ANNUAL REPORT
First National Financial Corporation
—
2
Corporate
Profile
First National Financial is Canada’s largest
non-bank mortgage lender. Founded in 1988,
our mortgage loan solutions are used by
hundreds of thousands of borrowers across
Canada to purchase single-family, multi-unit
and commercial properties. Customers
choose us and independent mortgage brokers
recommend us because of our service,
technology advantages and broad range
of competitive products.
Our common shares trade on the Toronto
Stock Exchange under the symbol FN, and
our preferred shares trade under the symbols
FN.PR.A and FN.PR.B.
Shareholders can find more information about
our people and markets at www.firstnational.ca.
—
1
2020 Annual Report First National Financial Corporation
A Record
Year
342,252
1,211
Borrowers served by First National in 2020 across Canada,
The number of full-time First National employees at year end,
an increase of 10% from 2019.
reflecting 18% year-over-year growth in our workforce to meet
customer needs.
$118.7 BILLION
$1.38 BILLION
Mortgages under administration (MUA) – the source of most of
Revenue in 2020 grew 4% to a new annual record, despite
the Company’s earnings – reached this milestone at year end
the dampening effect of lower interest rates.
2020, a 7% increase over 2019.
$190.2 MILLION
50%
Record net income in 2020 ($3.12 per share) reflected higher
The after-tax, Pre-Fair Market Value1 return on shareholders’
origination and wider mortgage spreads.
equity in 2020 demonstrates the efficiency of the First National
business model.
$148.4 MILLION
573%
Value of common share dividends declared in 2020, bringing
Total shareholder return between our IPO in 2006 and
the cumulative total to $1.5 billion ($25.80 per share) since the
December 31, 2020.
Company’s initial public offering in 2006.
(1) Non-IFRS measure. See MD&A for more details.
—
3
2020 Annual Report Our Leadership
Team
STEPHEN SMITH
Co-founder, Chairman and
Chief Executive Officer
MORAY TAWSE
Co-founder and
Executive Vice President
JASON ELLIS
President and
Chief Operating Officer
ROBERT INGLIS
Chief Financial Officer
HILDA WONG
Senior Vice President and
General Counsel
SCOTT MCKENZIE
Senior Vice President,
Residential Mortgages
JEREMY WEDGBURY
Senior Vice President,
Commercial Mortgages
—
4
First National Financial Corporation Message to
Shareholders
In the 33 years since First National began providing
mortgages, Canada has faced several economic
disruptions. Two of these – in 1990 and 2008 –
were classified by the C.D. Howe Institute as the
most severe since the mid-1950s. But 2020 was
in a category all its own.
The global COVID-19 health crisis created unique
and severe challenges for our country, society and
the economy that are far from over. It is in this
context that I compose my annual message to you.
As you will have noted from the opening
pages of this report, First National took
on these challenges and continued
its record-setting pace of increased
performance. Our key financial metrics –
mortgages under administration (MUA),
revenue and earnings – all reached record
levels. Supported by strong earnings,
the company increased its regular
common share dividend payments by
7.7% and paid a special dividend of
$0.50 per share. First National was also
a job creator, adding 183 talented new
employees to serve our customers and
meet the demands of growth.
Do not let this performance deceive you.
This past year tested our people, our
culture and our technology like they have
never been tested before.
Like other businesses, we had no
advance warning of what was to come,
although we did enter 2020 with a
strong and proven foundation. In January,
our budgets for the year were based on
an optimistic, business-as-usual outlook
supported by strong momentum in the
form of new mortgage commitments.
Our key concern was uncertain
securitization margins as mortgage
spreads had tightened entering 2020.
Our outlook changed abruptly.
On March 11, 2020, the World Health
Organization declared the outbreak
of COVID-19 a global pandemic and,
within days, states of emergency were
declared across Canada that shut down
non-essential businesses and activities.
This prompted the federal government
to announce various measures to aid the
millions of Canadians who lost income.
It also led the Bank of Canada to drop its
key overnight rate by 150 basis points in
less than a month and introduce a large
quantitative easing program to ensure
the financial system remained liquid.
Fortunately, First National was deemed
essential under government pandemic
protocols, which allowed us to remain
open through each subsequent
lockdown. However, the pandemic was
game changing for our business because
it forced our entire workforce to relocate.
In March, we asked our employees across
the country to work remotely from
home so they could avoid exposure to
the coronavirus. To support them, our
IT team quickly secured and distributed
computers to enable secure access
to our systems. We also asked our
employees to maintain the high levels
of service our customers and partners
in the mortgage broker community
have come to expect and deserve. This
was difficult in the weeks immediately
following the first lockdown due to the
extraordinary volume of requests for
service and support.
The Bank of Canada’s swift action also
required equally swift action by our team
to reset mortgage pricing and reassess
market risk in our underwriting practices.
Although First National only has direct
credit exposure to $2.8 billion (2.4%) of
MUA, these portfolios are risk managed.
For the first time ever, we also granted
mortgage payment deferrals to
borrowers who demonstrated financial
need due to the pandemic. By May,
we had approved mortgage payment
deferrals for 33,800 borrowers, or 13.9%
of single-family MUA eligible for this
program. Providing deferrals enabled
these borrowers to regain the ability to
meet their financial obligations, but also
required First National to make timely
payments of interest and amortizing
principal on the NHA-MBS securities
it had issued. By year end, virtually
no borrowers were on deferral, an
outcome that speaks to the economic
recovery and the creditworthiness of the
company’s borrowers.
—
5
2020 Annual Report First National Financial Corporation
“First National expects
residential originations
in 2021 to be comparable
to the record set in 2020.”
—
6
First National Financial Corporation Lessons Learned,
Advantages Validated
One cannot live through a crisis like this
without seeing how a business and its
markets stand up to extreme stress. From
the experience of the past year, what we
learned and validated about our business
model can be summarized as follows.
Nothing stops the First National
team from helping customers and
supporting business partners.
Canadians need
and value
mortgage borrowers.
Throughout the year, we saw numerous
For the best advice and the most
examples of extraordinary customer
competitive mortgage offerings, the
service. While at times we were
independent broker channel has always
challenged to meet the aggressive
been unsurpassed, which is why its
turnaround objectives we set for
greatest proponent is First National. The
ourselves, the people of First National
pandemic also reinforced the channel’s
set a new benchmark for excellence
other advantage: convenience. Securing
under the most trying of circumstances.
a First National mortgage with the
help of a broker is far easier and, in this
environment, safer than a physical visit
to a traditional lender. These competitive
benefits are reflected in the channel’s
market share gains over the years and
particularly in 2020.
Technology and innovation
are more important to
success than ever.
First National made a name for itself
by developing an innovative non-bank,
non-branch business model and creating
MERLIN™, the first underwriting system
of its kind serving the mortgage broker
channel. These innovations were
introduced three decades ago but found
even greater relevance in 2020 as they
allowed us to rise above capital market
volatility and the pandemic lockdown
to deliver reliable funding and seamless
service even while working from home.
Innovation continued in 2020 in the way
we used our IT backbone in areas such as
recruitment, training, and employee and
customer communication.
—
7
2020 Annual Report Not all recessions
are equal.
Our funding is as
reliable as that of any
financial institution.
Best Place to Work
In typical recessions, job losses lead
As a non-bank, we do not take
A sustainable financial services
to housing market correction. To
consumer deposits. However, our
company is one where people build
date, this recession has rewritten the
deep and diversified funding sources
lifelong careers because the work
economic history books, as the housing
have allowed First National to lend in
they do is meaningful, challenging
market improved. We did not expect
all economic conditions. Our ability
and rewarding, and the workplace
this last spring. Much to our surprise,
to do so when other lenders pulled
environment is professional, stable
in the second quarter of 2020, new
back served us well during the 2008
and supportive. Based on our long-
single-family mortgage originations
recession and again this past year. In
tenured workforce, First National is a
increased 15% or $600 million. In the
our commercial business, this liquidity
sustainable company. We are striving
third and fourth quarters, the results
advantage supported annual origination
to keep it that way as we grow by
were even better, with growth of 42%
growth of 23% in 2020, bringing our
maintaining a flat organizational
or $1.7 billion and 65% or $2.3 billion,
total commercial MUA to a record
structure that is highly attuned to
respectively. First National ended the
$35.1 billion. These numbers tell only
employee, customer and partner needs,
year with single-family MUA of $83.6
part of the story. In the spring, investor
offering effective human resources
billion, a new record. Economists and
demand for conventional commercial
programs, and listening attentively to
market commentators offered several
product weakened because of
employees both formally and informally
explanations for the housing market’s
perceived market risk. First National
for improvement ideas.
ability to withstand the gravitational
seamlessly adjusted so that borrower
pull of this recession. Among them:
needs were met with insured financings.
ultra-low interest rates, government
Our ability to use conventional and
income supports, and the idea that job
insured products to address the needs
losses were felt more acutely by those
of commercial borrowers across more of
in part-time positions who are not
the credit spectrum makes us a valuable
typically home buyers. All of these
contributor in financing a wide variety of
reasons seem plausible, and with
property assets, including apartments –
interest rates at current levels, it is
our mainstay – as well as industrial,
possible that Canada can look forward
self-storage and office. In 2021, we
to another year of strong housing
expect further success in commercial
market conditions. With all the usual
markets because of our funding model
caveats one needs to include with
and expertise.
We augment what we hear by inviting
outside experts to independently
survey our team. In 2020, First National
once again – for the fourth consecutive
year – achieved Great Places to
Work® certification. This year, we
qualified in two categories: 2020 Best
Workplaces™ in Financial Services &
Insurance and 2020 Best Workplaces™
in Ontario.
such a forward-looking statement,
First National expects residential
originations in 2021 to be comparable
to the record set in 2020.
Our culture is not defined
by our office address.
With five locations across Canada,
we have pride of place and believe
corporate culture is more quickly
formed and perpetuated in the office,
which is why we look forward to
returning when it is safe to do so.
However, the ties that bind us run
deeper than physical location. First
National’s culture is entrepreneurial,
principled and family oriented. We
have continued to place an emphasis
on preserving our culture while the
pandemic keeps us apart.
—
8
First National Financial Corporation 2021 Agenda
In business, it is not a good idea to
take anything for granted. In a
pandemic, it is not possible. We simply
do not know how or when this health
crisis will finally play out. That said, we
are very positive about First National’s
prospects in 2021. I would encourage
you to read the Outlook found in our
MD&A to learn more.
Our business agenda for the coming
year is not radically different than it
was last year. We will strive to be better
in every way. This is a tall order, but
continuous improvement is part of our
mindset. One key difference is that we
will pursue growth for at least part of
the year while maintaining our work-
from-home stance. It is too early to say
when we can safely return to our offices,
but we continue to monitor health
guidelines so we are prepared when that
day arrives. We are scheduled to move
into new Toronto headquarters in late
2021, a change of scenery that we look
forward to for several reasons, including
the fact that the building is new, fit-for-
purpose and able to accommodate our
future workforce needs.
—
9
2020 Annual Report Looking Forward
Thank You
First National will build on the lessons
Many people deserve credit for this
learned last year and over the past 33
past year’s record performance, starting
years to stay grounded and focused
with our employees. Up and down
on what matters: relationships with
the line, veterans and newcomers, the
customers, partners, employees and
First National team is comprised of
shareholders. Relationships are the
hard workers who are motivated to help
key to success for our business. We
our customers buy homes and finance
must continue to find ways to offset
commercial properties. Special thanks
the distancing effect of COVID-19
to the leaders of our company –
on all of these relationships. This
including Jason Ellis, who added the
will involve creative applications of
title President of First National to his
technology but also timely, thoughtful
COO responsibilities just a few months
communication and, in the case of
before COVID-19 hit. My fellow directors
customer relationships, value-added
also deserve credit for their stewardship
service and advice. In short, innovation
during this most unusual period.
built on the values we have created
since our founding.
I reserve and offer my utmost thanks to
our customers, business partners and
fellow shareholders for your loyalty,
patronage and confidence. We will do
our best to reward you in 2021.
Yours sincerely,
STEPHEN SMITH
Chairman and Chief Executive Officer
March 2, 2021
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10
First National Financial Corporation MORTGAGES UNDER ADMINISTRATION
($ Billions)
2020 MUA BY ASSET TYPE
5%
4-year compound annual growth
120
100
80
60
40
20
120
0
100
80
2016
2017
2018
2019
2020
A
75%
Insured
B
19%
Uninsured single-family
residential
C
6%
Uninsured
multi-residential
and commercial
C
B
A
2020 REVENUE SOURCES PRIOR
TO FAIR VALUE GAINS/LOSSES
2018
2019
2020
A
60
1400
REVENUE
40
1200
($ Millions)
20
1000
120
0
800
100
7%
600
80
4-year compound annual growth
2016
2017
400
60
1400
200
40
1200
0
20
1000
0
800
600
350
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
2016
400
300
1400
200
250
1200
0
200
1000
150
800
100
600
350
50
PRE-FAIR MARKET VALUE INCOME(1)
400
300
0
($ Millions)
200
250
2016
2018
2018
2017
2017
2019
2019
2020
2020
0
200
2016
7%
4-year compound annual growth
2017
150
2016
2017
2018
2019
2020
100
350
50
300
0
250
200
150
100
50
0
2016
2017
2018
2019
2020
(1)Non-IFRS measure. See MD&A for more details.
2018
2019
2020
A
49%
Institutional placements
B
18%
Net interest –
securitized mortgages
C
24%
Mortgage servicing
D
9%
Investment income
2020 FUNDING
SOURCES
68%
Institutional investors
B
30%
Securitization
C
2%
Internal
D
B
C
C
B
A
A
—
11
2020 Annual Report First National Financial Corporation
Management’s
Discussion
and Analysis
The following management’s discussion and
analysis (“MD&A”) of financial condition
and results of operations is prepared as of
March 2, 2021. 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
December 31, 2020. The audited consolidated
financial statements of the Company have been
prepared in accordance with International
Financial Reporting Standards (“IFRS”).
—
13
2020 Annual Report This MD&A contains forward-looking
information. Please see “Forward-
GENERAL DESCRIPTION
OF THE COMPANY
2020 RESULTS SUMMARY
Looking Information” for a discussion of
First National Financial Corporation is
Management is very pleased with the
the risks, uncertainties and assumptions
the parent company of First National
performance of the Company during
relating to these statements. The
Financial LP (“FNFLP”), a Canadian-
2020, particularly given widespread
selected financial information and
based originator, underwriter and
economic disruption that commenced
discussion below also refer to certain
servicer of predominantly prime
with COVID-19-related employment
measures to assist in assessing financial
residential (single-family and multi-
loss. First National’s employees worked
performance. These other measures,
unit) and commercial mortgages. With
from home throughout most of 2020,
such as “Pre-FMV Income” and
over $118 billion in mortgages under
beginning in mid-March, and remained
“After-tax Pre-FMV Dividend Payout
administration (“MUA”), First National is
productive and efficient. Supported
Ratio”, should not be construed as
Canada’s largest non-bank originator and
by a resilient housing market across
alternatives to net income or loss or
underwriter of mortgages and is among
other comparable measures determined
the top three in market share in the
Canada, the Company increased single-
family origination 42% year over year.
in accordance with IFRS as an indicator
mortgage broker distribution channel.
The commercial segment had excellent
of performance or as a measure of
liquidity and cash flow. These measures
do not have standard meanings
prescribed by IFRS and therefore may
not be comparable to similar measures
presented by other issuers.
Unless otherwise noted, tabular amounts
are in thousands of Canadian dollars.
Additional information relating to the
Company is available in First National
Financial Corporation’s profile on the
System for Electronic Data Analysis
and Retrieval (“SEDAR”) website at
www.sedar.com.
—
14
results given the economic environment
and a challenging period for non-
residential real estate. Commercial
origination for the year increased by
23%. Total combined new origination
was higher by 35% compared to 2019.
Earnings were strong as the Company
benefited from strong origination and
wider mortgage spreads.
• MUA grew to $118.7 billion at December
31, 2020 from $111.4 billion at December
31, 2019, an increase of 7%; the growth
from September 30, 2020, when
MUA was $117.1 billion, was 5% on an
annualized basis.
First National Financial Corporation • Total new single-family mortgage
• Revenue for 2020 increased by 4%
The Company’s Board of Directors
origination was $19.2 billion in 2020
to $1.38 billion from $1.33 billion in
increased the regular monthly dividend
compared to $13.5 billion in 2019,
2019. The increase was affected by
from $1.95 to $2.10 per common share
an increase of 42%. The Company
changes in the fair market of financial
on an annualized basis effective with
attributes this to an increasing
instruments related to interest rate
the dividend payable on December
market share in the mortgage broker
movements in both years. Excluding
15, 2020, and declared a special
distribution channel. The Company
such amounts, revenue grew 8%
common share dividend in the amount
believes that the value of its long-
to $1.45 billion in 2020 from $1.34
of $0.50 per share, payable on
time broker relationships and effective
billion in 2019. This growth was
December 15, 2020, to shareholders
technology may have been a significant
largely a function of higher mortgage
of record on November 30, 2020. This
advantage during the 2020 pandemic.
origination, which fuelled an increase
special dividend reflects the Board’s
Commercial segment origination of
in placement fee revenue of 62%.
determination that the Company has
$9.1 billion was 23% higher than the
$7.4 billion originated in 2019. Overall
new origination increased by 35% in
2020 compared to 2019.
• Income before income taxes increased
by 7% to $258.7 million in 2020 from
$241.7 million in 2019. The increase was
affected by changing capital market
generated excess capital in the past
year and that the capital needed for
near-term growth can be generated
from current operations.
• The Company took advantage of
conditions. Excluding the gains and
opportunities in the year to renew over
losses related to financial instruments,
$6.7 billion of single-family mortgages
the Company’s earnings before income
($5.5 billion a year ago). For the
taxes and gains and losses on financial
commercial segment, renewals were
instruments (“Pre-FMV Income”) for
similar at approximately $2.0 billion in
2020 increased by 31% to $323.0
each year.
million from $247.1 million in 2019.
The increase is largely the result of
higher origination and wider mortgage
spreads, which both had favourable
impacts on placement fee revenue.
—
15
2020 Annual Report SELECTED QUARTERLY INFORMATION
Quarterly Results of First National Financial Corporation
($000s, except per share amounts)
Revenue
Net income (loss)
for the period
Pre-FMV
income for
the period(1)
Net income (loss)
per common share
Total assets
$387,303
$373,760
$344,581
$274,650
$342,138
$362,833
$335,241
$286,311
$69,123
$72,517
$50,844
($2,255)
$48,993
$60,578
$44,164
$23,478
$94,937
$99,644
$75,506
$52,921
$60,418
$79,816
$67,565
$39,269
$1.13
$1.20
$0.84
$39,488,527
$38,314,904
$39,040,298
($0.05)
$39,203,792
$0.80
$1.00
$0.72
$0.38
$37,685,593
$37,249,143
$37,229,876
$36,193,793
2020
Fourth quarter
Third quarter
Second quarter
First quarter
2019
Fourth quarter
Third quarter
Second quarter
First quarter
(1) This non-IFRS measure adjusts income before income taxes by eliminating the impact of changes in fair value by adding back losses on the valuation of financial instruments
(except those on mortgage investments) and deducting gains on the valuation of financial instruments. The figures presented for 2019 have been restated to conform to
2020’s presentation.
