servicer of predominantly
prime residential (single family and multi-unit) and
commercial mortgages. With over $99 billion in
mortgages under administration as at December
31, 2016, FNFLP is an originator and underwriter of
mortgages and a significant participant in the mort-
gage broker distribution channel.
The Corporation is incorporated under the laws of the
Province of Ontario, Canada and has its registered
office and principal place of business located at 100
University Avenue, Toronto, Ontario. The Corporation’s
common and preferred shares are listed on the Toronto
Stock Exchange under the symbols FN, FN.PR.A and
FN.PR.B, 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 finan-
cial statements have been prepared on a historical
cost basis, except for derivative financial instruments
and financial assets and financial liabilities that are
recorded at fair value through profit or loss (“FVTPL”)
and measured at fair value.
The carrying values of recognized assets and liabilities
that are hedged items in fair value hedges, and other-
wise carried at amortized cost, are adjusted to record
changes in fair value attributable to the risks that are
being hedged. The consolidated financial statements
are presented in Canadian dollars and all values are
rounded to the nearest thousand except when other-
wise indicated. The consolidated financial statements
were authorized for issue by the Board of Directors
on February 28, 2017.
(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 to obtain exposure to a diversified
portfolio of high yielding mortgages. While the
Company has legal ownership of approximately 21%
of the units issued by the Fund, because of its status
as the sole seller of assets to the Fund and its rights
as promoter, the Company determined that it has
de facto control of 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 Company’s shareholders. The
net income attributable to non-controlling interests
is also separately disclosed on the consolidated
statements of comprehensive income.
41 Notes to Consolidated Financial Statements
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, 2016, the Company recorded, on its consolidated
statements of financial position, its portion of the
assets of the SPE amounting to $243 million (2015
– $165 million). The Company also recorded, in its
consolidated statements of comprehensive income,
interest revenue — securitized mortgages of $4.6
million (2015 – $6.4 million) and interest expense —
securitized mortgages of $3.5 million (2015 – $5.0
million) related to its interest in the SPE.
The consolidated financial statements have been
prepared using consistent accounting policies for
like transactions and other events in similar circum-
stances. 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 vehicles,
the Company receives cash proceeds from the
transaction. These proceeds are accounted for as debt
related to securitized mortgages and the Company
continues to hold the mortgages on its consolidated
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
(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 criteria
for derecognition, no gain or loss is recognized at the
time of the transaction. Instead, net interest income is
recognized over the term of the mortgages. Interest
revenue — securitized mortgages represents interest
portion of mortgage payments received and accrued
by borrowers and is net of the amortization of capital-
ized origination costs. Interest expense — securitized
mortgages represents the costs to finance these mort-
gages, 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.
42
First National Financial Corporation 2016 Annual Report future expected cash flows, calculated using man-
agement’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 mort-
gages administered for investors or third parties,
the Company recognizes servicing income when
services are rendered. For mortgages placed under
deferred placement arrangements, the Company
retains the rights and obligations to service the
mortgages. The deferred placement fees receivable
is the present value of the excess retained cash
flows over normal servicing fee rates and is report-
ed 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 inter-
est-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.
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
transferred control of the asset.
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 derecognizes
these assets. The Company retains a residual interest
representing the rights and obligations associated
with servicing the mortgages. Placement fees are
earned by the Company for its origination and un-
derwriting 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 values based on the net present value of
43 Notes to Consolidated Financial Statements
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 liabilities
are classified as either at FVTPL or at amortized cost.
Management determines the classification of financial
assets and financial liabilities at initial recognition.
Financial assets and financial liabilities at FVTPL
Financial instruments are classified in this category
if they are held for trading or if they are designated
by management as FVTPL at inception.
Financial instruments are classified as FVTPL if they
are acquired principally for the purpose of selling in
the short term. Financial assets and financial liabilities
may be designated at FVTPL when:
(i)
the designation eliminates or significantly reduc-
es 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 lia-
bilities is managed and its performance evalu-
ated 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 30 day
floating rate funding provided by the ABCP notes.
The swaps are derivatives and are required by IFRS
to be accounted for at fair value. This value can
change significantly with the passage of time as the
interest rate 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
placement fees receivable can experience unsched-
uled prepayments. As well, the Company pledges
these assets under its bank credit facility. Accord-
ingly, 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
(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.
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 as-
sets with fixed or determinable payments that are not
quoted in an active market and it is expected that sub-
stantially all of the initial investment will be recovered,
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.
44
First National Financial Corporation 2016 Annual Report 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 over-the-counter.
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.
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 partic-
ipation 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 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 acquisition 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.
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 Government of Canada bonds. Bonds purchased
under resale agreements consist of the purchase of a
bond with the commitment from the Company to re-
sell the bond to the original seller at a specified price.
The Company uses the combination of bonds sold
short and bonds purchased under resale agreements
to economically hedge its mortgage commitments
and the portion of funded mortgages that it intends
to securitize in subsequent periods.
Debt Related to Securitized and Participation
Mortgages
Debt related to securitized mortgages represents
obligations related to the financing of mortgages
pledged under securitization. This debt is measured
at its amortized cost using the effective yield method.
Any discount/premium 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.
45 Notes to Consolidated Financial Statements
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.
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. Mortgag-
es and loan investments are classified as loans and
receivables, and are recognized as being impaired
when the Company is no longer reasonably assured
of the timely collection of the full amount of principal
and interest. An allowance for such loan losses is es-
tablished 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 re-
viewed 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 an-
nual 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 mortgag-
es from third parties. Purchased mortgage servicing
rights are initially recorded at cost and charged to
income over the life of the underlying mortgage
servicing obligation. The fair value of such rights is
determined on a periodic basis to assess the continued
recoverability of the unamortized cost in relation
to estimated future cash flows associated with the
underlying serviced assets. Any loss arising from an
excess of the unamortized cost over the fair value is
immediately recorded as a charge to income.
Restricted Cash
Restricted cash represents principal and interest
collected on mortgages pledged under securitiza-
tion that is held in trust until the repayment of debt
related to these mortgages is made in a subsequent
period.
46
First National Financial Corporation 2016 Annual Report 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 NHAMBS 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 ex-
pected cost of servicing these mortgages. This is
similar to the method the Company uses to calcu-
late deferred placement fees. 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, 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 accor-
dance with the liability method of tax allocation.
Under this method, the provision for income taxes is
calculated based on income tax laws and income tax
rates substantively enacted as at the dates of the
consolidated statements of financial position. The
income tax provision consists of current income taxes
and deferred income taxes. Current and deferred
taxes relating to items in the Company’s equity are
recorded directly against equity.
Current income taxes are amounts expected to be
payable or recoverable as the result of operations in
the current year and any adjustment to tax payable/
recoverable recorded in previous years.
Deferred income taxes arise on temporary differ-
ences between the carrying amounts of assets and
liabilities on the consolidated statements of financial
position and their tax bases. Deferred tax liabilities
are generally recognized for all taxable temporary
differences and deferred tax assets are recognized
to the extent that future realization of the tax
benefit is probable. Deferred 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 average
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, NHAMBS,
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
provides cash collateral for credit enhancement
purposes as required by the rating agencies. Credit
exposure to securitized mortgages is generally lim-
ited 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.
47 Notes to Consolidated Financial Statements
The full amount of the cash collateral is recorded as
an asset and the Company anticipates full recovery
of these amounts. NHAMBS securitizations may also
require cash collateral in some circumstances. As
at December 31, 2016, the cash held as collateral for
securitization was $22,877 (2015 – $29,157).
The following table compares the carrying amount
of mortgages pledged for securitization and the
associated debt:
Securitized mortgages at face value
$ 25,946,355
$ 26,565,848
2016
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
21,369
138,940
—
26,106,664
636,763
—
—
—
(57,765)
26,508,083
—
6,098
$ 26,743,427
$ 26,514,181
2015
Carrying amount of
securitized mortgages
Carrying amount of
associated liabilities
Securitized mortgages at face value
$ 24,346,182
$ 24,787,631
Mark-to-market adjustment
Capitalized origination costs
Debt discounts
Add
Principal portion of payments held in restricted cash
Participation debt
39,914
137,965
—
24,524,061
452,226
—
—
—
(64,566)
24,723,065
—
20,662
$ 24,976,287
$ 24,743,727
The principal portion of payments held in restricted
cash represents payments on account of mortgages
pledged under securitization which has been re-
ceived 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 securi-
tization debt, this amount is added to the carrying
value of mortgages pledged under securitization in
the above table.
48
First National Financial Corporation 2016 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
2016
2015
$ 137,965
$ 125,324
65,682
72,668
(64,707)
(60,027)
$ 138,940
$ 137,965
During the year ended December 31, 2016, the Com-
pany invested in mortgages that were transferred into
the securitization vehicles with principal balances as of
December 31, 2016 of $6,406,495 (2015 – $5,845,336).
The following table summarizes the insured mort-
gages pledged under securitization that are past
due as at December 31:
The contractual maturity profile of the mortgages
pledged under securitization programs is summa-
rized as follows:
2017
2018
2019
2020
2021 and thereafter
$ 3,370,518
3,852,259
5,199,458
4,686,251
8,837,869
$ 25,946,355
Mortgages pledged under securitization have been
classified as loans and receivables, except for approx-
imately $2.7 billion (2015 – $3.4 billon) of mortgages
measured at FVTPL. The mortgages classified as
loans and receivables are carried at par plus un-
amortized origination costs.
Arrears days
31 to 60
61 to 90
Greater than 90
2016
2015
$ 51,524 $ 46,977
40,508
8,480
43,205
36,891
$ 135,237 $ 92,348
Within mortgages pledged under securitization,
the Company’s exposure to credit loss is limited to
uninsured mortgages with principal balances total-
ling $125,092 (2015 – $14,864), before consideration
of the value of underlying collateral. None of these
mortgages had principal and interest payments in
arrears as at December 31, 2016 or 2015. 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.
49 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 prepay-
ment. 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
2016
Commercial
mortgages
Residential
mortgages
$ 84,777
$ 2,578,979
28
0.1%
—
—
2.0%
402
799
21
10.7%
192
383
1.8%
7,152
14,262
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
(1) The weighted average life of prepayable assets in periods is calculated by multiplying the principal col-
lections 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.