With First National’s large portfolio of
In the past eight quarters, the Company
of wider mortgage spreads and increased
mortgages pledged under securitization,
has experienced a relatively volatile
profitability. To start 2020, COVID-19-
quarterly revenue is driven primarily
economic environment. In 2018, the
related financial turmoil meant that the
by the gross interest earned on the
economic outlook was positive and
Company reported a small loss. In the
mortgages pledged under securitization.
there was a surplus of liquidity for
final two quarters of 2020, the Company
The gross interest on the mortgage
investment in financial assets. This
benefited from abnormally wide
portfolio is dependent both on the size
bred a very competitive marketplace
mortgage spreads, which were the result
of the portfolio of mortgages pledged
such that mortgage funding spreads
of the aftermath of the COVID-19-related
under securitization, as well as mortgage
tightened to levels not seen since 2007.
financial crisis that began at the end of
rates. Recently MUA increased, and
This reduced the profitability of the
the 2020 first quarter. These spreads
revenue followed. Net income is partially
Company’s operations. Toward the end
were the basis for growth in Pre-FMV
dependent on conditions in bond
of 2018, economic worries resurfaced,
Income in these quarters.
markets, which affect the value of gains
interest rates fell and mortgage spreads
and losses on financial instruments
widened by about 0.30%. This had a
arising from the Company’s interest
significant positive effect on the value
rate hedging program. Accordingly, the
of the Company’s operations. In the first
movement of this measurement between
quarter of 2019, Pre-FMV Income was at
quarters is related to factors external
its lowest in the two-year period prior
to the Company’s core business. By
to the COVID-19 pandemic, as tighter
removing this volatility and analyzing
spread 2018-originated mortgages were
Pre-FMV Income, management believes
securitized and placed. Combined with
a more appropriate measurement of the
lower origination volumes than typically
Company’s performance can be assessed.
experienced in the first quarter of each
year, profitability was low. This trend
reversed in the second quarter of 2019, as
the Company was able to take advantage
—
16
First National Financial Corporation OUTSTANDING SECURITIES OF THE CORPORATION
At December 31, 2020, and March 2, 2021, the Corporation had 59,967,429 common shares; 2,887,147 Class A preference shares,
Series 1; 1,112,853 Class A preference shares; 200,000 November 2024 senior unsecured notes; and 200,000 November 2025
senior unsecured notes outstanding.
SELECTED ANNUAL FINANCIAL INFORMATION AND RECONCILIATION TO PRE-FMV INCOME(1)
($000s, except per share amounts)
2020
2019
2018
For the year ended December 31,
INCOME STATEMENT HIGHLIGHTS
Revenue
Interest expense – securitized mortgages
Brokerage fees
Salaries, interest and other operating expenses
Add (deduct): realized and unrealized losses (gains)
on financial instruments
Deduct: unrealized losses regarding mortgage investments
Pre-FMV Income(1)
Add (deduct): realized and unrealized gains (losses)
on financial instruments excluding those on mortgage
investments
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
1,380,294
(708,162)
(159,018)
(254,385)
67,355
(3,076)
323,008
(64,279)
(68,500)
190,229
148,419
3.12
2.47
1,326,523
(739,071)
(102,596)
(243,143)
9,655
(4,300)
247,068
(5,355)
(64,500)
177,213
144,421
2.90
2.41
1,181,510
(646,069)
(75,354)
(232,670)
(3,162)
(4,000)
220,255
7,162
(60,990)
166,427
171,407
2.73
2.86
$39,488,527
$37,685,593
$36,037,127
Total long-term financial liabilities
$398,554
$374,025
$174,829
Notes:
(1) Pre-FMV Income is not a recognized earnings measure under IFRS and does not have a standardized meaning prescribed by IFRS. Therefore, Pre-FMV Income may not be
comparable to similar measures presented by other issuers. Investors are cautioned that Pre-FMV Income should not be construed as an alternative to net income or loss
determined in accordance with IFRS as an indicator of the Company’s performance or as an alternative to cash flows from operating, investing and financing activities as a
measure of liquidity and cash flows. The figures for 2019 and 2018 have been restated to conform to 2020’s presentation.
—
17
2020 Annual Report
VISION AND STRATEGY
GROWTH IN PORTFOLIO
OF MORTGAGES
UNDER ADMINISTRATION
The Company provides mortgage
Management considers the growth
Company’s uninsured products. Together,
financing solutions to the residential
in MUA to be a key element of the
overall new origination for 2020
and commercial mortgage markets
Company’s performance. The portfolio
increased 35% year over year.
in Canada. By offering a full range
grows in two ways: through mortgages
of mortgage products, with a focus
originated by the Company and through
on customer service and superior
third-party mortgage servicing contracts.
technology, the Company believes that it
Mortgage originations not only drive
Third-Party Mortgage Underwriting and
Fulfilment Processing Services
is the leading non-bank mortgage lender
revenues from placement and interest
In 2015, the Company launched its
in the industry. The Company intends
from securitized mortgages, but perhaps
third-party underwriting and fulfilment
to continue leveraging these strengths
more importantly, longer-term value from
processing services business with a
to lead the non-bank mortgage lending
servicing rights, renewals and the growth
large Canadian schedule I bank (“Bank”).
industry in Canada, while appropriately
of the customer base for marketing
The business is designed to adjudicate
managing risk. The Company’s strategy
initiatives. As at December 31, 2020, MUA
mortgages originated by the Bank
is built on four cornerstones: providing
totalled $118.7 billion, up from $111.4 billion
through the single-family residential
a full range of mortgage solutions for
at December 31, 2019, an increase of 7%.
mortgage broker channel. First National
Canadian single-family and commercial
The growth of MUA in the fourth quarter
employs a customized software solution
customers; growing assets under
of 2020 from September 30, 2020, on an
based on its industry-leading MERLIN™
administration; employing technology to
annualized basis, was 5%.
enhance service to mortgage brokers and
borrowers, lower costs and rationalize
business processes; and maintaining a
conservative risk profile. An important
element of the Company’s strategy is its
GROWTH IN ORIGINATION
OF MORTGAGES
technology to accept mortgage
applications from the Bank in the
mortgage broker channel and underwrite
these mortgages in accordance with the
Bank’s underwriting guidelines. The Bank
funds all the mortgages underwritten
direct relationship with the mortgage
Direct Origination by the Company
under the agreement and retains full
borrower. The Company is considered 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 relationship, the Company
can negotiate new transactions and
pursue marketing initiatives. Management
believes this strategy will provide long-
term profitability and sustainable brand
recognition for the Company.
KEY PERFORMANCE DRIVERS
The Company’s success is driven by the
following factors:
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.
Increased origination satisfies demand
from its institutional customers and
produces volume for the Company’s
own securitization programs. In 2020,
the Company’s single-family origination
increased across the country. The
Company believes this is the result
of its strong broker relationship and
technology, which have both been
significant benefits in the pandemic
period. All of the Company’s sales
• Growth in the portfolio of mortgages
offices experienced double-digit growth.
under administration;
• Growth in the origination of mortgages;
• Raising capital for operations; and
In aggregate, the Company’s single-
family origination grew by 42% in 2020
compared to 2019. The commercial
segment also had higher origination.
• Employing innovative securitization
Total volumes increased by 23% to $9.1
transactions to minimize funding costs.
billion in 2020 compared to $7.4 billion
in 2019, even though investor appetite
for non-residential mortgages was
lower than in the prior year, resulting
in contraction in origination of the
responsibility for mortgage servicing
and the client relationship. Management
considers the agreement a way to
leverage the capabilities and strengths
of First National in the mortgage broker
channel and add some diversity to the
Company’s service offerings. In late
2019, the Company entered into a similar
agreement with another Canadian bank.
Excalibur Mortgage Products
The Company originates alternative
single-family (“Excalibur”) mortgage
products. Alternative lending describes
single-family residential mortgages
that are originated using broader
underwriting criteria than those applied
in originating prime mortgages. These
mortgages generally have higher interest
rates than prime mortgages. First
National’s relationships with mortgage
brokers and its underwriting systems
allow for cost effective origination of
significant volumes. The product is
originated primarily for placement with
institutional investors, but beginning
in April 2019, the Company finalized
an agreement with a bank-sponsored
securitization conduit to fund a portion
—
18
First National Financial Corporation of the Excalibur origination. In early
the bank credit facility. In April 2020,
2020, an agreement was entered into
the Company drew on the bank credit
with another bank-sponsored conduit
facility to repay all of the 4.01% $175
to provide additional funding for this
million Series 1 notes when they matured.
product. The Excalibur relaunch was
Effectively in 2020, the new note
rolled out gradually, beginning in Ontario.
issuance has increased the Company’s
Currently the program is open to include
medium-term debt by $200 million,
all Ontario brokers. In the third quarter
such that it now stands at approximately
of 2020, the Company began testing the
$400 million.
product selectively in the BC region.
RAISING CAPITAL
FOR OPERATIONS
Bank Credit Facility
The Company has a revolving line of
credit with a syndicate of banks of $1.25
billion. This facility enables the Company
to fund the large amounts of mortgages
accumulated for securitization. In 2019,
the Company extended the term of
the facility by one year such that the
maturity is March 2024. The facility bears
interest at floating rates. The Company
has elected to undertake this debt for a
number of reasons: (1) the facility provides
the amount of debt required to fund
mortgages originated for securitization
purposes; (2) the debt is revolving and
can be used and repaid as the Company
requires, providing more flexibility than
senior unsecured notes, which are fully
drawn during their term; (3) the three-
year remaining term gives the Company
a committed facility for the medium term;
and (4) the cost of borrowing reflects the
Company’s BBB issuer rating.
Note Issuance
In November 2020, the Company
issued 200,000 2.961% Series 3 senior
unsecured notes for a five-year term
pursuant to a private placement under
an offering memorandum. These notes
add to the Company’s 2019 issuance
of 200,000 3.582% Series 2 senior
unsecured notes. The net proceeds of
both offerings, after broker commissions,
were loaned to FNFLP. On settlement,
the proceeds were used to pay down
a portion of the indebtedness under
Preferred Share Issuance
Effective April 1, 2016, the Company reset
the dividend rate on the 2,887,147 Class A
Series 1 preference shares issued in 2011
that did not elect to convert to Class A
Series 2 preference shares. The Series 1
shares provide an annual dividend rate
of 2.79%. Also, effective April 1, 2016,
1,112,853 Class A Series 2 were issued
on the conversion from Series 1 shares.
These bear a floating rate dividend
calculated quarterly based on the 90-day
T-Bill rate. Both the Series 1 and Series 2
shares pay quarterly dividends, subject
to Board of Directors approval, and
are redeemable at the discretion of the
Company such that after each five-year
term ending on March 31, the Company
can choose to extend the shares for
another five-year term at a fixed spread
(2.07%) over the relevant index (five-
year Government of Canada bond yield
for any Series 1 shares or the 90-day
T-Bill rate for any Series 2 shares). In
February 2021, the Company indicated
to shareholders that it would not be
redeeming the shares and would be
resetting the dividend rates for another
five-year term. While the investors in
these shares have an option on each
five-year anniversary to convert
their Series 1 preference shares into
Series 2 preference shares (and
vice versa), there is no provision of
redemption rights to these shareholders.
As such, the Company considers these
shares to represent a permanent source
of capital.
—
19
2020 Annual Report EMPLOYING SECURITIZATION
TRANSACTIONS TO MINIMIZE
FUNDING COSTS
Approval as Both an Issuer of
NHA-MBS and Seller to the Canada
Mortgage Bonds Program
Canada Mortgage Bonds Program
The Company has served as an issuer
as central banks cut overnight rates
The CMB program is an initiative where
and administrator of NHA-MBS since
significantly. Credit spreads widened and
Canada Housing Trust (“CHT”) issues
1995. In December 2007, the Company
the capital markets stopped functioning
securities to investors in the form of
was approved by Canada Mortgage and
normally. In the second quarter, as
semi-annual interest-yielding five- and
Housing Corporation (“CMHC”) as an
financial systems began to normalize
10-year bonds. As a seller into the CMB,
issuer of NHA-MBS and as a seller into
and markets began to recover, mortgage
the Company is able to make direct
the Canada Mortgage Bonds (“CMB”)
coupons remained elevated as other
sales into the program. The ability to sell
program. Issuer status provides the
credit spreads, including those on NHA-
into the CMB has given the Company
Company with direct and independent
MBS, narrowed. The resulting spreads on
access to lower costs of funds on
access to reliable and low-cost funding.
mortgages funded through NHA-MBS
both single-family and multi-family
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
2009–2016
2017–2018
2019
2020
Average five-year
mortgage spread
for the period
1.12%
1.50%
2.68%
1.77%
1.36%
1.42%
1.76%
had positive impacts on 2020 results
mortgage securitizations. Because of
and have increased the profitability of
the effectiveness of the CMB, many
the Company’s securitization portfolio
institutions have indicated their desire to
in future periods. In 2020, the Company
participate. As a result, CHT has created
originated and renewed for securitization
guidelines through CMHC that limit
purposes approximately $8.3 billion of
the amount that can be sold by each
single-family mortgages and $2.8 billion
seller into the CMB each quarter. The
of multi-unit residential mortgages. In
Company is subject to these limitations.
2020, the Company issued approximately
Pursuant to the COVID-19 crisis, CHT
$8.1 billion of NHA-MBS pools.
announced that the 2020 CMB program
The Company is subject to various
$40 billion to $60 billion. For 2021, the
regulations put in place by CMHC to
Minister of Finance has reduced the
control the amount of NHA-MBS that
authorized amount of new guarantees
a single issuer can create. These rules
for CMB back to $40 billion.
would be increased from a target of
include the amount of CMHC guarantees
that is a requirement to issue a pool.
Currently there is a tiered NHA-MBS
guarantee fee pricing structure, such
that any guarantees issued to one
issuer over $9.0 billion of issuance have
The table shows a history of spread
a higher price. The tiered limit of $9.0
information. Generally, when this
billion remains unchanged for 2021.
spread is wider, the Company can earn
Late in 2020, CMHC announced that
higher returns from its securitization
guarantee fees will be increased for
activities, although funding spreads are
NHA-MBS pools issued after January
also a variable in the profit equation.
1, 2021. The Company estimates the
Between 2009 and 2019, liquidity issues
increase will translate into a 0.05%
at financial institutions created by
increase in annual cost of funding
the financial crisis diminished and the
per year for its NHA-MBS program.
competition for mortgages increased
such that spreads tightened in the
10-year period as shown above, falling
to a low of 1.10% in the third quarter of
2018. Toward the end of the first quarter
of 2020, fears of a global pandemic
related to COVID-19 led to a dramatic
and sudden decrease in bond yields
—
20
First National Financial Corporation
KEY PERFORMANCE INDICATORS
The principal indicators used to measure
the fair value of financial instruments and adding back depreciation and amortization.
the Company’s performance are:
The addbacks of amortization ended in 2016 when IPO-related intangible assets were
• Earnings before income taxes
and losses and gains on financial
instruments, with the exception of any
losses related to mortgage investments
(“Pre-FMV Income”(1)); and
• Dividend payout ratio.
fully amortized. Accordingly, effective January 1, 2020, the Company elected to simplify
the non-IFRS measure it presents to adjust only for fair value-related gains and losses.
This measure will be reported as “Pre-FMV Income”. Measures prior to 2020 were
restated in accordance with this revised calculation. Pre-FMV Income is not recognized
under IFRS. However, management believes that Pre-FMV Income is a useful measure
that provides investors with an indication of income normalized for capital-market
fluctuations. Pre-FMV Income should not be construed as an alternative to net income
Beginning in 2012, the Company used
determined in accordance with IFRS or to cash flows from operating, investing and
Pre-FMV EBITDA as a key performance
financing activities. The Company’s method of calculating Pre-FMV Income may differ
measure. This non-IFRS measure was
from other issuers and, accordingly, Pre-FMV Income may not be comparable to
used to adjust the Company’s earnings
measures used by other issuers.
by excluding gains and losses related to
($000s)
FOR THE PERIOD
Revenue
Income before income taxes
Pre-FMV Income(1)
AT PERIOD END
Total assets
QUARTER ENDED
YEAR ENDED
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
387,303
94,273
94,937
342,138
66,593
60,418
1,380,294
1,326,523
258,729
323,008
241,713
247,068
39,488,527
37,685,593
39,488,527
37,685,593
Mortgages under administration
118,723,990
111,378,891
118,723,990
111,378,891
Note:
(1) This non-IFRS measure adjusts income before income taxes by eliminating the impact of changes in fair value by adding back losses on the valuation of financial instruments
(except those on mortgage investments) and deducting gains on the valuation of financial instruments. The 2019 comparative figures were revised to conform to the
2020 presentation.
Since going public in 2006, First
has been able to pay distributions to its
useful to shareholders, as it indicates
National has been considered a high-
shareholders that represent a relatively
the percentage of earnings paid out as
yielding, dividend-paying company.
large ratio of its earnings. The Company
dividends. Similar to the performance
With a large MUA that generates
calculates the dividend payout ratio
measurement for earnings, the
continuing income and cash flow and a
as dividends declared on common
Company also calculates the dividend
business model that is designed to make
shares over net income attributable to
payout ratio on a basis using after-tax
efficient use of capital, the Company
common shareholders. This measure is
Pre-FMV Income.
—
21
2020 Annual Report Determination of Common Share Dividend Payout Ratio
($000s)
FOR THE PERIOD
Net income attributable to
common shareholders
Total dividends paid or declared
on common shares
Dividends paid or declared
on common shares,
excluding special dividend
Total common share dividend
payout ratio
Regular common share
dividend payout ratio(1)
After-tax Pre-FMV dividend
payout ratio(2)
QUARTER ENDED
YEAR ENDED
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
68,465
48,230
187,383
174,156
60,717
58,968
148,419
144,421
30,733
28,984
118,435
114,437
89%
45%
45%
122%
60%
66%
79%
63%
50%
83%
66%
64%
Note:
(1) This ratio is calculated by excluding the payment of the special dividends declared at the end of each year.
(2) This non-IFRS measure adjusts the net income used in the calculation of the “Regular common share dividend payout ratio” to after tax Pre-FMV income so as to eliminate the
impact of changes in fair value by adding back losses on the valuation of financial instruments (except those on mortgage investments) 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, 2020,
yields change; however, the offsetting
calculations, the dividend payout ratio for
the common share payout ratio was
economic impact is generally reflected
2020 would have been 50% compared to
79% compared to 83% in 2019. However,
in narrower or wider spreads in the
64% in 2019.
in both 2020 and 2019, the Company
future once the mortgages have been
declared a special dividend and
pledged for securitization. Accordingly,
recorded gains and losses on account
management does not consider these
of the changes in fair value of financial
losses to affect its dividend payment
instruments. The gains and losses are
policy. If the special dividends and gains
recorded in the period in which the
and losses on financial instruments in the
prices on Government of Canada bond
two years are excluded from the above
The Company also paid $2.8 million of
dividends on its preferred shares in 2020
compared to $3.1 million in 2019.
—
22
First National Financial Corporation
REVENUES AND FUNDING
SOURCES
Mortgage Origination
Placement Fees and Gain on
Deferred Placement Fees
Mortgage Servicing and Administration
The Company derives a significant
The Company recognizes revenue at
The Company services virtually all
amount of its revenue from mortgage
the time that a mortgage is placed with
mortgages generated through its
origination activities. Most mortgages
an institutional investor. Cash amounts
mortgage origination activities on
originated are funded either by
received in excess of the mortgage
behalf of a wide range of institutional
placement with institutional investors or
principal at the time of placement are
investors. Mortgage servicing and
through securitization conduits, in each
recognized in revenue as “placement
administration is a key component of
case with retained servicing. In general,
fees”. The present value of additional
the Company’s overall business strategy
originations are allocated from one
amounts expected to be received over
and a significant source of continuing
funding source to another depending
the remaining life of the mortgage sold
income and cash flow. In addition to
on different criteria, including type of
(excluding normal market-based servicing
pure servicing revenues, fees related to
mortgage and securitization limits,
fees) is recorded as a “deferred placement
mortgage administration are earned by
with an overall consideration related to
fee”. A deferred placement fee arises
the Company throughout the mortgage
maintaining diversified funding sources.
The Company retains servicing rights on
when mortgages with spreads in excess
of a base spread are placed. Normally the
term. Another aspect of servicing is
the administration of funds held in
virtually all the mortgages it originates,
Company would earn an upfront cash
trust, including borrowers’ property tax
which provide the Company with
placement fee, but investors prefer paying
escrows, reserve escrows and mortgage
servicing fees to complement revenue
the Company over time, as they earn
payments. As acknowledged in the
earned through originations. For the
net interest margin on such transactions.
Company’s agreements, any interest
year ended December 31, 2020, new
Upon the recognition of a deferred
earned on these funds accrues to the
origination volume increased from $21.0
placement fee, the Company establishes
Company as partial compensation for
billion to $28.3 billion, or about 35%,
a “deferred placement fee receivable” that
administration services provided. The
compared to 2019.
is amortized as the fees are received by
Company has negotiated favourable
Securitization
the Company. Of the Company’s $36.9
interest rates on these funds with the
billion of new originations and renewals
chartered banks that maintain the
in 2020, $25.0 billion was placed with
deposit accounts, which has resulted in
The Company securitizes a portion of
institutional investors.
significant additional servicing revenue.
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 $36.9 billion of new
originations and renewals in 2020,
$11.0 billion was originated for its own
securitization programs.
For all institutional placements, the
In addition to the interest income earned
Company earns placement fees.
on securitized mortgages and deferred
Revenues based on these originations
placement fees receivable, the Company
are equal to either (1) the present
also earns interest income on mortgage-
value of the excess spread, or (2) an
related assets, including mortgages
origination fee based on the outstanding
accumulated for sale or securitization,
principal amount of the mortgage. This
mortgage and loan investments and
revenue is received in cash at the time
purchased mortgage servicing rights.
of placement. In addition, under certain
circumstances, additional revenue
from institutional placements may
be recognized as “gain on deferred
placement fees” as described above.
The Company provides underwriting and
fulfilment processing services to two
mortgage originators using the mortgage
broker distribution channel. The
Company earns a fee based on the dollar
value of funded mortgages. These fees
are recognized at the time a mortgage
funds and are included in “Mortgage
servicing income” in the consolidated
statement of income.
—
23
2020 Annual Report RESULTS OF OPERATIONS
The following table shows the volume of mortgages originated by First National and mortgages under administration for the
periods indicated:
($ millions)
MORTGAGE ORIGINATIONS
BY SEGMENT
New single-family residential
New multi-unit and commercial
Sub-total
Single-family residential renewals
Multi-unit and commercial renewals
QUARTER ENDED
YEAR ENDED
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
5,962
2,723
8,685
1,648
558
3,624
2,226
5,850
1,409
603
19,165
9,112
28,277
6,668
1,962
13,523
7,431
20,954
5,504
1,996
Total origination and renewals
$10,891
$7,862
$36,907
$28,454
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
4,618
1,211
2,182
2,547
333
2,140
201
1,994
3,185
342
13,067
3,929
8,023
11,036
852
8,223
3,204
7,153
8,887
987
Total
$10,891
$7,862
$36,907
$28,454
MORTGAGES UNDER ADMINISTRATION
Single-family residential
Multi-unit residential and commercial
Total
83,601
35,123
$118,724
80,709
30,670
$111,379
83,601
35,123
$118,724
80,709
30,670
$111,379
Total new mortgage origination volumes
efficiently during the pandemic. Lower
$37 billion in 2020. Origination for direct
increased in 2020 compared to 2019 by
mortgage rates have also encouraged
securitization into NHA-MBS, CMB and
35%. Single-family volumes increased
home purchasing across the country.
ABCP programs remained a large part
by 42% and commercial segment
In the commercial segment, the
of the Company’s strategy, with volume
volumes increased by 23% year over
Company’s expertise in underwriting
of $11.0 billion in 2020.
year. Management believes the increase
multi-unit mortgages was fundamental
in the single-family segment is due to its
to growth, and origination volumes
strong broker and investor relationships
and its MERLIN™ technology and
grew by 23%. When combined with
renewals, total production for both
operating systems, which support
business segments increased by 30%
physical distancing and have allowed
from $28.5 billion in 2019 to almost
the Company to continue to underwrite
—
24
First National Financial Corporation Net Interest – Securitized Mortgages
Placement Fees
Mortgage Servicing Income
Comparing the year ended December
Placement fee revenue increased by 62%
Mortgage servicing income increased
31, 2020, to the year ended December
to $333.7 million from $205.5 million in
12% to $175.0 million from $156.7 million.
31, 2019, “net interest – securitized
the comparative year. The increase was
This increase was largely attributable to
mortgages” decreased by about 7%
the result of 59% year-over-year growth
the Company’s third-party underwriting
to $129.4 million from $138.6 million.
in residential mortgage volume with
business unit. Much like the Company’s
The decrease was largely due to the
institutional investors. This growth was
experience in single-family origination,
consequences of the market disruption
augmented by higher per unit placement
mortgage brokers referring mortgages
that accompanied the COVID-19
fees, which resulted from the aftermath
to First National’s third-party customers
pandemic. In March 2020, the Bank
of the pandemic-related financial turmoil.
have embraced the MERLIN™ technology.
of Canada cut overnight interest rates
As mortgage spreads widened beginning
The Company believes the technology
by 1.5%. The ensuing financial turmoil
in the second quarter of 2020, the value
has been advantageous during the
affected securitization margins in
of mortgages retained on the Company’s
pandemic-related lockdown period and
the first and second quarters. By
balance sheet increased as other credit
led to increased origination volumes.
the third quarter, financial market
spreads began to normalize. When the
conditions had normalized. Even so,
Company subsequently placed such
net interest was negatively impacted
origination, this value came through
by the significant impact from the
in the form of higher placement fees.
cost of indemnities payable to MBS
Similar economics were evident in the
debtholders when mortgages prepaid
commercial segment, where both volume
prior to the scheduled maturity date.
and wider mortgage spreads led to
The indemnities are calculated to make
increased placement fees.
Mortgage Investment Income
Mortgage investment income decreased
19% to $69.0 million from $84.7 million.
The decrease was due primarily to the
interest rate environment, as short-term
rates fell significantly in March as the
Bank of Canada cut its overnight rate
by 1.5%. This started a steady reduction
in the Company’s offered mortgage
whole the debtholders who are assumed
to reinvest the prepayment principal at
risk-free reinvestment rates. With the
recent decrease in interest rates, the
cost of such indemnities has increased
significantly. The Company calculates
Gains on Deferred Placement Fees
Gains on deferred placement fees
rates. The result was lower amounts of
revenue increased 179% to $32.4
interest earned while mortgages are
million from $11.6 million. The gains
accumulated for securitization and sale
that because of the increase in indemnity
related to multi-unit residential
on the balance sheet.
costs, net securitization spread is lower
by about $18.4 million. The Company’s
prime ABCP programs suffered in the
first two quarters of 2020 as the cost of
funds reacted negatively to the financial
turmoil produced by the pandemic
such that profitability was decreased.
The Excalibur securitization program
had favourable results as the Company
increased this portfolio and credit loss
ratios were lower than expected.
mortgages originated and sold to
institutional investors. Volumes for
these transactions increased by 40%
from 2019, and mortgage spreads on
commercial segment mortgages widened
significantly year over year.
—
25
2020 Annual Report Realized and Unrealized Gains (Losses)
on Financial Instruments
This financial statement line item
multi-residential commitments and mortgages it originates for its own securitization
typically consists of three primary
programs. It has also done the same for the funded single-family mortgages and the
components: (1) gains and losses related
swaps used in its ABCP programs. This decision has reduced the volatility of gains and
to the Company’s economic hedging
losses on financial instruments otherwise recorded in the Company’s regular earnings,
activities of single-family commitments,
as gains and losses on hedged items are generally deferred and amortized into
(2) gains and losses related to holding
income over the term of the related mortgages. The Company has not documented a
a portfolio of mortgage and loan
hedging relationship for its interest mitigation program used to economically hedge
investments at fair value, and (3) gains
commitments on single-family mortgages. The Company believes, given the optional
and losses on interest rate swaps used
nature of these commitments, it is difficult to establish a valid hedging relationship.
to mitigate interest rate risk associated
For financial reporting purposes, this means that there will still be gains and losses on
with its CMB activity. With the adoption
financial instruments, but these should be limited to those on the bonds sold short used
of IFRS 9 in 2018, a significant portion of
to mitigate such risk. The Company has recorded mortgage and loan investments at fair
the Company’s interest rate management
value on its balance sheet. Accordingly, there are fair value gains or losses associated
program qualifies as hedging for
with these mortgages. The following table summarizes these gains and losses by
accounting purposes. The Company
category in the periods indicated:
has elected to document hedging
relationships for virtually all of the
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
Net gains (losses) on financial instruments
QUARTER ENDED
YEAR ENDED
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
114
924
(778)
260
5,931
(700)
244
5,475
(75,689)
(8,269)
(3,076)
11,410
(67,355)
(4,300)
2,914
(9,655)
In the first quarter of 2020, financial
a significant impact on the Company’s
to decline, but at a slower pace. For the
repercussions related to COVID-19 were
short bond positions and the Company
year, losses on account of short bonds
very severe. With rapid unemployment
recorded $66.4 million of losses in the
totalled $75.7 million. In the fourth
and liquidity fears, the Bank of Canada
first quarter of 2020 on the bonds the
quarter, interest rates were less volatile
reduced its overnight lending rate by
Company used to mitigate interest rate
and the impact on financial instruments
1.50%, and bond yields quickly fell as
risk on single-family commitments. As
was much less significant.
the fears of a global pandemic and
the financial markets normalized after
recession increased. The lower yields had
the first quarter, bond yields continued
—
26
First National Financial Corporation Brokerage Fees Expense
Interest Expense
Income before Income Taxes
and Pre-FMV EBITDA
Brokerage fees expense increased 55%
Interest expense decreased 32% to $53.2
Income before income taxes increased by
to $159.0 million from $102.6 million.
million from $77.7 million. As discussed
This increase is explained by higher
in the “Liquidity and Capital Resources”
origination volumes of single-family
section of this analysis, the Company
mortgages for institutional investors,
warehouses a portion of the mortgages
which increased by 59% year over
it originates prior to settlement with the
year. Unit broker fees were generally
investor or funding with a securitization
consistent between 2020 and 2019;
vehicle. The Company used senior
however, commercial segment fees and
unsecured notes together with a $1.25
portfolio insurance costs did not grow at
billion credit facility with a syndicate of
7% to $258.7 million from $241.7 million
in 2019. This increase was partially the
result of changing capital markets. As
described previously in this MD&A, the
Company’s results generally include
gains or losses on account of financial
instruments used to economically hedge
residential mortgage commitments. In
2020, the Company recorded $64.3
the same rate as single-family origination.
banks and 30-day repurchase facilities to
million of losses on financial instruments
These factors moderated the growth of
fund the mortgages during this period.
the overall brokerage fee expenses.
The overall interest expense decreased
(excluding $3.1 million of losses related
to mortgage and loan investments).
Salaries and Benefits Expense
from the prior year due to the significant
Comparatively, in 2019, the Company
decrease in short-term lending rates
recorded $5.4 million of gains on financial
pursuant to the Bank of Canada’s 1.5%
instruments (excluding the impact of
Salaries and benefits expense increased
rate cut in March 2020.
22% to $143.5 million from $117.6 million.
Salaries were higher as overall headcount
increased by 18% (1,028 employees
Other Operating Expenses
as at December 31, 2019, and 1,211 at
Other operating expenses increased by
December 31, 2020). The increase was
20% to $57.6 million from $47.9 million.
also the result of $13.7 million of higher
The primary change in other operating
compensation earned by commercial
expenses was higher hedging costs,
sales staff and for increased bonus
which increased $8.1 million between the
provisions pursuant to increased
years. The expense increased as 30-day
origination levels and Company profits
interest rates moved down significantly
earned in 2020. Management salaries
relative to five- and 10-year bond yields,
were paid to the two senior executives
making it more expensive to borrow the
(co-founders) who together control
short bonds that the Company uses to
$4.3 million of losses related to mortgage
and loan investments). The change in
these values, excluding the losses on
mortgage investments, accounted for a
$58.9 million decrease in comparative
income before income taxes. Pre-FMV
Income, which eliminates the impact
of such gains and losses on financial
instruments, increased by 29% to $323.0
million from $251.3 million. This growth
was largely the result of increased
origination and higher per unit placement
fee revenue, such that placement fee
revenues net of brokerage fees increased
about 71% of the Company’s common
hedge interest rate exposure. Without
by $71.8 million.
shares. The current period expense is a
these costs, other operating expenses
result of the compensation arrangement
increased by $1.6 million, reflecting costs
executed on the closing of the initial
to support the growth of the business
public offering (“IPO”) in 2006.
and MUA, particularly information
technology costs. Discretionary
costs, including promotion, travel and
entertainment, were lower as a result of
the pandemic.
—
27
2020 Annual Report Income Tax Expense
The provision for taxes increased by 6%
to $68.5 million from $64.5 million. The
provision increased proportionately with
net income before income taxes. The
overall effective tax rate was slightly
lower in 2020, as one of the provinces
where the Company operates reduced its
corporate tax rate during the year.
Other Comprehensive Income
For the commercial segment, the
Company hedges the interest rate
risk associated with insured multi-
residential mortgages. This hedging
begins on commitment and ends when
the Company either securitizes the
mortgages or places the mortgage with
an institutional investor. As the Company
determined that these cash flow hedges
were effective, the Company recorded
$73.1 million of pre-tax net losses on
such hedges in OCI in 2020. These losses
would have been recorded as losses on
financial instruments under the previous
IFRS standard. In the year, the Company
amortized a portion of these losses
and a portion of opening accumulated
OCI into regular earnings. In 2020, this
amortization totalled $32.5 million. The
remaining OCI amount will be amortized
into net income in future periods.
—
28
First National Financial Corporation OPERATING SEGMENT REVIEW
The Company aggregates its business from two segments for financial reporting purposes: (i) Residential (which includes single-family
residential mortgages), and (ii) Commercial (which includes multi-unit residential and commercial mortgages), as summarized below:
OPERATING BUSINESS SEGMENTS
FOR THE YEAR ENDED
RESIDENTIAL
COMMERCIAL
($000s, except percent amounts)
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
Originations and renewals
25,833,197
19,026,919
11,075,085
9,427,357
Percentage change
Revenue
Percentage change
Income before income taxes
Percentage change
AS AT
Identifiable assets
Mortgages under administration
36%
975,979
(3%)
141,085
(18%)
1,008,013
171,423
17%
404,315
27%
117,644
67%
318,510
70,290
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
28,945,884
83,600,868
28,535,288
80,709,370
10,512,867
35,123,122
9,120,529
30,669,521
RESIDENTIAL SEGMENT
COMMERCIAL SEGMENT
LIQUIDITY AND CAPITAL
RESOURCES
Overall residential origination volumes
2020 commercial revenues increased
The Company’s fundamental liquidity
including renewals increased by 36%
by about 27% compared to 2019. This
strategy has been to invest in prime
between 2020 and 2019, while residential
increase was the result of higher spread
Canadian mortgages. Management’s
revenues decreased by 3%. Growth in
origination, which drove a 77% increase
belief has always been that these
origination did not translate into growth
in placement fees. Interest revenue on
mortgages are considered “AAA” by
in revenue, due to the reduction in
the securitized mortgage portfolio grew
investors and should always be well
short-term interest rates that followed
by 13% year over year. Income before
bid and highly liquid. This strategy
the Bank of Canada’s overnight rate cut
income taxes for this segment was not
proved effective during the turmoil
of 1.5%. This negatively affected interest
affected by fair-value considerations.
experienced in 2007 through 2009,
revenue – securitized mortgages, as
This measure increased by 67% year over
and once again in the COVID-19 crisis,
well as mortgage investment income.
year. The increase is due to the higher
when capital markets were disrupted
Net income before tax was affected by
placement fee revenues offset partially
and the demand for high-quality assets
fair value-related revenues. Without the
by higher compensation payable to
increased. As the Company’s results
impact of these revenues, net income
the Company’s commercial origination
in those years demonstrated, First
before tax increased to $205.4 million
employees. Identifiable assets increased
National was able to attract investors
in 2020 from $176.8 million in 2019,
from those at December 31, 2019, as the
to purchase its mortgage origination at
or by 16%. This growth was largely
Company increased its investment in
profitable margins. Originating prime
the result of income from placement
mortgages pledged for securitization
mortgages also allows the Company
fees offset by lower securitization net
by $1.4 billion.
interest margin as described earlier in
this MD&A. Identifiable assets increased
from December 31, 2019, as the Company
increased its investment in mortgages
pledged for securitization by about
$700 million. This growth was offset
by lower hedging-related assets.
to securitize in the capital markets;
however, this activity requires significant
cash resources to purchase and hold
mortgages prior to arranging for term
debt through the securitization markets.
For this purpose, the Company uses the
combination of unsecured notes and
the Company’s revolving bank credit
facility. This aggregate indebtedness is
typically used to fund: (1) mortgages
accumulated for sale or securitization,
—
29
2020 Annual Report (2) the origination costs associated
the nature of the assets which the debt
Management believes that, at its peak,
with securitization, and (3) mortgage
is funding.
and loan investments. The Company
has a credit facility with a syndicate of
financial institutions for total credit of
$1.25 billion. This facility was extended in
May 2019 for a five-year term maturing
in May 2024. At December 31, 2020, the
Company had entered into repurchase
transactions with financial institutions
to borrow $1.4 billion related to $1.4
billion of mortgages held in “mortgages
accumulated for sale or securitization”
on the balance sheet.
Since being approved as an issuer of
NHA-MBS, the Company has funded
the difference between the mortgages
it uses to create NHA-MBS and the debt
obligations it assumes upon issuance.
In recent years, this requirement has
generally been limited to mortgages in
arrears where First National does not
receive payments from the borrower
but is obliged to pay the interest and
amortizing principal on the NHA-MBS
debt. However, due to the rapid rise in
At December 31, 2020, outstanding
national unemployment pursuant to
bank indebtedness was $682.8 million
the COVID-19 pandemic, this funding
(December 31, 2019 – $797.8 million).
requirement has increased as borrowers
Together with the unsecured notes of
requested mortgage payment deferrals.