50
First National Financial Corporation 2016 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 re-
sult 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 variability
of future cash flows from these mortgages. The inves-
tors have no recourse to the Company’s other assets
for failure of mortgagors to pay when due.
During the year ended December 31, 2016,
$2,213,576 (2015 – $1,922,906) of mortgages were
placed with institutional investors, which created
gains on deferred placement fees of $16,332 (2015
– $11,051). Cash receipts on deferred placement fees
receivable for the year ended December 31, 2016
were $11,014 (2015 – $9,835).
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 de-
ferred placement fees receivable are subject to
measurement uncertainty. As at December 31, 2016,
the fair value of deferred placement fees receiv-
able is $43,933 (2015 – $38,164). An assumption of
no credit losses was used, commensurate with the
credit quality of the investors. An assumption of no
prepayment for the commercial segment was used,
as borrowers cannot refinance for financial advantage
without paying the Company a fee commensurate with
its investment in the mortgage. 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 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:
Average life (in months) (1)
Residual cash flows discount rate (annual rate)
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
2016
63
3.9%
$435
$863
2015
64
3.5%
$339
$673
(1)The weighted average life of prepayable assets in periods is 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 Notes to Consolidated Financial Statements
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.
2016
2015
Mortgages accumulated for
securitization
$ 1,797,321 $ 1,483,836
Mortgages accumulated for sale
40,595
13,577
$ 1,837,916 $ 1,497,413
The Company estimates that the expected cash
flows from the receipt of payments on the deferred
placement fees receivable will be as follows:
2017
2018
2019
2020
2021 and thereafter
$ 12,159
10,484
8,133
5,931
12,060
The Company’s exposure to credit loss is limited to
$345,179 (2015 – $217,205) of principal balances of
uninsured mortgages within mortgages accumulated
for sale or securitization, before consideration of the
value of underlying collateral. These are conventional
prime single-family mortgages similar to the mort-
gages described in note 3. For the same rationale, the
Company has not recorded any provision for credit
loss related to these mortgages.
$ 48,767
Note 6.
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:
Mortgage and Loan Investments
As at December 31, 2016, 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.
Mortgage and loan investments consist of the
following:
Mortgage loans, classified as
loans and receivables
Mortgage loans, designated as
FVTPL
2016
2015
$ 213,372
$ 198,744
41,858
47,267
255,230
246,011
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.
52
First National Financial Corporation 2016 Annual Report The following table discloses the composition of the Company’s portfolio of mortgage and loan investments
by geographic region as at December 31, 2016:
Province/Territory
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
Portfolio
balance
Percentage of
portfolio
$ 17,654
6.92 %
15,968
32,216
347
811
6,627
188
142,981
440
35,731
1,503
764
6.25
12.62
0.14
0.32
2.60
0.07
56.02
0.17
14.00
0.59
0.30
255,230
100.00
The following table discloses the mortgages that are
past due as at December 31:
Arrears days
31 to 60
61 to 90
Greater than 90
2016
2015
$ 4,932 $ 3,742
61
2,857
48,172 42,394
53,165 48,993
The portfolio contains $12,873 (2015 – $19,997) of
insured mortgages and $242,357 (2015 – $226,014)
of uninsured mortgage and loan investments as at
December 31, 2016. Of the uninsured mortgages,
approximately $44,231 (2015 – $49,177) have princi-
pal balance in arrears. Three of these mortgages are
non-performing and have principal balances totalling
$43,286 as at December 31, 2016 (2015 – six mort-
gages, totalling $42,394). The Company has stopped
accruing interest on these mortgages, and has provid-
ed allowances for potential credit losses of $10,041 as
at December 31, 2016 (2015 – $6,541). The Company
acknowledges that there is a higher risk of credit loss-
es 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.
53 Notes to Consolidated Financial Statements
The maturity profile in the table below is based on the earlier of contractual renewal or maturity dates.
Residential
Commercial
2017
$ 11,271
2018
$ 227
2019
—
2021 and
2020
thereafter Book value Book value
$ 622
$ 18,113
$ 30,233
$ 20,295
177,016
29,667
14,481
—
3,833
224,997
225,716
$ 188,287
$ 29,894
$ 14,481
$ 622
$ 21,946
$ 255,230
$ 246,011
2016
2015
Interest income for the year was $15,390 (2015 – $15,381) and is included in mortgage investment income on
the consolidated statements of comprehensive income.
Note 7.
Other assets
The components of other assets are as follows as at
December 31:
Property, plant and equipment, net
$ 12,556 $ 12,583
2016
2015
Intangible assets, net
Goodwill
Purchased mortgage servicing
rights
—
2,500
29,776
29,776
664
1,316
42,996
46,175
The intangible assets were fully amortized during
the 2016 year.
For the purpose of testing goodwill for impairment,
the cash-generating unit is considered to be the
Corporation as a whole, since the goodwill relates to
the excess purchase price paid for the Corporation’s
business in connection with the IPO. The recoverable
amount of the Corporation is calculated by reference
to the Corporation’s market capitalization, mortgages
under administration, origination volume, and profit-
ability. These factors indicate that the Corporation’s
recoverable amount exceeds the carrying value
of its net assets and accordingly, goodwill is not
impaired.