$399 million (December 31, 2019 – $375
In such situations, the Company
million), this “combined debt” was used
determined to grant mortgage payment
to fund $805.7 million (December 31,
deferrals. Qualifying borrowers received
the Company granted deferrals to
as many as 14% of its single-family
borrowers. There have been no
significant deferral requests granted to
the multi-family segment of borrowers.
The Company has significant credit
lines and prime mortgage assets that
continue to be liquid in turbulent
economic times. Such facilities will
provide the cash needed to fund this
investment in ”timely payments”. For
non-securitized MUA, the Company’s
institutional investors will be required
to fund any deferred payments which
First National grants to borrowers in
that investor’s portfolio. The Company’s
current deferral program ended on
September 30, 2020. At December 31,
2020, there were virtually no mortgages
on deferral.
2019 – $817.5 million) of mortgages
three months of payment deferral.
The Company funds a portion of its
accumulated for sale or securitization.
In cases of extended hardship, the
mortgage originations for institutional
At December 31, 2020, the Company’s
Company provided a second three-
placement on the same day as the
other interest-yielding assets included:
month deferral after the initial deferral
advance of the related mortgage. The
(1) deferred placement fees receivable
period ended. During this deferral
remaining originations are funded by
of $62.5 million (December 31, 2019 –
period, a portion of such mortgages
the Company on behalf of institutional
$42.0 million) and (2) mortgage and
ceased to amortize and interest
investors or pending securitization by
loan investments of $213.3 million
otherwise payable was capitalized to
the Company. On specified days, the
(December 31, 2019 – $370.4 million).
the principal of the mortgage. The three
Company aggregates all mortgages
The difference between “combined
mortgage default insurers approved
warehoused to date for an institutional
debt” and the mortgages accumulated
these steps, permitting the deferrals
investor and transacts a settlement
for sale or securitization funded by it,
to occur without any impact on
with that institutional investor. A similar
which the Company considers a proxy
subsequent claims under the mortgage
process occurs prior to arranging
for true leverage, decreased between
insurance policies. In turn, First National
for funding through securitization.
December 31, 2019, and December 31,
has been required to make “timely
The Company uses a portion of
2020, and now stands at $275.8 million
payments” on the NHA-MBS securities.
the committed credit facility with
(December 31, 2019 – $353.3 million).
This means that despite not receiving
the banking syndicate to fund the
This represents a debt-to-equity ratio of
payments from borrowers on the
mortgages during this warehouse
approximately 0.48:1. This ratio is lower
mortgages that support the NHA-MBS,
period. The credit facility is designed to
than the ratio of 0.63:1 at December 31,
the Company has been required to pay
be able to fund the highest balance of
2019. In general, the decrease was the
the interest and amortizing principal
warehoused mortgages in a month and
result of repayments of $157 million
on the debt. In effect, the Company
is normally only partially drawn.
of mortgage and loan investments,
de-leveraged its balance sheet by
primarily related to the Company’s
paying off the debt while the related
commercial bridge loan portfolio.
mortgages did not as amortize as
These proceeds were used to pay down
quickly. At December 31, 2020, the
the Company’s debts. Despite some
Company estimates that it had reduced
significant losses on account of financial
its NHA-MBS debt by approximately
instruments incurred in the year, the
$64 million because of the impact
Company was able to increase earnings
of deferred payments. This has been
to offset such losses. The Company
believes the ratio is appropriate given
funded by the Company’s available
cash resources.
The Company also invests in short-term
mortgages, usually for six- to 18-month
terms, to bridge existing borrowers in
the interim period before long-term
financing. 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.
—
30
First National Financial Corporation FINANCIAL INSTRUMENTS
AND RISK MANAGEMENT
The syndicate has also provided
Commencing January 1, 2018, the
family programs. For multi-unit
credit to finance a portion of the
Company has recorded mortgages
residential and commercial mortgages,
Company’s deferred placement fees
accumulated for sale and mortgage
the Company assumes all mortgages
receivable and the origination costs
and loan investments as financial assets
committed will fund, and hedges each
associated with securitization, as
measured at “fair value through profit
mortgage individually. This includes
well as other miscellaneous longer-term
or loss” such that changes in market
mortgages committed for the CMB
financing needs.
value are recorded in the consolidated
program as well as mortgages to be sold
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 December 31, 2020, the investment
in cash collateral was $88.2 million
(December 31, 2019 – $83.6 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 quarterly basis on the outstanding
preference shares. For purposes of
the enhanced dividend tax credit
rules contained in the Income Tax
Act (Canada) and any corresponding
provincial and territorial tax legislation,
all dividends (and deemed dividends)
paid by the Company to Canadian
residents on both common and
preference shares after June 30, 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.
statement of income. The mortgages
to the Company’s other securitization
accumulated for sale are held for very
vehicles. As at December 31, 2020,
short periods, and any change in value
the Company had entered into $0.6
due to changing interest rates is the
billion of notional value forward bond
obligation of the ultimate institutional
sales for this segment. The Company is
investor. Accordingly, the Company
also a party to four interest rate swaps
believes there will be little, if any, effect
that economically hedge the interest
on its income related to the change
rate exposure related to certain CMB
in fair value of these mortgages. The
transactions in which the Company
majority of mortgages in mortgage
has replacement obligations. As at
and loan investments are uninsured
December 31, 2020, the aggregate
commercial segment bridge loans.
notional value of these swaps, maturing
These are primarily floating rate loans
between June 2021 and September
that have mortgage terms of 18 months
2026, was $99.0 million. During the
or less. As the mortgages do not
2020 year, the value of these swaps
conform to conventional mortgage
increased by $11.4 million.
lending, there are few active quoted
markets available to determine the fair
value of these assets. The Company
estimates fair value based upon:
benchmark interest rates, credit spreads
for similar products, creditworthiness
and status of the borrower, valuation of
the underlying real property, payment
history, and other conditions specific
to the rationale for the loan. Any
favourable or unfavourable amounts will
be recorded in the statement of income
each quarter.
As described above, the Company
employs various strategies to reduce
interest rate risk. In the normal course
of business, the Company also takes on
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 ultimate date of placement
or securitization. If credit spreads
widen during this holding period, this
is unfavourable for the Company. It
means that the Company cannot fund
The Company believes its hedging
the mortgages originated with a funding
policies are suitably designed such
source as effectively as originally
that the interest rate risk of holding
intended. Despite entering into effective
mortgages prior to securitization
interest rate hedges, the Company’s
is mitigated. Prior to 2018, the
exposure to credit spreads will remain.
Company did not attempt to adopt
This risk is inherent in the Company’s
hedge accounting; however, with the
business model and the Company
introduction of IFRS 9 on January 1,
believes it cannot be economically
2018, the Company began designating
hedged. As at December 31, 2020, the
hedging relationships such that the
results of any effective hedging will
Company had various exposures to
changing credit spreads. In particular,
not affect the Company’s statement of
in mortgages accumulated for sale or
income. See previous discussion in this
securitization, there were approximately
MD&A under “Realized and Unrealized
$2.2 billion of mortgages that were
Gains (Losses) on Financial Instruments”.
susceptible to some degree of changing
As at December 31, 2020, the Company
credit spreads.
had over $1.1 billion of notional forward
bond positions related to its single-
—
31
2020 Annual Report “
A significant
portion of
First National’s
business model
consists of the
origination and
placement or
securitization
of financial
assets.”
CAPITAL EXPENDITURES
A significant portion of First National’s business model
consists of the origination and placement or securitization of
financial assets. Generally, placement activities do not require
much capital investment, because of the Company’s business
model. 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. The business requires capital expenditures on technology
(both software and hardware), leasehold improvements, and
office furniture. During the year ended December 31, 2020, the
Company purchased new computer equipment and software
and made leasehold improvements. In the long term, the
Company expects capital expenditures on fixed assets will be
approximately $6.0 million annually, but will likely be higher in
2021 as the Toronto office moves its premises and invests in new
leasehold improvements.
SUMMARY OF CONTRACTUAL OBLIGATIONS
The Company’s long-term obligations include five- to
10-year leases of premises for its offices across Canada,
and its obligations for the ongoing servicing of mortgages
sold to securitization conduits and mortgages related to
purchased servicing rights. The Company sells its mortgages
to securitization conduits on a fully serviced basis and is
responsible for the collection of the principal and interest
payments on behalf of the conduits, including the management
and collection of mortgages in arrears.
PAYMENTS DUE BY PERIOD
($000s)
0–1
1–3
4–5
Total
years
years
years
After
5 years
Lease obligations
46,926
7,931 20,152 18,152
691
—
32
First National Financial Corporation CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
The Company prepares its financial
fixed-rate mortgages. Currently there are
investments. These are generally
statements in accordance with IFRS,
no deferred placement fees related to
non-homogeneous mortgages and
which requires management to make
single-family mortgages.
estimates, judgements and assumptions
that management believes are
reasonable based upon the information
available. These estimates, judgements
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 experience 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, 2020. The policies
that First National believes are the most
critical to aid in fully understanding
and evaluating its reported financial
results include the determination of the
gains on deferred placement fees and
the impact of fair value accounting on
financial instruments.
The Company uses estimates in
valuing its gain or loss on the sale of
its mortgages placed with institutions
earning a deferred placement fee.
Under IFRS, valuing a gain on deferred
placement fees requires the use of
estimates to determine the fair value of
the retained interest (derived from the
present value of expected future cash
flows) in the mortgages. These retained
interests are reflected on the Company’s
balance sheet as deferred placement
fees receivable. The key assumptions
used in the valuation of gains on
deferred placement fees are prepayment
rates and the discount rate used to
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 assumes there is virtually no
prepayment on multi-unit residential
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
other loans where it is difficult to find
independent valuation comparatives.
The Company uses information in its
underwriting files, regional real estate
information and other internal
measures to determine the fair value
of these assets.
used reflect the expected performance
As a mortgage lender, the Company
of the mortgage portfolio over the
invests in uninsured mortgages. When
lives of the mortgages. The method of
it funds these mortgages through
determining the assumptions underlying
securitization debt, it continues to
the estimates used for the year ended
be liable for any credit losses. The
December 31, 2020, continue to be
key inputs in the measurement of
consistent with those used for the year
any expected credit loss (“ECL”)
ended December 31, 2019, and the
include probability of default, loss
quarters ended September 30, June 30
given default and forecast of future
and March 31, 2020.
Effective January 1, 2018, the
Company elected to treat certain
of its financial assets and liabilities,
including mortgages accumulated for
sale, 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. A portion of the bonds sold
short are designated as an effective
hedge, and accordingly, a portion
of the change in the short bonds’
fair value may be recorded in Other
Comprehensive Income or deferred
against hedge assets. This accounting
should reduce the volatility in current
earnings as changes in the value on
short bonds should be better matched
to the change in value of the hedged
items (mortgages). The Company’s
assets and liabilities are such that the
Company must use valuation techniques
based on assumptions that are not
fully supported by observable market
prices or rates in most cases. Much like
the valuation of deferred placement
fees receivable described above, the
Company’s method of determining the
fair value of the assets listed above are
subject to Company estimates. The
most significant would be implicit in
the valuation of mortgage and loan
economic conditions, which involves
significant judgement. Upon application
of IFRS 9 with respect to impairment,
there has been no impact on the
Company’s earnings. Because of the
high proportion of government-insured
mortgages in its securitized portfolio
and the low historical loss rates on
the uninsured mortgages on which
the Company lends, ECL has been
determined to be $0.7 million for 2020.
Disclosure Controls and Internal
Controls over Financial Reporting
The Company’s disclosure controls
and procedures are designed to
provide reasonable assurance that
information required to be disclosed
by the Company in reports filed under
Canadian securities laws is recorded,
processed, summarized and reported
within the time periods specified
under those laws, and include controls
and procedures that are 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, 2020, management
evaluated, under the supervision of
and with the participation of the Chief
Executive Officer and Chief Financial
Officer, the effectiveness of the
—
33
2020 Annual Report RISKS AND UNCERTAINTIES
AFFECTING THE BUSINESS
Company’s disclosure controls and
The business, financial condition and
with such legislation. Among the risks
procedures. Based on this evaluation,
results of operations of the Company
of all potential tax matters, there is a
management concluded that the
are subject to a number of risks and
risk that tax legislation changes are
Company’s disclosure controls and
uncertainties and are affected by a
detrimental to the Company or that
procedures, as defined by National
number of factors outside the control of
Canadian tax authorities interpret tax
Instrument 52-109, Certification of
management of the Company. In addition
legislation differently than the Company’s
Disclosure in Issuers’ Annual and
to the risks addressed elsewhere in this
filing positions. Risk and risk exposure
Interim Filings, were effective as of
discussion and the financial statements,
are managed through a combination of
December 31, 2020.
these risks include: ability to sustain
insurance, a system of internal controls
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 preparation
of financial statements for external
purposes in accordance with reporting
standards; however, because of its
inherent limitations, internal control over
financial reporting may not prevent or
detect misstatements on a timely basis.
Management evaluated, under the
supervision of and with the participation
of the Chief Executive Officer and Chief
Financial Officer, the effectiveness of
the Company’s internal control over
financial reporting based on the criteria
set forth in Internal Control – Integrated
Framework (2013) issued by the
Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”),
and, based on that evaluation,
concluded that the Company’s internal
control over financial reporting was
effective as of December 31, 2020, and
that no material weaknesses have been
identified in the Company’s internal
control over financial reporting as of
December 31, 2020. No changes were
made in the Company’s internal controls
over financial reporting during the year
ended December 31, 2020, that have
materially affected, or are reasonably
likely to materially affect, the Company’s
internal controls over financial reporting.
—
34
performance and growth, reliance on
and sound operating practices. The
sources of funding, concentration of
Company’s key business model is to
institutional investors including third-
originate primarily prime mortgages and
party servicing customers, reliance on
find funding through various channels to
independent mortgage brokers, changes
earn ongoing servicing or spread income.
in interest rates, repurchase obligations
For the single-family residential segment,
and breach of representations and
the Company relies on independent
warranties on mortgage sales, risk of
mortgage brokers for origination and
servicer termination including the impact
several large institutional investors for
of trigger events on cash collateral and
sources of funding. These relationships
retained interests, reliance on multi-unit
are critical to the Company’s success.
residential and commercial mortgages,
In October 2019, the sale transaction
general economic conditions, legislation
involving an institution for which the
and government regulation (including
Company administers a large portfolio
regulations imposed by the Department
of third-party originated mortgages
of Finance and CMHC and the policies set
was completed. The new owners of the
by and for mortgage default insurance
institution may decide not to renew the
companies), potential for losses on
existing contract with First National or
uninsured mortgages, competition,
to exercise termination clauses within
reliance on mortgage insurers, reliance
the agreement. In the event of non-
on key personnel and the ability to
renewal or termination, the Company’s
attract and retain employees and
MUA will decrease. For a more complete
executives, conduct and compensation
discussion of the risks affecting the
of independent mortgage brokers,
Company, reference should be made to
failure or unavailability of computer and
the Company’s Annual Information Form.
data processing systems and software,
insufficient insurance coverage, change
in or loss of ratings, impact of natural
disasters and other events, unfavourable
litigation, 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, dividends that 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 commodity tax laws and pays such
taxes as it determines are compliant
It became clear to the Company in mid-
March 2020 that COVID-19 was highly
contagious and the Company executed
its business continuity plan. In this case,
the plan called for a “working from home”
contingency. Within the first month,
most of the Company’s staff across the
country transitioned to working from
home. The COVID-19 crisis has been
the cause of significant unemployment
across the country and widespread
economic hardship. During the duration
of this crisis, the probability of the risks
listed above having a negative impact
on the Company has increased. Related
losses could be material.
First National Financial Corporation FORWARD-LOOKING
INFORMATION
OUTLOOK
Forward-looking information is included
currently expects. These factors
2020 results exceeded management’s
in this MD&A. In some cases, forward-
include reliance on sources of funding,
expectations. Single-family origination
looking information can be identified by
concentration of institutional investors,
increased by 42% from the comparative
the use of terms such as “may”, “will”,
reliance on independent mortgage
volume in 2019, and commercial
‘“should”, “expect”, “plan”, “anticipate”,
brokers, and changes in interest rates as
segment origination increased by
“believe”, “intend”, “estimate”, “predict”,
outlined in the “Risk and Uncertainties
23% despite the pandemic-related
“potential”, “continue” or other similar
Affecting the Business” section. In
slowdown in demand for uninsured
expressions concerning matters that
evaluating this information, the reader
commercial product. With COVID-19-
are not historical facts. Forward-looking
should specifically consider various
related uncertainties still widespread,
information may relate to management’s
factors, including the risks outlined in
it is difficult to look too far ahead.
future outlook and anticipated events or
the “Risk and Uncertainties Affecting the
However, with the results of the last
results, and may include statements or
Business” section, that may cause actual
three quarters of 2020 and a window on
information regarding the future financial
events or results to differ materially from
the first quarter of 2021, management
position, business strategy and strategic
any forward-looking information. The
is very positive about the 2021 fiscal
goals, product development activities,
forward-looking information contained in
year. The expectation for the next
projected costs and capital expenditures,
this discussion represents management’s
year includes: residential origination
financial results, risk management
expectations as of March 2, 2021, and
comparable to 2020, commercial
strategies, hedging activities, geographic
is subject to change after such date.
segment success in growing origination,
expansion, licensing plans, taxes and
However, management and the Company
and continued employee productivity
other plans and objectives of or involving
disclaim any intention or obligation to
from the Company’s work-from-home
the Company. Particularly, information
update or revise any forward-looking
strategy. During 2020, the value
regarding growth objectives, any increase
information, whether as a result of new
of First National’s business model
in mortgages under administration,
future use of securitization vehicles,
information, future events or otherwise,
was demonstrated. By designing
except as required under applicable
systems that do not rely on face-
industry trends and future revenues is
securities regulations.
forward-looking information. Forward-
looking information is based on certain
factors and assumptions regarding,
among other things, interest rate
changes and responses to such changes,
the demand for institutionally placed
and securitized mortgages, the status
of the applicable regulatory regime,
and the use of mortgage brokers for
single-family residential mortgages.
This forward-looking information should
not be read as providing guarantees of
future performance or results, and will
not necessarily be an accurate indication
of whether or not, or the times by
which, those results will be achieved.
While management considers these
assumptions to be reasonable based on
information currently available to it, they
may prove to be incorrect. Forward-
looking information is subject to certain
factors, including risks and uncertainties,
which could cause actual results to
differ materially from what management
to-face interactions, the Company’s
business practices resonated with
mortgage brokers and borrowers
alike during the pandemic period.
The commercial segment benefited
from reduced competition, and First
National increased its market share
while earning wider spreads. With
the expected distribution of vaccines
across the nation, the economic effects
of COVID-19 will hopefully diminish.
However, the return to normalcy
is certainly some months away.
Management believes it will continue
to have an advantage over traditional
bank origination channels, which have
been faced with disruption during the
pandemic. First National expects that
goodwill with its broker partners and
customers created during the past nine
months will persist through 2021. On
the funding side, there continues to
be strong demand from institutional
investors as a result of the substantial
amount of liquidity in the financial
system. Securitization markets have
normalized after a period of disruption
at the beginning of the crisis.
While it is not early in the crisis, there
is still significant uncertainty about its
—
35
2020 Annual Report duration and the extent of repercussions. The outbreak of
COVID-19 has resulted in governments worldwide enacting
emergency measures to combat the spread of the virus.