54
First National Financial Corporation 2016 Annual Report Note 8.
Mortgages Under Administration
As at December 31, 2016, the Company had mort-
gages under administration of $99,391,490 (2015
– $93,829,629), including mortgages held on the
Company’s consolidated statements of financial posi-
tion. 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, 2016, the Company administered
303,389 mortgages (2015 – 292,905) for 102 institu-
tional investors (2015 – 94) with an average remaining
term to maturity of 41 months (2015 – 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
2016
2015
$ 59,062,554
$ 55,632,571
2,099,598
10,417,963
1,738,652
9,367,126
25,946,355
24,346,182
1,865,020
2,745,098
$ 99,391,490
$ 93,829,629
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 accumulated
for securitization as described in note 5. As at
December 31, 2016, the Company has included in ac-
counts receivable and sundry $14,618 (2015 – $19,776)
of uninsured nonperforming mortgages (net of pro-
visions for credit losses) and outstanding claims from
mortgage default insurers. The Company incurred
actual credit losses, net of recoveries, of $1 during the
year ended December 31, 2016 (2015 – $53).
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 consoli-
dated statements of financial position. The aggregate
of these accounts as at December 31, 2016 was
$798,876 (2015 – $651,737).
Note 9.
Bank Indebtedness
Bank indebtedness includes a revolving credit facility
of $1,000,000 (2015 – $1,000,000) maturing in May
2020, of which $624,904 (2015 – $592,908) was
drawn as at December 31, 2016 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.
55 Notes to Consolidated Financial Statements
Note 10.
Debt Related to Securitized and
Participation Mortgages
Debt related to securitized mortgages represents the
funding for mortgages pledged under the NHA-MBS,
CMB and ABCP programs. As at December 31,
2016, debt related to securitized mortgages was
$26,508,083 (2015 – $24,723,065), net of unamortized
discounts of $57,765 (2015 – $64,566). A comparison
of the carrying amounts of the pledged mortgages
and the related debt is summarized in note 3.
As at December 31, 2016, debt related to participation
mortgages was $6,098 (2015 – $20,662).
Debt related to securitized and participation mortgages
is reduced on a monthly basis when the principal
payments received from the mortgages are applied.
Debt discounts and premiums are amortized over
the term of each debt on an effective yield basis.
Debt related to securitization mortgages had a
similar contractual maturity profile as the associated
mortgages in mortgages pledged under securitization.
Note 11.
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 inter-
est 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 coun-
terparties exchange a series of payments based on
different interest rates applied to a notional amount
in a single currency.
The following tables present, by remaining term to
maturity, the notional amounts and fair values of the
swap contracts that do not qualify for hedge ac-
counting as at December 31, 2016 and 2015:
Less than 3 years
3 to 5 years
6 to 10 years
Total
notional amount
Fair value
Interest rate swap
contracts
$ 1,115,136
$ 3,009,611
$ 2,172
$ 4,126,919
$ 5,353
2016
Less than 3 years
3 to 5 years
6 to 10 years
Total
notional amount
Fair value
Interest rate swap
contracts
$ 133,739
$ 2,491,102
$ 10,188
$ 2,635,029
$ (30,244)
2015
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.
56
First National Financial Corporation 2016 Annual Report Note 12.
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.
Note 13.
Commitments, Guarantees and
Contingencies
As at December 31, 2016, the Company has the
following operating lease commitments for its office
premises:
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 determined
that the estimated potential loss from these guarantees
is insignificant.
Note 14.
Securities Transactions under
Repurchase 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.
$ 6,965
Note 15.
6,234
2,188
1,609
1,500
$ 18,496
Obligations Related to Securities
and Mortgages Sold Under
Repurchase Agreements
The Company uses repurchase agreements to fund
specific mortgages included in mortgages accumu-
lated for sale or securitization. The current contracts
are with financial institutions, are based on bankers’
acceptance rates and mature on or before January
31, 2017.
2017
2018
2019
2020
2021 and thereafter
Outstanding commitments for future advances on
mortgages with terms of one to 10 years amounted to
$1,172,905 as at December 31, 2016 (2015 – $1,003,088).
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 administration.
Certain of these commitments have been sold to
institutional investors while others will expire before
being drawn down. Accordingly, these amounts do
not necessarily represent future cash requirements
of the Company.
57 Notes to Consolidated Financial Statements
Note 16.
Accounts Payable and Accrued
Liabilities
The major components of accounts payable and
accrued liabilities are as follows as at December 31:
Accounts payable
$ 46,900 $ 36,634
2016
2015
Accrued interest on securitiza-
tion debt
Servicing liability
Swap liabilities
40,833
39,021
17,893
19,125
16,873
30,244
122,499
125,024
Accrued interest on securitization debt is the interest
due on securitization related debt due subsequent to
year end.
Note 17.