These measures, which include the implementation of
travel bans, self-imposed quarantine periods and physical
distancing, have caused material disruption to businesses
globally, resulting in an economic recession. Global equity
markets have experienced significant volatility. Governments
and central banks have reacted with significant monetary
and fiscal interventions designed to stabilize economic
conditions. The duration and impact of the COVID-19
outbreak is unknown at this time, as is the long-term efficacy
of the government and central bank interventions. It is not
possible to reliably estimate the length and severity of these
developments and the impact on the financial results and
condition of the Company and its operating subsidiaries in
future periods.
When management reported for the second quarter, the
nature of deferred mortgage payments and the need for
cash resources to fund these assets was described. As of
May 11, 2020, the Company had approved mortgage payment
deferrals for approximately 13.9% of the Company’s single-
family mortgages under administration eligible for such an
approval. On September 30, 2020, the Company ended its
deferral program, such that by the end of 2020, there were
virtually no mortgages on deferral.
The Company is confident that its strong relationships
with mortgage brokers and diverse funding sources will
continue to set First National apart from its competition.
The Company will continue to generate income and cash
flow from its $34 billion portfolio of mortgages pledged
under securitization and $83 billion servicing portfolio and
focus on the value inherent in its significant single-family
renewal book.
—
36
First National Financial Corporation —
37
2020 Annual Report Management’s
Responsibility for
Financial Reporting
The management of First National
We are responsible for establishing
which follows. The auditors have full
Financial Corporation (the “Company”) is
and maintaining internal control over
and free access to, and meet at least
responsible for the integrity, consistency
financial reporting for the Company.
quarterly with, the Audit Committee to
and reliability of the consolidated
We have designed such internal control
discuss their audit and related matters.
STEPHEN SMITH
Chairman and Chief Executive Officer
ROBERT INGLIS
Chief Financial Officer
March 2, 2021
financial statements and Management’s
over financial reporting, or caused it to
Discussion and Analysis (“MD&A”).
be designed under our supervision, to
The consolidated financial statements
provide reasonable assurance regarding
have been prepared by Management in
the reliability of financial reporting and
accordance with International Financial
the preparation of financial statements
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
for external purposes. We evaluated,
or caused to be evaluated under our
supervision, the effectiveness of the
Company’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
effectiveness of internal control over
financial reporting at the financial year-
end based on that evaluation. We have
also disclosed in the MD&A any change
in our internal control over financial
reporting that occurred during the
year that has materially affected, or is
reasonably likely to materially affect, our
internal control over financial reporting.
material respects the financial condition,
The Board of Directors oversees that
results of operations and cash flows of
management fulfils its responsibility for
the Company as of the dates and for the
financial reporting and internal control.
periods presented. The preparation of
The financial statements have been
financial statements involves transactions
reviewed by the Audit Committee and
affecting the current period which
approved by the Board of Directors.
cannot be finalized with certainty
Ernst & Young LLP, the independent
until future periods. Estimates and
auditors appointed by the shareholders,
assumptions are based on historical
has performed an independent audit of
experience and current conditions, and
the Company’s consolidated financial
are believed to be reasonable.
statements and provide their report
—
38
First National Financial Corporation
Independent
Auditor’s Report
To the Shareholders of First National
Financial Corporation
REPORT ON THE AUDIT OF
THE CONSOLIDATED FINANCIAL
STATEMENTS
OPINION
BASIS FOR OPINION
KEY AUDIT MATTERS
We have audited the consolidated
We conducted our audit in accordance
Key audit matters are those matters
financial statements of First National
with Canadian generally accepted
that, in our professional judgement,
Financial Corporation and its subsidiaries
auditing standards. Our responsibilities
were of most significance in the audit of
[collectively, the “Company”], which
under those standards are further
the financial statements of the current
comprise the consolidated statements
described in the Auditor’s responsibilities
period. These matters were addressed in
of financial position as at December 31,
for the audit of the consolidated financial
the context of the audit of the financial
2020 and December 31, 2019, and the
statements section of our report. We
statements as a whole, and in forming
consolidated statements of income,
are independent of the Company in
the auditor’s opinion thereon, and we do
comprehensive income, changes in equity
accordance with the ethical requirements
not provide a separate opinion on these
and cash flows for the years then ended,
that are relevant to our audit of the
matters. For each matter below, our
and notes to the consolidated financial
consolidated financial statements in
description of how our audit addressed
statements, including a summary of
Canada, and we have fulfilled our ethical
the matter is provided in that context.
significant accounting policies.
responsibilities in accordance with these
requirements. We believe that the audit
evidence we have obtained is sufficient
and appropriate to provide a basis for
our opinion.
In our opinion, the accompanying
consolidated financial statements
present fairly, in all material respects,
the consolidated financial position of the
Company as at December 31, 2020 and
December 31, 2019, and its consolidated
financial performance and its consolidated
cash flows for the years then ended in
accordance with International Financial
Reporting Standards [“IFRSs”].
We have fulfilled the responsibilities
described in the Auditor’s responsibilities
for the audit of the financial statements
section of our report, including in relation
to these matters. Accordingly, our audit
included the performance of procedures
designed to respond to our assessment
of the risks of material misstatement
of the financial statements. The results
of our audit procedures, including the
procedures performed to address the
matters below, provide the basis for
our audit opinion on the accompanying
financial statements.
—
39
2020 Annual Report Measurement of Estimated Credit Losses
Fair Value Measurement of Mortgage
and Loan Investments
As more fully described in Note 2 and
We obtained an understanding of
As more fully described in Note 6 to
Note 3 to the financial statements, the
management’s controls over exposure
the financial statements, the Company
Company is exposed to credit risk on its
to credit risk, including mortgage
held a portfolio of mortgage and loan
mortgage assets. In 2020 the Company
underwriting policies and processes
investments classified as fair value
has recorded an allowance for credit
used to assess borrower capacity,
through profit and loss with a balance
losses of $862 thousand. The Company
income verification, creditworthiness
of $213 million. The mortgage and
manages credit risk by employing
and collateral. We tested the operating
loan investments are measured at
underwriting policies and procedures
effectiveness of these controls by
management’s best estimate of fair value,
designed to minimize exposure to credit
assessing for a sample of mortgages
with changes in fair value recognized in
losses, and by acquiring insurance
originated and funded, compliance with
income. A fair value loss of $3 million was
against borrower default on substantially
management’s underwriting policy and
recorded in income during the current year.
all its mortgages [93% were insured as
processes and eligibility, when arranged,
at December 31, 2020]. The remaining
for insurance against borrower default
residual credit risk is related to $2.5
based on criteria of the mortgage
billion of uninsured mortgages, which are
default insurer.
Auditing the valuation of mortgage and
loan investments required judgement.
The fair value of these assets is based
on non-observable inputs. As these
For the purpose of auditing the
mortgages do not conform to conventional
allowance for credit losses, among
mortgage lending, there are few active
other procedures:
• We tested the accuracy of the
Company’s historic default and
write-off data and evaluated
management’s ECL impairment
analysis, by obtaining the Company’s
historical data, corroborated by data
from independent sources, to develop
a range for the estimated ECL on the
uninsured portfolio of mortgages held
at amortized cost
• We compared our range to
management’s estimate of allowance
for credit losses
• We also assessed the adequacy of
the Company’s disclosures on the
management of credit risk.
quoted markets available to determine the
fair value of these assets. Management
estimates fair value using significant
assumptions which include, among others,
benchmark interest rates, credit spreads
for similar products, creditworthiness
and status of the borrower, valuation of
the underlying real property, payment
history, and other conditions specific to the
rationale for the loan. These inputs give rise
to estimation uncertainty and judgement
in determining the fair value of these
assets. Where the assets are in default,
the valuation is highly dependent on the
valuation of the underlying real property,
which is subject to estimation uncertainty.
To test the valuation of mortgage and loan
investments, among other procedures,
• We performed an independent
assessment of the borrower’s credit
quality for a sample of performing
and non-performing mortgage and loan
investments to evaluate the estimate of
net realizable value.
primarily conventional prime single-family.
The Company’s expected credit loss
[“ECL”] impairment analysis considers a
range of possible outcomes supported by
past loss events, current conditions and an
expectation of future possible outcomes.
The allowance for credit losses was
identified as a key audit matter due to the
high estimation uncertainty in determining
the probability of default and loss given
default assumptions. Management
judgement was involved in selecting
appropriate values for these critical
assumptions, which in the event of a
credit loss includes estimates of the
amounts recoverable from underlying
collateral. In forming their judgement,
management had to both make an
assessment of the effectiveness of
their credit management strategies in
minimizing future credit losses as well
as make a forecast of possible future
economic conditions and consider
the impact of each on their critical
assumptions. Variations in the key
assumptions and judgements described
can have a material effect on the
measurement of ECL.
—
40
First National Financial Corporation OTHER INFORMATION
RESPONSIBILITIES OF
MANAGEMENT AND THOSE
CHARGED WITH GOVERNANCE
FOR THE CONSOLIDATED
FINANCIAL STATEMENTS
• For a sample of mortgage and loan
Management is responsible for
Management is responsible for the
investments, we involved our valuation
the other information. The other
preparation and fair presentation of
specialists to assist in the assessment
information comprises:
of fair value by performing an
independent valuation of the
• Management’s Discussion and Analysis
underlying collateral using independent
• The information, other than the
market data.
consolidated financial statements
the consolidated financial statements
in accordance with IFRSs, and for
such internal control as management
determines is necessary to enable the
preparation of consolidated financial
• We also assessed the adequacy of the
Company’s disclosures related to
the fair value measurement of these
mortgage and loan investments,
and our auditor’s report thereon, in
statements that are free from material
the Annual Report
misstatement, whether due to fraud
Our opinion on the consolidated
financial statements does not cover the
or error.
In preparing the consolidated financial
including categorization in the fair
other information and we do not and
statements, management is responsible
value hierarchy.
will not express any form of assurance
for assessing the Company’s ability to
conclusion thereon.
In connection with our audit of the
consolidated financial statements,
our responsibility is to read the other
information and, in doing so, consider
whether the other information is materially
inconsistent with the consolidated
continue as a going concern, disclosing,
as applicable, matters related to going
concern and using the going concern
basis of accounting unless management
either intends to liquidate the Company
or to cease operations, or has no realistic
alternative but to do so.
financial statements or our knowledge
Those charged with governance
obtained in the audit or otherwise appears
are responsible for overseeing the
to be materially misstated.
Company’s financial reporting process.
We obtained Management’s Discussion
and Analysis prior to the date of this
auditor’s report. If, based on the work we
have performed, we conclude that there
is a material misstatement of this other
information, we are required to report
that fact in this auditor’s report. We have
nothing to report in this regard.
The Annual Report is expected to be
made available to us after the date of the
auditor’s report. If, based on the work we
will perform on this other information,
we conclude that there is a material
misstatement of this other information,
we are required to report that fact to
those charged with governance.
—
41
2020 Annual Report AUDITOR’S RESPONSIBILITIES
FOR THE AUDIT OF THE
CONSOLIDATED FINANCIAL
STATEMENTS
Our objectives are to obtain reasonable
• Evaluate the appropriateness of
We communicate with those charged
assurance about whether the
consolidated financial statements
as a whole are free from material
accounting policies used and the
with governance regarding, among other
reasonableness of accounting
matters, the planned scope and timing of
estimates and related disclosures
the audit and significant audit findings,
misstatement, whether due to fraud
made by management.
or error, and to issue an auditor’s
report that includes our opinion.
Reasonable assurance is a high level
of assurance, but is not a guarantee
that an audit conducted in accordance
with Canadian generally accepted
auditing standards will always detect
a material misstatement when it exists.
Misstatements can arise from fraud
or error and are considered material
if, individually or in the aggregate,
they could reasonably be expected to
influence the economic decisions of users
taken on the basis of these consolidated
financial statements.
• Conclude on the appropriateness of
management’s use of the going
including any significant deficiencies in
internal control that we identify during
our audit.
concern basis of accounting and,
We also provide those charged with
based on the audit evidence obtained,
governance with a statement that we
whether a material uncertainty exists
related to events or conditions that
have complied with relevant ethical
requirements regarding independence,
may cast significant doubt on the
and to communicate with them all
Company’s ability to continue as a
relationships and other matters that may
going concern. If we conclude that
reasonably be thought to bear on our
a material uncertainty exists, we
independence, and where applicable,
are required to draw attention in our
related safeguards.
auditor’s report to the related
disclosures in the consolidated financial
statements or, if such disclosures are
inadequate, to modify our opinion.
As part of an audit in accordance with
Our conclusions are based on the audit
Canadian generally accepted auditing
evidence obtained up to the date of
standards, we exercise professional
our auditor’s report. However, future
judgement and maintain professional
events or conditions may cause the
skepticism throughout the audit. We also:
Company to cease to continue as a
• Identify and assess the risks of material
going concern.
misstatement of the consolidated
• Evaluate the overall presentation,
in extremely rare circumstances, we
financial statements, whether due to
structure, and content of the
determine that a matter should not be
fraud or error, design and perform audit
consolidated financial statements,
communicated in our report because the
procedures responsive to those
including the disclosures, and whether
adverse consequences of doing so would
risks, and obtain audit evidence that
is sufficient and appropriate to provide
the consolidated financial statements
represent the underlying transactions
reasonably be expected to outweigh
the public interest benefits of such
a basis for our opinion. The risk of
and events in a manner that achieves
communication.
not detecting a material misstatement
fair presentation.
resulting from fraud is higher than for
one resulting from error, as fraud may
involve collusion, forgery, intentional
omissions, misrepresentations, or the
override of internal control.
The engagement partner on the audit
• Obtain sufficient appropriate audit
resulting in this independent auditor’s
evidence regarding the financial
report is Andre de Haan.
information of the entities or business
activities within the Company to
express an opinion on the consolidated
• Obtain an understanding of internal
financial statements. We are
control relevant to the audit in order
to design audit procedures that are
responsible for the direction,
supervision and performance of the
Toronto, Canada
appropriate in the circumstances,
Company’s audit. We remain solely
March 2, 2021
but not for the purpose of expressing
responsible for our audit opinion.
an opinion on the effectiveness of the
Company’s internal control.
—
42
From the matters communicated with
those charged with governance, we
determine those matters that were of
most significance in the audit of the
consolidated financial statements of the
current period and are therefore the
key audit matters. We describe these
matters in our auditor’s report unless
law or regulation precludes public
disclosure about the matter or when,
First National Financial Corporation CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at December 31
(in thousands of Canadian dollars)
Notes
2020
2019
ASSETS
Restricted cash
Cash held as collateral for securitization
Accounts receivable and sundry
Mortgages accumulated for sale or securitization
Mortgages pledged under securitization
Deferred placement fees receivable
Mortgage and loan investments
Securities purchased under resale agreements
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 short
Debt related to securitized mortgages
Senior unsecured notes
Income taxes payable
Deferred income tax liabilities
Total liabilities
Common shares
Preferred shares
Retained earnings
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
See accompanying notes
On behalf of the Board:
JOHN BROUGH
Director
ROBERT MITCHELL
Director
3
3
5
3
4
6
15
7
9
15
16
14
10
12
18
18
17
17
669,219
88,206
119,531
2,250,519
34,137,421
62,535
213,301
1,884,811
62,984
681,596
83,587
131,042
1,918,581
31,995,424
42,046
370,414
2,414,835
48,068
$39,488,527
$37,685,593
682,832
797,758
1,418,445
185,772
1,888,049
1,072,062
149,906
2,397,325
34,265,504
32,245,793
398,554
11,470
67,100
374,025
4,764
82,300
$38,917,726
$37,123,933
122,671
97,394
383,993
(33,257)
570,801
122,671
97,394
345,029
(3,434)
561,660
$39,488,527
$37,685,593
—
43
2020 Annual Report
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
(in thousands of Canadian dollars, except earnings per share)
Notes
2020
2019
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 losses on financial instruments
EXPENSES
Brokerage fees
Salaries and benefits
Interest
Other operating
Income before income taxes
Income tax expense
Net income for the year
EARNINGS PER SHARE
Basic
See accompanying notes
837,576
(708,162)
129,414
333,696
32,365
69,033
174,979
(67,355)
$672,132
159,018
143,503
53,246
57,636
$413,403
258,729
68,500
$190,229
877,720
(739,071)
138,649
205,451
11,619
84,670
156,718
(9,655)
$587,452
102,596
117,575
77,700
47,868
$345,739
241,713
64,500
$177,213
3.12
2.90
3
4
6
19
18
17
—
44
First National Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31
(in thousands of Canadian dollars)
NET INCOME FOR THE YEAR
OTHER COMPREHENSIVE INCOME (LOSS) ITEMS THAT
MAY BE SUBSEQUENTLY RECLASSIFIED TO INCOME
Net losses from change in fair value of cash flow hedges
Reclassification of net losses to income
Income tax recovery
Total other comprehensive loss
Total comprehensive income
See accompanying notes
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years ended December 31
Notes
18
2020
190,229
(73,147)
32,524
(40,623)
10,800
(29,823)
2019
177,213
(25,118)
24,700
(418)
100
(318)
$160,406
$176,895
(in thousands of Canadian dollars)
Common
shares
Preferred
shares
Retained
earnings
Accumulated other
comprehensive loss Total equity
BALANCE AS AT JANUARY 1, 2020
122,671
97,394
345,029
(3,434)
561,660
Net income for the year
Other comprehensive loss
Dividends paid or declared
—
—
—
—
—
—
190,229
—
190,229
—
(29,823)
(29,823)
(151,265)
—
(151,265)
BALANCE AS AT DECEMBER 31, 2020
$122,671
$97,394
$383,993
$(33,257)
$570,801
Common
shares
Preferred
shares
Retained
earnings
Accumulated other
comprehensive loss
Total equity
BALANCE AS AT JANUARY 1, 2019
122,671
97,394
315,294
(3,116)
532,243
Net income for the year
Other comprehensive loss
Dividends paid or declared
—
—
—
—
—
—
177,213
—
(147,478)
—
177,213
(318)
(318)
—
(147,478)
BALANCE AS AT DECEMBER 31, 2019
$122,671
$97,394
$345,029
$(3,434)
$561,660
—
45
2020 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
(in thousands of Canadian dollars)
OPERATING ACTIVITIES
Net income for the year
Add (deduct) items
Deferred income taxes
Non-cash portion of gains on deferred placement fees
Decrease (increase) in restricted cash
Net investment in mortgages pledged under securitization
Net increase in debt related to securitized mortgages
Securities purchased under resale agreements, net
Securities sold short, net
Amortization of deferred placement fees receivable
Amortization of property, plant and equipment
Unrealized losses (gains) on financial instruments
Net change in non-cash working capital balances related to operations
Cash provided by (used in) operating activities
INVESTING ACTIVITIES
Additions to property, plant and equipment
Investment of cash held as collateral for securitization
Investment in mortgage and loan investments
Repayment of mortgage and loan investments
Cash provided by (used in) investing activities
FINANCING ACTIVITIES
Dividends paid
Obligations related to securities and mortgages sold under repurchase agreements
Issuance of senior unsecured notes
Repayment of matured senior unsecured notes
Cash provided by (used in) financing activities
Net decrease 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
—
46
2020
2019
190,229
177,213
(4,400)
(31,320)
12,377
(2,077,042)
1,954,756
530,024
(621,315)
10,831
7,660
63,082
34,882
(285,841)
$(250,959)
(3,585)
(4,619)
(817,101)
971,138
$145,833
(150,621)
346,383
199,290
(175,000)
$220,052
114,926
(797,758)
$(682,832)
999,551
735,830
66,194
3,600
(11,176)
(104,500)
(1,403,327)
1,439,725
(226,686)
258,081
10,714
7,813
(43,200)
108,257
350,440
$458,697
(5,874)
(7,673)
(1,142,162)
956,114
$(199,595)
(147,220)
(190,333)
199,040
—
$(138,513)
120,589
(918,347)
$(797,758)
1,031,267
779,504
52,154
First National Financial Corporation Notes to Consolidated
Financial Statements
[in thousands of Canadian dollars,
unless otherwise indicated]
December 31, 2020 and 2019
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 $118 billion in mortgages under
administration as at December 31, 2020,
FNFLP is a significant participant in the
mortgage broker distribution channel.