Shareholders’ Equity
(a) Authorized
Unlimited number of common shares
Unlimited number of cumulative 5-year rate reset
preferred shares, Class A Series 1
Unlimited number of cumulative 5-year rate reset
preferred shares, Class A Series 2
(b) Capital Stock
Balance, December 31, 2016 and 2015
59,967,429
common shares
$ 122,671 $ 122,671
4,000,000
preferred shares
$ 97,394 $ 97,394
2016
2015
(c) Preferred Shares
On January 25, 2011, the Company issued 4 mil-
lion 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
received a cumulative quarterly fixed dividend
yielding 4.65% annually for the initial period ended
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. On April
1, 2016, the Company reset the dividend rate on the
Class A Series 1 shares to 2.79% for a new five year
term ending March 31, 2021.
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, Se-
ries 2 (“Series 2 Preferred Shares”), subject to certain
conditions, on March 31, 2021 and on March 31 every
five years thereafter. Holders of the Series 2 Preferred
Shares will be entitled to receive cumulative quarterly
floating dividends at a rate equal to the three-month
Government of Canada treasury bill yield plus 2.07%
as and when declared by the Board of Directors.
On April 1, 2016, certain preferred shareholders exer-
cised their right to convert fixed rate Series 1 shares
into floating rate Series 2 shares. Subsequent to the
conversion, 2,887,147 Series 1 preferred shares and
1,112,853 Series 2 preferred shares were outstanding
with a total carrying value of $97,394.
Preferred shares do not have voting rights. The par
value per preferred share is $25.
58
First National Financial Corporation 2016 Annual Report (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 18.
Income Taxes
2016
2015
$ 199,744
$ 107,118
(3,213)
196,531
(4,650)
102,468
59,967,429
59,967,429
3.28
1.71
The major components of deferred tax expense
(recovery) for the years ended December 31 consists
of the following:
The major components of current income tax ex-
pense (recovery) for the years ended December 31
consists of the following:
Related to origination and
reversal of timing differences
2016
2015
Income taxes relating to the prior year
—
(55)
2016
2015
$ 7,700 $ (2,000)
Income taxes relating to the current
year
64,600
41,300
64,600
41,245
The effective income tax rate reported in the consolidated statements of comprehensive income varies from the
Canadian tax rate of 26.54% for the year ended December 31, 2016 (2015 – 26.44%) 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
59 Notes to Consolidated Financial Statements
2016
26.54%
274,129
72,754
—
(699)
277
(89)
57
2015
26.44%
148,676
39,310
(55)
(785)
266
467
42
72,300
39,245
The movement in significant components of the Company’s deferred tax liabilities and assets for the years
ended December 31, 2016 and 2015 are as follows:
Deferred income tax liabilities
Deferred placement fees receivable
Capitalized broker fees
Carrying values of mortgages pledged under
securitization in excess of tax values
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
Gains (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
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
Gains (losses) on interest rate swaps
Share and debenture issuance costs
Total deferred income tax assets
Net deferred income tax liabilities
As at
January 1, 2016
Recognized
in income
As at
December 31, 2016
$ 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
$ 1,524
1,372
(4,930)
(664)
(1,818)
(585)
$ (5,101)
374
330
(2,032)
14,116
13
$ 12,801
$ 7,700
$ 11,660
38,015
5,671
—
15,331
589
$ 71,266
(4,908)
(4,749)
(3,296)
4,787
—
$ (8,166)
$ 63,100
As at
January 1, 2015
Recognized
in income
As at
December 31, 2015
$ 9,136
33,048
11,038
1,978
14,894
1,536
$ 71,630
(5,639)
(2,375)
(684)
(5,316)
(216)
$ 1,000
3,595
(437)
(1,314)
2,255
(362)
$ 4,737
357
(2,704)
(580)
(4,013)
203
$ 10,136
36,643
10,601
664
17,149
1,174
$ 76,367
(5,282)
(5,079)
(1,264)
(9,329)
(13)
$ (14,230)
$ 57,400
$ (6,737)
$ (2,000)
$ (20,967)
$ 55,400
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.
60
First National Financial Corporation 2016 Annual Report Note 19.
Financial Instruments and Risk
Management
Risk Management
The various risks to which the Company is exposed
and the Company’s policies and processes to measure
and manage them individually are set out below:
Interest Rate Risk
Interest rate risk arises when changes in interest rates
will affect the fair value of financial instruments.
The Company uses various strategies to reduce
interest rate risk. The Company’s risk management
objective is to maintain interest rate spreads from
the point that a mortgage commitment is issued to
the transfer of the mortgage to the related 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
borrower and the time the mortgage is sold to a
securitization vehicle and the underlying cost of
funding is set. 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 2016 and 2015.
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
2016
2015
2016
2015
$ 2,805
$ 3,001
$ (393)
$ (1,308)
10,948
10,649
(787)
(2,615)
61 Notes to Consolidated Financial Statements
Credit Risk
Credit risk is the risk of loss associated with a
counterparty’s inability or unwillingness to fulfill
its payment obligations. The Company’s credit risk
is mainly lending related in the form of mortgage
default. The Company uses stringent underwriting
criteria and experienced adjudicators to mitigate
this risk. The Company’s approach to managing
credit risk is based on the consistent application of
a detailed set of credit policies and prudent arrears
management. As at December 31, 2016, 99.5% (2015
– 99.9%) of the pledged mortgages were insured
mortgages. See details in note 3. The Company’s
exposure is further mitigated by the relatively short
period over which a mortgage is held by the
Company prior to securitization.