2. SIGNIFICANT ACCOUNTING
POLICIES
[A] BASIS OF PREPARATION
The consolidated financial statements
FNAM is a wholly owned subsidiary of
have been prepared in accordance
the GP, and an indirect subsidiary of the
with International Financial Reporting
Standards [“IFRS”]. The consolidated
Company. FNAM is a NHA approved
lender and NHA-MBS issuer in the
financial statements have been prepared
capacity of an “aggregator”. Its business
on a historical cost basis, except for
model is to purchase mortgages from
derivative financial instruments and
mortgage originators in order to create
certain financial assets and financial
NHA-MBS pools, and subsequently sell
liabilities that are recorded at fair value
these into the Canada Mortgage Bonds
through profit or loss [“FVTPL”] and
programs [“CMB”].
measured at fair value. The carrying
values of recognized assets and liabilities
The Corporation is incorporated under
that are designated as hedged items
the laws of the Province of Ontario,
in fair value hedges, and that would
Canada and has its registered office
otherwise be carried at amortized cost,
and principal place of business located
are adjusted to record changes in fair
at 100 University Avenue, Toronto,
value attributable to the risks that are
Ontario. The Corporation’s common and
being mitigated in effective hedge
preferred shares are listed on the Toronto
relationships. The consolidated financial
Stock Exchange under the symbols FN,
statements are presented in Canadian
FN.PR.A and FN.PR.B, respectively.
dollars and all values are rounded to the
nearest thousand except when otherwise
indicated. The consolidated financial
statements were authorized for issue by
the Board of Directors on March 2, 2021.
[B] BASIS OF CONSOLIDATION
The consolidated financial statements
comprise the financial statements
of the Company and its subsidiaries,
including FNFLP, First National
Financial GP Corporation [“GP”, the
general partner of FNFLP], FNFC
Trust, a special purpose entity [“SPE”]
which is used to manage undivided co
ownership interests in mortgage assets
funded with Asset-Backed Commercial
Paper [“ABCP”], First National Asset
Management Inc. [“FNAM”], and First
National Mortgage Corporation.
The Company did not consolidate, in its
financial statements, three SPEs over
which the Company does not have
control. The SPEs are sponsored by
third-party financial institutions which
acquire 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,
2020, the Company recorded, on its
consolidated statements of financial
position, its portion of the assets of the
SPEs amounting to $1,565 million
[2019 – $1,275 million]. The Company also
recorded, in its consolidated statements
of income, interest revenue – securitized
mortgages of $51.1 million [2019 –
$31.4 million] and interest expense –
securitized mortgages of $39.2 million
[2019 – $27.4 million] related to its
interest in the SPEs.
The consolidated financial statements
have been prepared using consistent
accounting policies for like
transactions and other events in similar
circumstances. All intercompany assets
and liabilities, equity, income, expenses
and cash flows relating to transactions
between these companies are eliminated
in full on consolidation.
—
47
2020 Annual Report [C] USE OF ESTIMATES
[D] SIGNIFICANT ACCOUNTING POLICIES
The preparation of consolidated
FINANCIAL INSTRUMENTS
The Company accounts for its financial assets and liabilities in accordance with IFRS 9,
Financial Instruments [“IFRS 9”].
Classification and Measurement of Financial Assets
The Company classifies its financial assets as either amortized cost or at FVTPL
as summarized below:
reporting of financial assets and financial
Mortgages accumulated for sale
Securities purchased under resale agreements
Mortgages accumulated for securitization
Mortgages pledged under securitization
Mortgage and loan investments
Deferred placement fees receivable
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
liabilities at fair value.
The global pandemic related to
an outbreak of COVID-19 has cast
additional uncertainty on the
assumptions used by management in
making its judgements and estimates.
Governments and central banks have
reacted with significant monetary
and fiscal interventions designed to
stabilize economic conditions. The
duration and impact of the COVID-19
outbreak is unknown at this time, as
is the efficacy of the government and
central bank interventions. It is not
possible to reliably estimate the length
Classification and Measurement of Financial Liabilities
The Company classifies its financial liabilities as either amortized cost or at FVTPL
as summarized below:
Obligations related to securities and mortgages sold
under repurchase agreements
Securities sold short
Amortized cost
Amortized cost
FVTPL
Amortized cost
FVTPL
Amortized cost
FVTPL
FVTPL
Amortized cost
Amortized cost
Amortized cost
and severity of these developments
Debt related to securitized mortgages
and the impact on the consolidated
financial results and condition of the
Servicing liabilities
Company and its operating subsidiaries
Senior unsecured notes
in future periods. Given that the full
extent of the impact that COVID-19,
including government and/or regulatory
responses to the outbreak, will have
on the Canadian economy and the
Company’s business is highly uncertain
and difficult to predict at this time, there
is a higher level of uncertainty with
respect to management’s judgements
and estimates related to the fair value
of mortgage and loan investments and
the amount of expected credit losses for
uninsured residential mortgages.
—
48
First National Financial Corporation IMPAIRMENT
The expected credit loss [“ECL”]
expectation of future possible outcomes,
same hedging strategy when placing
impairment model applies to all debt
discounted to reflect the time value
mortgages with institutional investors who
instruments within financial assets
of money. The key inputs in the
plan to use CMB funding. The effective
classified as amortized cost or FVOCI,
measurement of ECL include Probability
portion of the change in the fair value
as well as certain off-balance sheet loan
of Default, Loss Given Default and
of the designated hedging instrument
commitments. The IFRS 9 ECL approach
forecast of future economic conditions,
qualifying as a cash flow hedge is
has three stages: Stage 1 – the credit risk
which involve significant judgement.
recognized in other comprehensive
has not increased significantly since initial
recognition such that an allowance for
credit loss is recognized and maintained
Hedge Accounting
equal to 12 months of expected credit loss;
Stage 2 – the credit risk has increased
significantly since initial recognition, and
the allowance for credit loss is increased
to cover full lifetime expected credit
loss; and Stage 3 – a financial asset
is considered credit impaired and the
allowance for credit loss continues to
be the full lifetime expected credit loss,
with interest revenue calculated on the
carrying amount [net of the allowance for
credit loss], rather than the gross carrying
value of the financial assets.
The Company assesses the credit risk of
the mortgages based on the expected
repayments of principal and interest.
All mortgages with arrears that are less
than 31 days past due are included in
Stage 1 whereas mortgages with principal
in arrears between 31 to 90 days are
included in Stage 2. While mortgages in
these two stages are not considered to
be impaired, the Company recognizes a
12-month ECL for Stage 1 mortgages and
The Company applies IFRS 9 hedge
accounting for certain mortgage
commitments and funded mortgages.
The Company uses a combination of
short Government of Canada bonds and
bond repo arrangements to manage
exposure to interest rate risk associated
with mortgage commitments and funded
mortgages held prior to securitization.
In addition, the Company uses interest
rate swaps to manage exposure to
interest rate risk for mortgages in SPEs.
The Company documents a hedging
relationship between the hedging
instrument and the hedged item at
inception when the relationship is
established. The Company also assesses
the effectiveness of the hedges at both
the hedge inception and on an ongoing
basis. Any ineffectiveness of any hedging
relationship is recognized immediately in
the consolidated statements of income.
a lifetime ECL for Stage 2 mortgages.
Cash Flow Hedges
When a mortgage is in arrears for over 90
days or the Company has issued a legal
demand for repayment, there is a specific
expectation of a detrimental impact on
the estimated cash flows and, therefore,
the Company considers the mortgages as
impaired and includes them in Stage 3.
The Company applies cash flow hedge
accounting for the anticipated funding
of its multi-unit residential commercial
segment mortgages. At the time of
mortgage commitment, the Company
shorts Government of Canada bonds as
the hedging instrument to hedge the
The Company’s ECL impairment model
cash flows on the anticipated future debt
is built on an unbiased and probability-
to be arranged through securitization of
weighted method, determined by
these mortgages obtained through CMB,
evaluating a range of possible outcomes
disclosed as debt related to securitized
supported by past loss events and
mortgages. The Company also uses the
income [“OCI”] in the consolidated
statements of comprehensive income.
When the hedge relationship is
terminated, the cumulative amounts
recognized in OCI are amortized into
interest expense – securitized mortgages
over the term of the securitized debt, or
amortized against placement fees from
institutional investors. Any change in
fair value of the hedge determined as
ineffective is recognized immediately in
regular income.
Fair Value Hedges
The Company enters into interest rate
swaps to protect against changes in the
fair value of fixed rate mortgages funded
by ABCP debt. The Company also shorts
Government of Canada bonds to manage
interest rate exposure for a portion of
single-family mortgage commitments
and funded residential mortgages
accumulated for securitization. The
Company applies hedge accounting for
the swaps. For the short bond hedges,
the Company documents a hedging
relationship during the period when the
mortgages are funded until the date they
are securitized or placed with an arm’s
length investor. The Company does not
apply hedge accounting to the short
bonds used to mitigate interest risk on
single-family mortgage commitments.
The Company’s policy is not to utilize
derivative financial instruments for
trading or speculative purposes.
—
49
2020 Annual Report REVENUE RECOGNITION
In the case of the swaps and short
The Company earns revenue from
For securitized mortgages that do not
bonds used to hedge funded
placement, securitization and servicing
meet the criteria for derecognition, no
mortgages, changes in fair value of the
activities related to its mortgage business.
gain or loss is recognized at the time
hedged item, to the extent that the
The majority of originated mortgages
of the transaction. Instead, net interest
hedging relationship is effective, are
are sold to institutional investors through
income is recognized over the term
offset by changes in the fair value of the
the placement of mortgages or funded
of the mortgages. Interest revenue –
hedging instrument, both of which are
through securitization conduits. The
securitized mortgages represents the
recognized in regular income. At hedge
Company retains servicing rights on
interest portion of mortgage payments
unwind, the realized change in the value
substantially all of the mortgages it
received and accrued by borrowers and
of the hedging instrument is adjusted
originates, providing the Company with
is net of the amortization of capitalized
origination costs. Interest expense –
securitized mortgages represents the
costs to finance these mortgages, net
of the amortization of debt discounts
and premiums.
Capitalized origination fees and debt
discounts or premiums are amortized on
an effective yield basis over the term of
the related mortgages or debt.
DERECOGNITION
A financial asset is derecognized when:
• The right to receive cash flows from
the asset has expired; or
• The Company has transferred its
rights to receive cash flows from the
assets or has assumed an obligation
to pay the cash flows, received in full
without material delay to a third party
under a “pass-through” arrangement;
and either [a] the Company has
transferred substantially all the risks
and rewards of the asset; or [b] the
Company has neither transferred nor
retained substantially all of the risks
and rewards of the asset, but has
transferred control of the asset.
to the carrying value of the hedged
servicing fees.
mortgages, and amortized into interest
revenue over the term of the hedged
mortgages. Any changes in the fair value
of an ineffective hedge is immediately
Interest Revenue and Expense from
Mortgages Pledged under Securitization
recorded in regular income.
The Company enters into securitization
transactions to fund a portion of
the mortgages it has originated.
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 associated 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.
—
50
First National Financial Corporation Placement Fees and Deferred
Placement Fees Receivable
Mortgage Servicing Income
Mortgage Investment Income
The Company enters into placement
The Company services substantially
The Company earns interest income
agreements with institutional investors
all of the mortgages that it originates,
from its interest-bearing assets, including
to purchase the mortgages it originates.
whether the mortgage is placed with
deferred placement fees receivable,
When mortgages are placed with
an institutional investor or transferred
mortgage and loan investments and
institutional investors, the Company
to a securitization vehicle. In addition,
mortgages accumulated for sale or
transfers the contractual right to
mortgages are serviced on behalf
securitization. Mortgage investment
receive mortgage cash flows to the
of third-party institutional investors
income is recognized on an accrual basis.
investors. Because it has transferred
and securitization structures. For all
substantially all the risks and rewards of
mortgages administered for investors or
these mortgages, it derecognizes these
assets. The Company retains a residual
third parties, the Company recognizes
servicing income when services are
interest representing the rights and
rendered. For mortgages placed under
obligations associated with servicing the
deferred placement arrangements,
mortgages. Placement fees are earned
the Company retains the rights and
by the Company for its origination and
obligations to service the mortgages. The
underwriting activities on a completed
deferred placement fees receivable is the
transaction basis when the mortgage
present value of the excess retained cash
is funded. Amounts immediately
flows over market servicing fee rates
BROKERAGE FEES
Brokerage fees are primarily fees paid to
external mortgage brokers. Brokerage
fees relating to mortgages placed with
institutional investors are expensed
as incurred, and those relating to
mortgages recorded at amortized cost
are capitalized to the carrying cost of the
related mortgages and amortized over
collected or collectible in excess of
and is reported as deferred placement
the term of the mortgages.
the mortgage principal are recognized
revenue at the time of placement.
as placement fees. When placement
Servicing income related to mortgages
fees and associated servicing fees are
placed with institutional investors is
earned over the term of the related
recognized in income over the life of
mortgages, the Company determines
the servicing obligation as payments
the present value of the future stream
are received from mortgagors. Interest
of placement fees and records a gain on
income earned by the Company from
deferred placement fees and a deferred
holding cash in trust related to servicing
placement fees receivable. Since quoted
activities is classified as mortgage
prices are generally not available
servicing income. The amortization of
for retained interests, the Company
any servicing liabilities is also recorded as
estimates values based on the net
mortgage servicing income.
present value of future expected cash
flows, calculated using management’s
best estimates of key assumptions
related to expected prepayment rates
and discount rates commensurate with
the risks involved.
The Company provides underwriting
and fulfilment processing services for
mortgages originated by two large
Canadian banks through the mortgage
broker distribution channel. The Company
recognizes servicing income when the
services are rendered and the underwritten
mortgages have been funded.
—
51
2020 Annual Report MORTGAGES PLEDGED UNDER
SECURITIZATION
SECURITIES SOLD SHORT AND
SECURITIES PURCHASED UNDER
RESALE AGREEMENTS
LEASES
Mortgages pledged under securitization
Securities sold short consist typically of
The Company measures right-of-use
are mortgages that the Company has
the short sale of Government of Canada
assets at cost. The right-of-use assets
originated and funded with debt raised
bonds. Bonds purchased under resale
are subsequently amortized using the
through the securitization markets,
agreements consist of the purchase
straight-line method. The right-of-use
and have been classified at amortized
of a bond with the commitment from
assets are also subject to impairment.
cost. The Company has a continuous
the Company to resell the bond to
Lease liabilities are calculated using
involvement in these mortgages,
the original seller at a specified price.
the present value of future lease
including the right to receive future cash
The Company uses the combination
payments, discounted at the Company’s
flows arising from these mortgages.
of bonds sold short and bonds
incremental borrowing rate. After the
Origination costs, such as brokerage
fees and bulk insurance premiums
purchased under resale agreements
to economically hedge its mortgage
commencement date, the amount of
lease liabilities is increased to reflect the
that are directly attributable to the
commitments and the portion of funded
accretion of interest and reduced for the
acquisition of such assets, are deferred
mortgages that it intends to securitize in
lease payments made.
and amortized over the term of the
subsequent periods.
The Company’s major leases are for
Bonds sold short are classified as FVTPL
premises at its Toronto head office and
and are recorded at fair value. The
four regional offices. The Company has
effective yield payable on bonds sold
elected not to recognize right-of-use
short is recorded as hedge expense
assets and a lease liability for its
in other operating expenses. Bonds
various office equipment leases, which
purchased under resale agreements are
are insignificant for application of
carried at cost plus accrued interest,
the standard.
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.
MORTGAGE AND LOAN
INVESTMENTS
Mortgage and loan investments are
non-derivative financial assets with
fixed or determinable payments, and
are classified as FVTPL. The mortgages
are measured at management’s best
estimate of the net realizable value.
Changes in fair value are recognized
immediately in the consolidated
statements of income.
mortgages on an effective yield basis.
DEBT RELATED TO
SECURITIZED 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.
MORTGAGES ACCUMULATED FOR
SALE OR SECURITIZATION
Mortgages accumulated for sale are
mortgages funded pending subsequent
settlement with institutional investors
and are classified as FVTPL and
recorded at fair value. These mortgages
are held for terms usually not exceeding
90 days.
Mortgages accumulated for
securitization are mortgages funded
pending the arrangement of term
debt through the Company’s various
securitization programs and are
measured at amortized cost.
—
52
First National Financial Corporation PROPERTY, PLANT AND EQUIPMENT
SERVICING LIABILITY
Property, plant and equipment are recorded at cost, less accumulated amortization, at
The Company places mortgages with
the following annual rates and bases:
third-party institutional clients, and
retains the rights and obligations to
30% declining balance
service these mortgages. When the
Computer equipment
Office equipment
Leasehold
improvements
Computer software
20% declining balance
Straight-line over the term of the lease
30% declining balance except for certain computer
licenses, which are straight-line over useful lives
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.
GOODWILL
Goodwill represents the price paid for the Company’s business in excess of the fair
value of the net tangible assets and identifiable intangible assets acquired in connection
with the IPO. Goodwill is reviewed annually for impairment, or more frequently when an
event or change in circumstances indicates that the asset might be impaired.
RESTRICTED CASH
Restricted cash represents principal and interest collected on mortgages pledged
under securitization that is held in trust until the repayment of debt related to these
mortgages is made in a subsequent period.
BANK INDEBTEDNESS
Bank indebtedness consists of bank loans net of cash balances or deposit with banks.
CASH HELD AS COLLATERAL FOR SECURITIZATION
Cash held as collateral for securitization represents cash-based credit enhancements
held by various securitization vehicles, including FNFC Trust and a Canadian Trust
Company acting as the title custodian for the Company’s NHA-MBS program.
service related fees are paid upfront by
a third party, the Company records a
servicing liability. The liability represents
the portion of the upfront fee required to
earn a market rate of servicing over the
related mortgage term. This is similar to
the method which the Company uses to
calculate 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, calculated 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.
—
53
2020 Annual Report INCOME TAXES
EARNINGS PER COMMON SHARE
3. MORTGAGES PLEDGED
UNDER SECURITIZATION
The Company accounts for income taxes
The Company presents earnings per
The Company securitizes residential
in accordance with the liability method
share [“EPS”] amounts for its common
and commercial mortgages in order
of tax allocation. Under this method, the
shares. EPS is calculated by dividing the
to raise debt to fund these mortgages.
provision for income taxes is calculated
net earnings attributable to common
Most of these securitizations consist of
based on income tax laws and income
shareholders of the Company by the
the transfer of fixed and floating rate
tax rates substantively enacted as at the
weighted average number of common
mortgages into securitization programs,
dates of the consolidated statements
shares outstanding during the year.
such as ABCP, NHA-MBS and CMB.