The maximum credit exposures of the financial
assets are their carrying values as reflected on the
consolidated 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 mortgages
default and the servicing cash flows cease. The large
portfolio of individual mortgages that underlies these
assets is diverse in terms of geographical location,
borrower exposure and the underlying type of real
estate. This diversity and the priority ranking of the
Company’s rights mitigate the potential size of any
single credit loss.
Securities purchased under resale agreements
are transacted with large regulated Canadian
institutions such that the risk of credit loss is very
remote. Securities transacted are all Government
of Canada bonds and, as such, have virtually no risk
of credit loss.
Liquidity Risk and Capital Resources
Liquidity risk is the risk that the Company will be un-
able 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 and (v)
mortgage and loan investments. The Company 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 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 mortgages
are used to pay down the related debt within
a 30 day period. Accordingly, these sources of
financing amortize at the same rate as the mortgages
pledged thereunder, providing an almost perfectly
matched asset and liability relationship.
Market Risk
Market risk is the risk of loss that may arise from
changes in market factors such as interest rates and
credit spreads. The level of market risk to which the
Company is exposed varies depending on market
conditions, expectations of future interest rates and
credit spreads.
Customer Concentration Risk
Placement fees and mortgage servicing income
from one Canadian financial institution represent
approximately 8.3% (2015 – 13.7%) of the Company’s
total revenue.
Fair Value Measurement
The Company uses the following hierarchy for
determining and disclosing the fair value of
financial instruments recorded at fair value in the
consolidated 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.
62
First National Financial Corporation 2016 Annual Report Valuation Methods and Assumptions
The Company uses valuation techniques to estimate
fair values, including reference to third party valuation
service providers using proprietary pricing models
and internal valuation models, such as discounted
cash flow analysis. The valuation methods and key
assumptions used in determining fair values for the
financial assets and financial liabilities are as follows:
(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
outstanding 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 $26,106,664
(2015 – $24,524,061) and a fair value of $26,388,372
(2015 – $24,996,681), debt related to securitized and
participation mortgages, which has a carrying value
of $26,514,181 (2015 – $24,743,727), and a fair value
of $26,681,028 (2015 – $25,035,141,883), and senior
unsecured notes, which have a carrying value of
$174,556 (December 31, 2015 – $174,420), and a fair
value of $174,349 (December 31, 2015 – $177,233).
These fair values are estimated using valuation tech-
niques in which one or more significant inputs are
unobservable (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 bor-
rowers with similar credit. This methodology will
reflect changes in interest rates which have occurred
since the mortgages were originated. Impaired mort-
gages 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 deter-
mined 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.
63 Notes to Consolidated Financial Statements
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
$ —
$ 40,595
$ —
$ 40,595
2016
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
Securities sold under repurchase agreements and sold short
Interest rate swaps
Total financial liabilities
Financial assets
—
—
—
—
—
—
—
22,227
2,663,755
2,663,755
43,933
43,933
41,858
—
41,858
22,227
$ —
$ 62,822 $ 2,749,546
$ 2,812,368
—
—
1,308,483
16,873
—
—
1,308,483
16,873
$ — $ 1,325,356
$ — $ 1,325,356
2015
Level 1
Level 2
Level 3
Total
Mortgages accumulated for sale
$ —
$ 13,577
$ —
$ 13,577
FVTPL mortgages
Deferred placement fees receivable
Mortgage and loan investments
Total financial assets
Financial liabilities
Securities sold under repurchase agreements and sold short
Interest rate swaps
Total financial liabilities
—
—
—
—
—
—
3,460,924
3,460,924
38,164
38,164
47,267
47,267
$ —
$ 13,577 $ 3,546,355
$ 3,559,932
—
—
971,606
30,244
—
—
971,606
30,244
$ — $ 1,001,850
$ — $ 1,001,850
64
First National Financial Corporation 2016 Annual Report In estimating the fair value of financial assets and fi-
nancial liabilities using valuation techniques or pricing
models, certain assumptions are used, including those
that are not fully supported by observable market
prices or rates (Level 3). The amount of the change
in fair value recognized by the Company in net
income for the year ended December 31, 2016 that
was estimated using a valuation technique based on
assumptions that are not fully supported by observ-
able market prices or rates was approximately a loss
of $5,062 (2015 – a gain of $19,366). 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 $2,158 (2015
– $37,076) of the Company’s financial assets and
financial liabilities for the years ended December
31, 2016 and 2015, all of which have been classified
as FVTPL.
FVTPL mortgages
Deferred placement fees receivable
Securities owned and sold short
Interest rate swaps
2016
2015
$ (4,597)
$ 18,642
(465)
10,897
21,915
724
(35,076)
(36,433)
27,750
(52,143)
The Company does not have any assets or liabilities that are measured at fair value on a non recurring 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, 2016 and 2015. 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, 2016
Investments
Unrealized loss
recorded in income
Payment and
amortization
Fair value as at
December 31, 2016
Financial assets
FVTPL mortgages
$ 3,460,924
$ 4,152,890
$ (4,597)
$ (4,945,462)
$ 2,663,755
Deferred placement
fees receivable
Mortgage and
loan investments
38,164
15,857
(465)
(9,623)
43,933
47,267
17,394
—
(22,803)
41,858
$ 3,546,355
$ 4,186,141
$ (5,062)
$ (4,977,888)
$ 2,749,546
65 Notes to Consolidated Financial Statements
Fair value as at
January 1, 2015
Investments
Unrealized loss
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
Note 20.