In these securitizations, the Company
transfers the assets to structured entities
for cash, and incurs interest-bearing
obligations typically matched to the term
of the mortgages. These securitizations
do not qualify for derecognition, although
the structured entities and other
securitization 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 limited
to this cash collateral. The principal and
interest payments on the securitized
mortgages are paid by the Company to
the structured entities monthly over the
term of the mortgages. The full amount
of the cash collateral is recorded as an
asset and the Company anticipates full
recovery of these amounts. NHA-MBS
securitizations may also require cash
collateral in some circumstances. As at
December 31, 2020, the cash held as
collateral for securitization was $88,206
[2019 – $83,587].
of financial position. The income tax
provision consists of current income
taxes and deferred income taxes.
Current and deferred taxes relating
to items in the Company’s equity are
recorded directly against equity.
Current income taxes are amounts
expected to be payable or recoverable
as the result of operations in the current
year and any adjustment to tax payable
or tax recoverable amounts recorded in
previous years.
Deferred income taxes arise on
temporary differences between the
carrying amounts of assets and liabilities
on the consolidated statements of
financial position and their tax bases.
Deferred tax liabilities are generally
recognized for all taxable temporary
differences and deferred tax assets
are recognized to the extent that
future realization of the tax benefit is
probable. Deferred taxes are calculated
using the tax rates expected to apply
in the periods in which the assets will
be realized or the liabilities settled.
Deferred tax assets and liabilities are
offset when they arise in the same tax
reporting group and relate to income
taxes levied by the same taxation
authority, and when a legal right to
offset exists in the entity.
—
54
First National Financial Corporation The following table compares the carrying amount of mortgages pledged for securitization and the associated debt:
Securitized mortgages
Capitalized amounts related to
hedge accounting
Capitalized origination costs
Debt discounts
Add
Principal portion of payments
recorded in restricted cash
Securitized mortgages
Capitalized amounts related to
hedge accounting
Capitalized origination costs
Debt discounts
Add
Principal portion of payments
held in restricted cash
2020
Carrying amount of
securitized mortgages ($)
Carrying amount of
associated liabilities ($)
33,827,022
125,581
184,818
—
34,137,421
612,742
34,750,163
(34,231,557)
(108,372)
—
74,425
(34,265,504)
—
(34,265,504)
2019
Carrying amount of
securitized mortgages ($)
Carrying amount of
associated liabilities ($)
31,776,442
43,280
175,702
—
31,995,424
623,253
32,618,677
(32,303,342)
(43,418)
—
100,967
(32,245,793)
—
(32,245,793)
The principal portion of payments held in restricted cash represents payments on account of mortgages pledged under securitization
which has been received at year-end but has not yet been applied to reduce the associated debt. This cash is applied to pay down
the debt in the month subsequent to collection. In order to compare the components of mortgages pledged under securitization to
securitization debt, this amount is added to the carrying value of mortgages pledged under securitization in the above table.
—
55
2020 Annual Report Mortgages pledged under securitization have been classified as amortized cost and are carried at par plus adjustment for
unamortized origination costs and amounts related to hedge accounting.
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
2020
175,702
95,849
(86,733)
$184,818
2019
169,453
85,421
(79,172)
$175,702
During the year ended December 31,
The following table summarizes the mortgages pledged under securitization that are 31
2020, the Company invested in
days or more past due as at December 31:
2020
2019
4,555
1,946
4,050
$10,551
3,098
416
4,464
$7,978
mortgages that were transferred into
the securitization vehicles with principal
balances as at December 31, 2020 of
$7,638,054 [2019 – $7,076,837].
The contractual maturity profile of the
ARREARS DAYS
31 to 60
mortgages pledged under securitization
61 to 90
programs is summarized as follows:
Greater than 90
2021
2022
2023
2024
4,823,976
5,910,797
6,111,016
5,636,441
All the mortgages pledged under securitization in arrears are insured, except for nine
mortgages which are uninsured and have a total principal balance of $2,572 as at
December 31, 2020 [2019 – five mortgages, $874]. The Company’s exposure to credit
2025 and thereafter
11,344,792
loss is limited to uninsured mortgages with principal balances totalling $2,312,549
$33,827,022
[2019 – $1,975,154], before consideration of the value of underlying collateral. The
majority of such mortgages are conventional prime single-family mortgages, with
an 80% or less loan to value ratio at origination, and verified borrower income. The
Company has provided an allowance of $862 for the year ended December 31, 2020
[2019 – $214].
—
56
First National Financial Corporation 4. DEFERRED PLACEMENT
FEES RECEIVABLE
In order to assist its borrowers during the
The Company enters into transactions
During the year ended December 31,
COVID-19 pandemic, in the first quarter
with institutional investors to sell primarily
2020, $3,461,154 [2019 – $2,419,508] of
of 2020, the Company started providing
fixed-rate mortgages in which placement
mortgages were placed with institutional
up to three months of payment deferrals
fees are received over time as well as
investors, which created gains on
to all single-family mortgagors applying
at the time of the mortgage placement.
deferred placement fees of $32,365
for payment relief because of temporary
These mortgages are derecognized
[2019 – $11,619]. Cash receipts on
hardship resulting from the pandemic.
when substantially all of the risks and
deferred placement fees receivable for
In the second and third quarters, the
rewards of ownership are transferred and
the year ended December 31, 2020 were
Company granted extensions to the
the Company has minimal exposure to
$13,008 [2019 – $12,655].
original three months period to qualified
the variability of future cash flows from
borrowers based on additional due
diligence. The payment deferral program
these mortgages. The investors have
no recourse to the Company’s other
ended September 30, 2020. Interest
assets for failure of mortgagors to make
continues to accrue on these mortgages
payments when due.
The Company estimates that the
expected undiscounted cash flows to be
received on the deferred placement fees
receivable will be as follows:
2021
2022
2023
2024
2025 and thereafter
15,013
12,842
10,997
9,229
22,423
$70,504
and the interest otherwise collectible is
capitalized to the mortgage’s principal.
As the deferral is provided temporarily
in keeping with a larger industry wide
relief program, the Company does not
consider these mortgages to be in
arrears for ECL disclosure purposes.
As at December 31, 2020, the Company
had permitted $58,996 of payment
deferrals related to $4,053,078 of
mortgages pledged under securitization.
A small portion of this amount has
amortized down during the year as
the affected mortgages have matured,
refinanced or resumed regular payments
such that the deferred payment balance
are being repaid over the amortization
of the mortgage. As at February 26, 2021,
the Company had permitted $55,495
of payment deferrals related to
$3,926,611 of mortgages pledged
under securitization.
Deferred placement fees receivable
is classified as amortized cost, and
has been calculated initially based on
the present value of the anticipated
future stream of placement fees. 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 the value of its investment in the
mortgage. The effect of variations, if
any, between actual experience and
assumptions will be recorded in future
consolidated statements of income but is
expected to be minimal.
—
57
2020 Annual Report 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 in
advance of settlement with institutional investors.
Mortgages originated for the Company’s own securitization programs are classified as
amortized cost and are recorded at par plus adjustment for unamortized origination
costs. 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 as the time period between origination and sale is
short. The following table summarizes the components of mortgages according to
their classification:
Mortgages accumulated
for securitization
Mortgages accumulated for sale
2020
2019
2,200,484
50,035
$2,250,519
1,884,571
34,010
$1,918,581
The Company’s exposure to credit loss is limited to $216,667 [2019 – $212,736]
of principal balances of uninsured mortgages within mortgages accumulated for
securitization, before consideration of the value of underlying collateral. As at
December 31, 2020, none of these mortgages is in arrears past 31 days. These are
primarily conventional prime single-family mortgages similar to the mortgages
described in Note 3. Accordingly, the expected credit loss related to these mortgages
is insignificant.
—
58
First National Financial Corporation 6. MORTGAGE AND LOAN INVESTMENTS
Mortgage and loan investments consist primarily of commercial first and second mortgages held for various terms, the majority
of which mature within one year.
Mortgage and loan investments are measured at FVTPL, and are recorded on a fair value basis. Any changes in fair value
are immediately recognized in income. The Company recorded a fair value loss of $3,076 [2019 – $4,300] for the year ended
December 31, 2020.
The following table discloses the composition of the Company’s portfolio of mortgage and loan investments by geographic region as
Portfolio balance
Percentage of portfolio
at December 31, 2020:
Province/Territory
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Nova Scotia
Nunavut
Ontario
Quebec
Saskatchewan
Yukon
Prince Edward Island
8,531
20,224
7,021
180
290
3,744
74
144,682
94
28,088
164
209
$213,301
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
2020
5,363
112
33,666
$39,141
The portfolio contains $5,544 [December
2019 – $35,014] have principal balances
original principal balance of $38,423
31, 2019 – $18,209] of insured mortgages
in arrears of more than 30 days. Three
[December 31, 2019 – three mortgages,
and $207,757 [December 31, 2019 –
of these mortgages are non-performing
original principal balance of $38,825,
$352,205] of uninsured mortgage and
and the Company has stopped accruing
and fair value of $13,133].
loan investments as at December 31,
interest. These mortgages are currently
2020. Of the uninsured mortgages,
recorded at fair value of $9,655 as at
approximately $34,738 [December 31,
December 31, 2020 and had a total
—
59
4.00
9.48
3.29
0.08
0.14
1.76
0.04
67.82
0.04
13.17
0.08
0.10
100.00%
2019
5,016
4
34,235
$39,255
2020 Annual Report The maturity profile of the principal amount of the loans in the table below is based on the earlier of contractual renewal
or maturity dates:
Residential
Commercial
2021
57,456
160,529
2022
4,012
5,021
2023
578
666
2024
11,082
365
2025 and
thereafter
2,152
209
2020
2019
Total
75,280
Total
71,591
166,790
298,823
$217,985
$9,033
$1,244
$11,447
$2,361
$242,070
$370,414
Interest income earned for the year was $14,337 [2019 – $15,065] and is included in mortgage investment income on the
consolidated statements of income.
The right-of-use assets pertain to five
premises leases for the Company’s office
2019
space across the country. The leases have
11,029
7,263
29,776
remaining terms of one to seven years.
The related lease liability of $22,922 as
at December 31, 2020, is grouped with
accounts payable and accrued liabilities
on the consolidated statements of
financial position.
The recoverable amount of the Company’s
goodwill is calculated by reference to
the Company’s market capitalization,
mortgages under administration,
origination volume, and profitability.
These factors indicate that the Company’s
recoverable amount exceeds the carrying
value of its net assets and accordingly,
goodwill is not impaired.
7. OTHER ASSETS
The components of other assets are as follows as at December 31:
Property, plant and equipment, net
Right-of-use assets
Goodwill
2020
10,483
22,725
29,776
$62,984
$48,068
—
60
First National Financial Corporation 8. MORTGAGES UNDER ADMINISTRATION
As at December 31, 2020, the Company managed mortgages under administration of $118,723,990 [2019 – $111,378,891], including
mortgages held on the Company’s consolidated statements of financial position. Mortgages under administration are serviced
for financial institutions such as banks, insurance companies, pension funds, mutual funds, trust companies, credit unions and
securitization vehicles. As at December 31, 2020, the Company administered 342,871 mortgages [2019 – 310,415] for 105 institutional
investors [2019 – 108] with an average remaining term to maturity of 42 months [2019 – 40 months].
Mortgages under administration are serviced as follows:
Institutional investors
Mortgages accumulated for sale or securitization and mortgage and loan investments
Mortgages pledged under securitization
CMBS conduits
2020
2019
80,725,722
2,495,926
33,827,022
1,675,320
76,040,779
2,306,608
31,776,442
1,255,062
$118,723,990
$111,378,891
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.
The Company maintains trust accounts on behalf of the investors it represents. The Company also holds municipal tax funds
in escrow for mortgagors. Since the Company does not hold a beneficial interest in these funds they are not presented on the
consolidated statements of financial position. The aggregate of these accounts as at December 31, 2020 was $852,361 [2019 –
$690,394]. As at December 31, 2020, the Company has included in accounts receivable and sundry $374 [2019 – $156] of uninsured
non-performing mortgages.
9. BANK INDEBTEDNESS
10. DEBT RELATED TO SECURITIZED MORTGAGES
Bank indebtedness includes a revolving
Debt related to securitized mortgages represents the funding for mortgages pledged
credit facility of $1,250,000 [2019 –
under the NHA-MBS, CMB and ABCP programs. As at December 31, 2020, debt related
$1,250,000] maturing in March 2024.
to securitized mortgages was $34,265,504 [2019 – $32,245,793], net of unamortized
At December 31, 2020, $682,832
discounts of $74,425 [2019 – $100,967]. A comparison of the carrying amounts of the
[2019 – $797,758] was drawn, of which
pledged mortgages and the related debt is summarized in Note 3.
the following have been pledged as
collateral:
Debt related to securitized mortgages is reduced on a monthly basis when the principal
payments received from the mortgages are applied. Debt discounts and premiums
[a] a general security agreement over all
are amortized over the term of each debt on an effective yield basis. Debt related to
assets, other than real property, of the
securitization mortgages had a similar contractual maturity profile as the associated
Company; and
mortgages in mortgages pledged under securitization.
[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.
—
61
2020 Annual Report 11. SWAP CONTRACTS
Swaps are over-the-counter contracts
The swap agreements that the Company enters into are interest rate swaps where two
in which two counterparties exchange
counterparties exchange a series of payments based on different interest rates applied
a series of cash flows based on agreed-
to a notional amount in a single currency.
upon rates to a notional amount. The
Company uses interest rate swaps to
manage interest rate exposure relating
to variability of interest earned on
mortgages pledged under securitization.
The following tables present, by remaining term to maturity, the notional amounts and
fair values of the swap contracts outstanding as at December 31, 2020 and 2019:
Less than
3 years
3 to 5 years
6 to 10 years
Total
notional amount
Fair value
2020
$2,634,822
$ 1,102,126
$44,983
$3,781,931
$(35,163)
Less than
3 years
3 to 5 years
6 to 10 years
Total
notional amount
Fair value
2019
$2,560,603
$1,122,379
$32,442
$3,715,424
$18,402
Interest rate
swap contracts
Interest rate
swap contracts
Favourable fair values of the interest rate swap contracts are included in accounts receivable and sundry and unfavourable fair values
are included in accounts payable and accrued liabilities on the consolidated statements of financial position.
12. SENIOR UNSECURED NOTES
On November 25, 2019, the Company
On November 17, 2020, the Company issued $200 million Series 3 senior unsecured
issued $200 million Series 2 senior
notes for a five-year term pursuant to a private placement under an offering
unsecured notes for a five-year term
memorandum. The notes bear interest at 2.961% payable in equal semi-annual
pursuant to a private placement under an
payments commenting May 17, 2021. On settlement, the net proceeds of the offering
offering memorandum. The notes bear
[$199.3 million, net of financing fees], were invested in FNFLP.
interest at 3.582% payable in equal semi-
annual payments commencing May 25,
2020. On settlement, the net proceeds
of the offering [$199.3 million, net of
financing fees], were invested in FNFLP.
On April 9, 2020, the Company repaid its maturing $175 million Series 1 senior
unsecured notes.
—
62
First National Financial Corporation 13. COMMITMENTS, GUARANTEES
AND CONTINGENCIES
As at December 31, 2020, the Company
Outstanding commitments for future advances on mortgages with terms of one to
has the following operating lease
10 years amounted to $2,456,591 as at December 31, 2020 [2019 – $1,446,303].
commitments for its office premises:
The commitments generally remain open for a period of up to 90 days. These
2021
2022
2023
2024 and thereafter
7,931
10,303
9,848
18,844
$46,926
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.
A portion of the Company’s commitments for premises listed above have been
accounted in right-of-use assets and recorded as other assets on the consolidated
statements of financial position.
In the normal course of business, the Company enters into a variety of guarantees.
Guarantees include contracts where the Company may be required to make payments
to a third party, based on changes in the value of an asset or liability that the third
party holds. In addition, contracts under which the Company may be required to make
payments if a third party fails to perform under the terms of the contract [such as
mortgage servicing contracts] are considered guarantees. The Company has determined
that the estimated potential loss from these guarantees is insignificant.
14. SECURITIES TRANSACTIONS
UNDER REPURCHASE AND
RESALE AGREEMENTS
15. OBLIGATIONS RELATED TO SECURITIES AND MORTGAGES SOLD
UNDER REPURCHASE AGREEMENTS
The Company’s outstanding securities
The Company uses repurchase agreements to fund specific mortgages included in
purchased under resale agreements
mortgages accumulated for sale or securitization. The current contracts are with
and securities sold under repurchase
financial institutions, are based on bankers’ acceptance rates and mature on or before
agreements have a remaining term to
January 31, 2021.
maturity of less than three months.
16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The major components of accounts payable and accrued liabilities are as follows as at December 31:
Accrued liabilities
Accrued dividends payable
Accrued interest on securitization debt
Servicing liability
Lease liability
2020
70,514
11,153
51,187
29,996
22,922
$185,772
2019
52,748
10,508
58,225
20,959
7,466
$149,906
—
63
2020 Annual Report Holders of the Class A 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.
Both classes of preferred shares do not have voting rights, are
redeemable only at the option of the Company, and are therefore
classified as equity. The par value per preferred
share is $25.
[d] Earnings per Share
Net income
attributable to
shareholders
Less: dividends
declared on
preferred shares
Net income
attributable to
common
shareholders
Number of common
shares outstanding
Basic earnings per
common share
2020
2019
190,229
177,213
(2,846)
(3,057)
187,383
174,156
59,967,429
59,967,429
$3.12
$2.90
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
[b] Capital Stock
Balance, December 31, 2020 and 2019
#
$
Common shares
Preferred shares
59,967,429
4,000,000
$122,671
$97,394
[c] Preferred Shares
On January 25, 2011, the Company issued 4 million Class A
Series 1 Preferred Shares at a price of $25.00 per share for gross
proceeds of $100,000 before issue expenses.
Holders of Class A Series 1 Preferred Shares have the right, at
their option, to convert their shares into cumulative, floating
rate Class A Preferred Shares, Series 2 [“Series 2 Preferred
Shares”], subject to certain conditions, on March 31, 2021 and on
March 31 every five years thereafter. As at December 31, 2020,
and December 31, 2019, there were 2,887,147 Series 1 Preferred
Shares and 1,112,853 Series 2 Preferred Shares outstanding with
a total carrying value of $97,394.
Holders of the Class A Series 1 Preferred Shares receive a
cumulative quarterly fixed dividend at a rate equal to the five
year Government of Canada yield plus 2.07%. The dividend rate
may be reset every five years, as and when approved by the
Board of Directors. The current dividend rate on the Class A
Series 1 Preferred Shares is 2.79% annually for a new five-year
term ending March 31, 2021.