Note 21.
Capital Management
Earnings by Business Segment
The Company’s objective is to maintain a capital
base so as to maintain investor, creditor and market
confidence and sustain future development of the
business. Management defines capital as the Com-
pany’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, 2016, the ratio was 1.39:1 (2015 –
1.64:1). The Company was in compliance with the
bank covenant throughout the year.
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.
66
First National Financial Corporation 2016 Annual Report Revenue
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income
Realized and unrealized gains (losses) on financial instruments
Expenses
Amortization
Interest
Other operating
Income before income taxes
Identifiable assets
Goodwill
Total assets
Capital expenditures
Revenue
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income
Realized and unrealized gains (losses) on financial instruments
Expenses
Amortization
Interest
Other operating
Income before income taxes
Identifiable assets
Goodwill
Total assets
Capital expenditures
67 Notes to Consolidated Financial Statements
2016
Residential
Commercial
Total
488,299
151,673
639,972
(372,890)
(122,791)
(495,681)
115,409
262,352
40,111
29,267
28,882
62,264
17,369
(1,517)
447,139
106,998
5,282
31,394
199,468
236,144
210,995
1,878
6,881
35,105
43,864
63,134
144,291
324,616
57,480
27,750
554,137
7,160
38,275
234,573
280,008
274,129
24,718,010
5,646,679
30,364,689
—
—
29,776
24,718,010
5,646,679
30,394,465
3,243
1,390
4,633
2015
Residential
Commercial
Total
477,552
143,270
620,822
(373,030)
(115,629)
(488,659)
104,522
244,323
33,176
(49,011)
333,010
6,374
30,797
195,384
232,555
100,455
27,641
49,495
19,642
(3,132)
93,646
2,740
5,147
37,538
45,425
48,221
132,163
293,818
52,818
(52,143)
426,656
9,114
35,944
232,922
277,980
148,676
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
Note 23.
Future Accounting Changes
The following accounting pronouncements issued
by the IASB, although not yet effective, may have a
future impact on the Company:
IFRS 9 – Financial Instruments
In July 2014, the International Accounting Standard
Board (“IASB”) issued the final version of IFRS 9 –
Financial Instruments, replacing IAS 39 and all
previous versions of IFRS 9. This final version of IFRS 9
includes a 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 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.
Note 22.
Related Party and
Other Transactions
In the past ten years, the Company has originated
and sold several commercial mezzanine mortgages
to various entities controlled by a senior executive
and shareholder of the Company. The Company ser-
vices these mortgages during their terms at market
commercial servicing rates. During the year, three
mortgages in this portfolio were refinanced as part
of an overall restructuring of the borrower's debts.
Accordingly, $22.9 million of mortgage principal
was discharged and three new mortgages totaling
$36.4 million on the properties were registered. The
increased amount of the total mortgage balance
represents the capitalization of outstanding accrued
interest on the old mortgages. The Company does
not consider this transaction to be a new related
party origination but will continue to administer the
mortgages in its servicing system. During the year,
the Company also originated $11,586 of new mortgages
for the related parties. The mortgages, which are
administered by the Company, have a balance of
$69,115 as at December 31, 2016 (2015 – $36,624).
As at December 31, 2016, three of the mortgages are
secured by real estate in which the Company is also
a subordinate mortgage lender.
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 Company with portfolio insurance at market
premiums. The total bulk insurance premium paid in
2016 was $2,402 (2015 – $2,366), 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, 2016, the portfolio had a balance of
$3,965 (2015 – $4,101).
Management Compensation
During the year ended December 31, 2016, the Compa-
ny paid a total annual compensation of $3,974 (2015
– $3,882) to six senior managers. Senior managers
are defined as those persons having authority and
responsibility for planning, directing and controlling
the activities of the Company.
68
First National Financial Corporation 2016 Annual Report 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 – Agreements
for the Construction of Real Estate, IFRIC 18 – Transfer
of Assets from Customers, and SIC 31 – Revenue –
Barter Transactions Involving Advertising Services.
The standard contains a single model that applies
to contracts with customers and two 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.
IFRS 15 is effective for fiscal years beginning on or
after January 1, 2018. The Company is currently an-
alyzing 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
instead 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 assessing the impact of this standard on
the Company’s consolidated financial statements.
Note 24.
Comparative Consolidated
Financial Statements
The comparative audited consolidated financial
statements have been restated from statements
previously presented to conform to the presen-
tation of the 2016 audited consolidated financial
statements.
69 Notes to Consolidated Financial Statements
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 pro-
cedures, as well as its financial reporting practices.
The Audit Committee consists of three independent
directors, all of whom are considered financially
literate for the purposes of the Canadian Securities
Administrators’ Multilateral Instrument 52-110 – Audit
Committees.
Committee Members
John Brough (Chair), Peter Copestake and
Robert Mitchell
Sound corporate governance is fundamental to
maintaining the confidence of investors and in-
creasing 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 management
of the Company, oversees matters related to our
strategic direction and assesses results relative to our
goals and objectives. As such, the Board has adopted
several policies that reflect recommended practices in
governance and disclosure. These include a Disclosure
Policy, a Code of Business Conduct, a Whistleblower
Policy and an Insider Trading Policy. These policies
follow the corporate governance guidelines of the
Canadian Securities Administrators. As a public
company, First National’s Board continues to update,
develop and implement appropriate governance poli-
cies 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.
70
First National Financial Corporation 2016 Annual Report Governance Committee
The Governance Committee’s responsibilities include:
• Periodically assessing and making recommenda-
tions on the Company’s approach to governance
issues;
• Assisting in the development of governance pol-
icies, practices and procedures for approval by
the Board of Directors;
• Reviewing conflicts of interest and transactions
involving related parties of the Company; and
• Periodically reviewing the composition and effec-
tiveness of the Board of Directors.
The Governance Committee consists of three direc-
tors, all of whom are independent for the purposes of
the Canadian Securities Administrators’ Multilateral In-
strument 58-101 — Disclosure of Corporate Governance
Practices.
Committee Members
Peter Copestake (Chair), Duncan Jackman and
Barbara Palk
71 Corporate Governance
Board Members
Collectively, the Board of Directors has extensive experience in mortgage lending, real
estate, strategic planning, law and finance. The Board consists of seven members, five of
whom are independent.
Stephen Smith
Moray Tawse
Mr. Smith is Chairman and Chief Executive Officer
of the Corporation, 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 innovator 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 mort-
gage 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 Compa-
ny. He is also Chairman of Historica Canada, producer
of the Heritage Minutes and publisher of The Ca-
nadian 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.
Mr. Tawse is Executive Vice President and Secretary
of the Corporation, Executive Vice President of First
National 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
Mr. 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 of
Ontario and Canada.
72
First National Financial Corporation 2016 Annual Report Peter Copestake
Barbara Palk
Ms. Palk retired as President of TD Asset Management
Inc. in 2010 following a 30 year career in institutional
investment and investment management. She cur-
rently serves on the Boards of TD Asset Management
USA Funds Inc. in New York, Ontario Teachers’ Pen-
sion Plan and Crombie Real Estate Investment Trust.
Her previous board experience includes the Cana-
dian Coalition for Good Governance, whose Gover-
nance Committee she chaired, Greenwood College
School, the Investment Counselling Association of
Canada, the Perimeter Institute, the Shaw Festival,
UNICEF Canada and Queen’s University, where she
was the Chair of the board of Trustees. Ms. Palk is
a member of the Institute of Corporate Directors,
a Fellow of the Canadian Securities Institute and
a CFA charterholder. She holds a Bachelor of Arts
(Honours, Economics) degree from Queen’s Univer-
sity, and has been named one of Canada’s Top 100
Most Powerful Women (2004).
Mr. 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 35 years he has held senior financial and ex-
ecutive management positions at federally regulated
financial institutions and in the federal government.
Other current directorships include Royal and Sun
Alliance 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
Mr. Jackman is the Chairman, President and Chief
Executive Officer of E L Financial Corporation Lim-
ited, an investment and insurance holding company
and has held similar positions with E-L Financial
since 2003. Mr. Jackman is also the Chairman and
President of Economic Investment Trust Limited
and United Corporations Limited, both closed-end
investment corporations, and has acted in a similar
capacity with these corporations since 2001. Mr.
Jackman sits on a number of public and private
company boards. Prior to 2001, Mr. Jackman held a
variety of positions including portfolio manager at
Cassels Blaikie and investment analyst at RBC Do-
minion Securities Inc. Mr. Jackman holds a Bachelor
of Arts from McGill University.
Robert Mitchell
Mr. Mitchell has been President of Dixon Mitchell In-
vestment Counsel Inc., a Vancouver-based investment
management company since 2000. Prior to that,
Mr. Mitchell was Vice President, Investments at
Seaboard Life Insurance Company. Mr. Mitchell has
an MBA from the University of Western Ontario, a
Bachelor of Commerce (Finance) from the University
of Calgary, and is a CFA charterholder.
73 Board Members
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, 2017, 9 a.m. EDT
TMX Broadcast Centre
The Gallery
The Exchange Tower
130 King Street West
Toronto, Ontario
Senior Executives of First National
Financial LP
Stephen Smith
Co-founder, Chairman and Chief Executive Officer
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
Moray Tawse
Co-founder and Executive Vice President
Investor Relations Website
www.firstnational.ca
Robert Inglis
Chief Financial Officer
Scott McKenzie
Senior Vice President, Residential Mortgages
Jeremy Wedgbury
Senior Vice President, Commercial Mortgages
Lisa White
Senior Vice President, Mortgage Operations
Hilda Wong
Senior Vice President and General Counsel
Registrar and Transfer Agent
Computershare Investor Services Inc.,
Toronto, Ontario
1.800.564.6253
Exchange Listing and Symbols
Common shares: (TSX) FN
Class A Series 1 Preference Shares: (TSX) FN.PR.A
Class A Series 2 Preference Shares: (TSX) FN.PR.B
74
First National Financial Corporation 2016 Annual Report firstnational.ca
Vancouver
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