—
64
First National Financial Corporation 18. INCOME TAXES
The major components of deferred provision for (recovery of)
The major components of the current income tax expense for
income taxes for the years ended December 31 consist of the
the years ended December 31 consists of the following:
following:
Related to
origination and
reversal of timing
differences
Decrease in future
tax rates
2020
2019
2020
2019
(3,971)
(429)
$(4,400)
3,769
(169)
$3,600
Income taxes
relating to the
current year
Income taxes
related to the
prior year
72,800
60,900
100
$72,900
—
$60,900
The effective income tax rate reported in the consolidated statements of income varies from the Canadian tax rate of 26.47% for the
year ended December 31, 2020 [2019 – 26.61%] for the following reasons:
COMPANY’S STATUTORY TAX RATE
Income before income taxes
Income tax at statutory tax rate
Increase (decrease) resulting from
Permanent differences
Changes in future tax rates
Prior year adjustment
Other
INCOME TAX EXPENSE
2020
26.47%
258,729
68,486
200
(429)
100
143
2019
26.61%
241,713
64,320
345
(169)
—
4
$68,500
$64,500
The movement in significant components of the Company’s deferred income tax liabilities and assets for the years ended December 31,
2020 and 2019 are as follows:
As at
January 1, 2020
Recognized
in income and OCI
As at
December 31, 2020
DEFERRED INCOME TAX
Deferred placement fees receivable
Deferred costs – securitization
Unrealized gains on interest rate swaps
Other
Right-of-use asset
Lease liability
Carrying values of mortgages pledged under securitization in
excess of tax values
Cumulative eligible capital property
Servicing liability
Fair value adjustments not deducted for tax purposes
11,189
72,749
13,354
505
1,933
(1,987)
(581)
(3,958)
(5,577)
(5,327)
5,364
(4,859)
(16,217)
306
4,082
(4,080)
3,210
296
(2,363)
(939)
Total
$82,300
$(15,200)
16,553
67,890
(2,863)
811
6,015
(6,067)
2,629
(3,662)
(7,940)
(6,266)
67,100
—
65
2020 Annual Report The amount of deferred tax recovery recorded in income and OCI consists of a recovery of $4,400 recorded in net income and a
recovery of $10,800 recorded in OCI related to unrealized losses on cash flow hedges.
As at
January 1, 2019
Recognized in
income and OCI
As at
December 31, 2019
DEFERRED INCOME TAX
Deferred placement fees receivable
Deferred costs – securitization
Unrealized gains on interest rate swaps
Other
Right-of-use asset
Lease liability
Carrying values of mortgages pledged under
securitization in excess of tax values
Cumulative eligible capital property
Servicing liability
Fair value adjustments not deducted for tax purposes
Total
11,078
75,370
5,885
64
2,890
(2,890)
(424)
(4,261)
(4,790)
(4,122)
$78,800
111
(2,621)
7,469
441
(957)
903
(157)
303
(787)
(1,205)
$3,500
11,189
72,749
13,354
505
1,933
(1,987)
(581)
(3,958)
(5,577)
(5,327)
$82,300
The amount of deferred tax expense recorded in income and OCI consists of $3,600 recorded in net income and a recovery of $100
recorded in OCI related to unrealized losses on cash flow hedges.
The calculation of taxable income of the Company is based on estimates and the interpretation of 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 income tax balances and the change could be significant.
19. FINANCIAL INSTRUMENTS
AND RISK MANAGEMENT
Risk Management
The various risks to which the Company
that a mortgage commitment is issued to the transfer of the mortgage to the related
is exposed and the Company’s policies
securitization vehicle or sale to an institutional investor. Primary among these strategies
and processes to measure and manage
is the Company’s decision to sell mortgages at the time of commitment, passing on
them individually are set out below:
interest rate risk that exists prior to funding to institutional investors. The Company
Interest Rate Risk
Interest rate risk is the risk that the fair
value or future cash flows of a financial
instrument will fluctuate because of
changes in market interest rates. The
Company’s exposure to the risk of
changes in market interest rates relates
primarily to the Company’s mortgages
accumulated for securitization.
The Company uses various strategies to
reduce interest rate risk. The Company’s
risk management objective is to maintain
uses synthetic bond forwards [consisting of bonds sold short and bonds purchased
under resale agreements] to manage interest rate exposure between the time a
mortgage rate is committed to the borrower and the time the mortgage is sold to a
securitization vehicle and the underlying cost of funding is 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 estimate how that probability changes as mortgages
move through the various stages of the pipeline. The amount that is actually
economically hedged is the expected value of the mortgages funding within the future
interest rate spreads from the point
commitment period.
—
66
First National Financial Corporation The table below provides the financial impact that an immediate and sustained 100
Liquidity risk is the risk that the Company
basis point and 200 basis point increase and decrease in short-term interest rates
will be unable to meet its financial
would have had on the net income of the Company in 2020 and 2019.
obligations as they come due.
Liquidity Risk and Capital Resources
100 BASIS POINT SHIFT
Decrease in
interest rate(1)
Increase in
interest rate
The Company’s liquidity strategy has
been to use bank credit to fund working
capital requirements and to use cash
2020
2019
2020
2019
flow from operations to fund longer-term
assets. The Company’s credit facilities are
typically drawn to fund: [i] mortgages
Impact on net income
$4,255
$5,909
$(4,255)
$(5,909)
accumulated for sale or securitization,
200 BASIS POINT SHIFT
Impact on net income
$15,995
$12,069
$(8,511)
$(11,818)
(1) Interest rate is not decreased below 0%.
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
[ii] origination costs associated with
mortgages pledged under securitization,
[iii] cash held as collateral for
securitization, [iv] costs associated with
deferred placement fees receivable,
[v] accounts receivable and sundry,
and [vi] mortgage and loan investments.
The Company has a credit facility with
a syndicate of financial institutions,
which provides for a total of $1,250,000
the form of mortgage default. The Company uses stringent underwriting criteria and
in financing.
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, 2020, 93% [2019 – 94%] of the
pledged mortgages were insured mortgages. See details in Note 3. The Company’s
exposure is further mitigated by the relatively short period over which a mortgage is
held by the Company prior to securitization.
The maximum credit exposures of the financial assets are their carrying values as
reflected on the consolidated 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.
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.
—
67
2020 Annual Report Customer Concentration Risk
Placement fees and mortgage servicing
[b] Deferred Placement Fees Receivable
market industry pricing practices,
including the rate of unscheduled
prepayment. Discount rates used are
determined by comparison to similar
term loans made to borrowers with
similar credit. This methodology will
reflect changes in interest rates which
have occurred since the mortgages
were originated. These fair values are
estimated using valuation techniques
in which one or more significant inputs
are unobservable [Level 3], and are
calculated for disclosure purposes only.
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
securitization, which has a carrying
value of $34,137,421 [2019 – $31,995,424]
and a fair value of $36,212,226 [2019 –
$32,831,505]; debt related to securitized
mortgages, which has a carrying value
of $34,265,504 [2019 – $32,245,793] and
a fair value of $34,909,488 [2019 –
$31,831,691]; and senior unsecured
notes, which have a carrying value of
$398,554 [2019 – $374,025] and a fair
value of $412,786 [2019 – $375,916].
These fair values are estimated using
valuation techniques in which one or
more significant inputs are unobservable
[Level 3].
income from one Canadian financial
institution represent approximately 13.1%
[2019 – 8.7%] 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:
The fair value of deferred placement
fees receivable is determined by internal
valuation models using market data
inputs, where possible. The fair value is
determined by discounting the expected
future cash flows related to the placed
mortgages at market interest rates. The
expected future cash flows are estimated
based on certain assumptions which are
not supported by observable market data.
Level 1 – quoted market price observed in
[c] Securities Owned and Sold Short
active markets for identical instruments;
The fair values of securities owned
Level 2 – quoted market price observed
in active markets for similar instruments
or other valuation techniques for which
all significant inputs are based on
observable market data; and
and sold short used by the Company
to hedge its interest rate exposure
are determined by quoted prices on
a secondary market.
Level 3 – valuation techniques in which
[d] Servicing Liability
one or more significant inputs are
unobservable.
Valuation Methods and Assumptions
The Company uses valuation techniques
to estimate fair values, including
reference to third party valuation
service providers using proprietary
pricing models and internal valuation
models such as discounted cash flow
analysis. The valuation methods and
The fair value of the servicing liability
is determined by internal valuation
models using market data inputs, 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 supported by observable market data.
key assumptions used in determining
[e] Other Financial Assets and Financial
fair values for the financial assets and
Liabilities
financial liabilities are as follows:
[a] Mortgages and Loan Investments
Mortgages and loan investments are
measured at FVTPL. The fair value
of these mortgages is based on non-
observable inputs, and is measured at
The fair value of mortgages accumulated
for sale, cash held as collateral for
securitization, restricted cash and
bank indebtedness correspond to the
respective outstanding amounts due to
their short-term maturity profiles.
management’s best estimate of the net
[f] Fair Value of Financial Instruments
realizable value.
Not Carried at Fair Value
The fair value of these financial
instruments are determined by
discounting projected cash flows using
—
68
First National Financial Corporation 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
Mortgage and loan investments
Interest rate swaps
Total financial assets
FINANCIAL LIABILITIES
Securities sold short
Total financial liabilities
FINANCIAL ASSETS
Mortgages accumulated for sale
Mortgage and loan investments
Interest rate swaps
Total financial assets
FINANCIAL LIABILITIES
Securities sold short
Interest rate swaps
Total financial liabilities
Level 1
Level 2
Level 3
Total
2020
—
—
—
—
—
—
50,035
—
21,109
$71,144
—
213,301
—
50,035
213,301
21,109
$213,301
$284,445
1,888,049
$1,888,049
—
—
1,888,049
$1,888,049
Level 1
Level 2
Level 3
Total
2019
—
—
—
—
—
—
—
34,010
—
29,970
$63,980
2,397,325
1,870
$2,399,195
—
370,414
—
34,010
370,414
29,970
$370,414
$434,394
—
—
—
2,397,325
1,870
$2,399,195
In estimating the fair value of financial
fair value recognized by the Company
loss of $4,300]. Although the Company’s
assets and financial liabilities using
in net income for the year ended
management believes that the estimated
valuation techniques or pricing models,
December 31, 2020 that was estimated
fair values are appropriate as at the
certain assumptions are used, including
using a valuation technique based on
date of the consolidated statements
those that are not fully supported
assumptions that are not fully supported
of financial position, those fair values
by observable market prices or rates
by observable market prices or rates was
may differ if other reasonably possible
[Level 3]. The amount of the change in
approximately a loss of $3,076 [2019 –
alternative assumptions are used.
—
69
2020 Annual Report Transfers between levels in the fair value
inputs and changes in their observability.
Company’s financial assets and financial
hierarchy are deemed to have occurred
During 2020 and 2019, the Company did
liabilities for the years ended December
at the beginning of the period in which
not have any transfers between levels.
31, 2020 and 2019, all of which have been
the transfer occurred. Transfers between
levels can occur as a result of additional
or new information regarding valuation
The following table presents changes in
the fair values, including realized losses of
$112,015 [2019 – losses of $74,832] of the
classified as FVTPL:
FVTPL mortgages
Securities sold short
Interest rate swaps
2020
(3,076)
(75,689)
11,410
$(67,355)
2019
(4,300)
(8,270)
2,915
$(9,655)
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,
2020 and 2019. 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, 2020
Investments
Unrealized losses
recorded in income
Payment and
amortization
Fair value as at
December 31, 2020
FINANCIAL ASSETS
Mortgage and
loan investments
FINANCIAL ASSETS
Mortgage and
loan investments
$370,414
$130,165
$(3,076)
$(284,202)
$213,301
Fair value as at
January 1, 2019
Investments
Unrealized losses
recorded in income
Payment and
amortization
Fair value as at
December 31, 2019
$188,666
$241,646
$(4,300)
$(55,598)
$370,414
20. CAPITAL MANAGEMENT
The Company’s objective is to maintain
capital and retained earnings. FNFLP
equity. As at December 31, 2020, the
a capital base so as to maintain investor,
has a minimum capital requirement as
ratio was 1.77:1 [2019 – 1.91:1]. The
creditor and market confidence and
stipulated by its bank credit facility.
Company was in compliance with the
sustain future development of the
The agreement limits the debt under
bank covenant throughout the year.
business. Management defines capital
bank indebtedness together with the
as the Company’s common share
unsecured notes to four times FNFLP’s
—
70
First National Financial Corporation 21. EARNINGS BY BUSINESS SEGMENT
The Company operates principally in two business segments, Residential and Commercial. These segments are organized by
mortgage type and contain revenue and expenses related to origination, underwriting, securitization and servicing activities.
Identifiable assets are those used in the operations of the segments.
REVENUE
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income [note 6]
Realized and unrealized losses on financial statements
EXPENSES
Amortization
Interest
Other operating
INCOME BEFORE INCOME TAXES
Identifiable assets
Goodwill
Total assets
2020
Residential
Commercial
Total
592,641
(507,187)
85,454
400,506
47,111
(64,279)
$468,792
7,118
40,736
279,853
$327,707
$141,085
244,935
(200,975)
43,960
140,534
21,922
(3,076)
$203,340
542
12,510
72,644
$85,696
$117,644
837,576
(708,162)
129,414
541,040
69,033
(67,355)
$672,132
7,660
53,246
352,497
$413,403
$258,729
28,945,884
10,512,867
39,458,751
—
—
29,776
$28,945,884
$10,512,867
$39,488,527
CAPITAL EXPENDITURES
$2,510
$1,075
$3,585
2019
Residential
Commercial
Total
REVENUE
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income
Realized and unrealized losses on financial statements
EXPENSES
Amortization
Interest
Other operating
INCOME BEFORE INCOME TAXES
Identifiable assets
Goodwill
Total assets
CAPITAL EXPENDITURES
661,081
(558,742)
102,339
293,008
59,256
(5,332)
$449,271
7,023
59,452
211,373
$277,848
$171,423
28,535,288
—
216,639
(180,329)
36,310
80,780
25,414
(4,323)
$138,181
790
18,248
48,853
$67,891
$70,290
9,120,529
—
877,720
(739,071)
138,649
373,788
84,670
(9,655)
$587,452
7,813
77,700
260,226
$345,739
$241,713
37,655,817
29,776
$28,535,288
$9,120,529
$37,685,593
$4,113
$1,761
$5,874
—
71
2020 Annual Report 22. RELATED PARTY AND
OTHER TRANSACTIONS
The Company has servicing contracts in
connection with commercial mezzanine
mortgages originated by the Company
and subsequently sold to various
entities controlled by a senior executive
and shareholder of the Company. The
Company services these mortgages
during their terms at market commercial
servicing rates. During the year, the
Company originated $48,671 of new
mortgages for the related parties. The
related parties also funded several
progress draws totalling $21,677 on
existing mortgages originated by the
Company. All such mortgages, which are
administered by the Company, have a
balance of $179,320 as at December 31,
2020 [December 31, 2019 – $188,968].
As at December 31, 2020, 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 by the Company in 2020
was $3,212 [2019 – $3,016], net of third-
party investor reimbursement.
—
72
First National Financial Corporation —
73
2020 Annual Report First National Financial Corporation
Corporate
Governance
First National’s Board of Directors and
management team fully acknowledge the
importance of their duty to serve the long-term
interests of shareholders. Sound corporate
governance is fundamental to maintaining the
confidence of investors and increasing shareholder
value. As such, First National is committed to
the highest standards of integrity, transparency,
compliance and discipline. These standards define
the relationships among all of our stakeholders –
Board, management and shareholders – and are
the basis for building these values and nurturing
a culture of accountability and responsibility
across the organization.
—
75
2020 Annual Report Policies
Committees
The Board supervises and evaluates
The Board of Directors has established
the management of the Company,
an Audit Committee and a Governance
oversees matters related to our strategic
Committee to assist in the efficient
direction and assesses results relative
functioning of the Company’s corporate
to our goals and objectives. As such,
governance strategy.
the Board has adopted several policies
that reflect recommended practices
in governance and disclosure. These
include a Disclosure Policy, a Code of
Business Ethics and Conduct Policy,
a Whistleblower Policy and an Insider
Trading Policy. As a public company,
First National’s Board continues
to update, develop and implement
AUDIT COMMITTEE
GOVERNANCE COMMITTEE
The Audit Committee’s responsibilities
The Governance Committee’s
include:
responsibilities include:
• Management of the relationship with
• Periodically assessing and making
the external auditor, including the
recommendations on the Company’s
oversight and supervision of the audit
approach to governance issues;
appropriate governance policies and
of the Company’s financial statements;
• Assisting in the development of
• Oversight and supervision of the
quality and integrity of the Company’s
governance policies, practices and
procedures for approval by the Board
financial statements, and
of Directors;
• Oversight and supervision of the
• Reviewing conflicts of interest and
adequacy of the Company’s internal
transactions involving related parties
accounting controls and procedures,
of the Company; and
as well as its financial reporting practices.
• Periodically reviewing the composition
The Audit Committee consists of three
and effectiveness of the Board
independent directors, all of whom are
of Directors.
considered financially literate for the
purposes of National Instrument
52-110 – Audit Committees.
Committee Members
The Governance Committee consists
of three directors, all of whom are
independent for the purposes of
National Instrument 58-101 – Disclosure
of Corporate Governance Practices.
John Brough (Chair), Robert Mitchell and
Robert Pearce
Committee Members
Barbara Palk (Chair), Duncan Jackman
and Robert Pearce
practices as it sees fit.
—
76
First National Financial Corporation Board of
Directors
STEPHEN SMITH
MORAY TAWSE
JOHN BROUGH
Stephen Smith, one of Canada’s leading
Moray Tawse is Executive Vice President
John Brough was President of both
financial services entrepreneurs, is the
and Secretary of the Corporation,
Torwest, Inc. and Wittington Properties
Chairman, Chief Executive Officer and
Executive Vice President of First National
Limited, real estate development
Co-founder of First National Financial
and Co-founder of First National.
companies, from 1998 to December 31,
Corporation. He has been an innovator
Mr. Tawse directs the operations of all
2007. Prior thereto, from 1996 to 1998,
in the development and utilization
of First National’s commercial mortgage
Mr. Brough was Executive Vice President
of various securitization techniques
origination activities. With over 30 years
and Chief Financial Officer of iSTAR
to finance mortgage assets, as well
as a leader in the development and
of experience in the real estate finance
industry, Mr. Tawse is one of Canada’s
Internet, Inc. From 1994 to 2020, he
was a Director and Chair of the Audit
application of information technology
leading experts on commercial real
and Risk Committee of Kinross Gold
in the mortgage industry.
estate and is often called upon to
Corporation. From 1974 to 1996, he held
Mr. Smith is Chairman of Canada
deliver keynote addresses at national
a number of positions with Markborough
Guaranty Mortgage Insurance Company,
real estate symposiums.
Properties, Inc., his final position being
which he owns in partnership with
Ontario Teachers’ Pension Plan. He is
Chairman and co-owner of Duo Bank of
Canada, formerly Walmart Canada Bank,
whose subsidiary Fairstone Financial Inc.
is Canada’s largest non-bank consumer
finance lender. Mr. Smith is the largest
shareholder in Equitable Bank, Canada’s
Challenger Bank™ . He is also Chairman
of Peloton Capital Management, a North
American focused private equity firm.
Mr. Smith is a member of the Board of
Directors of the C.D. Howe Institute,
E-L Financial Corporation Limited and
the Canada Infrastructure Bank. He is
also Chairman of Historica Canada, which
produces the Heritage Minutes and
publishes The Canadian Encyclopedia.
In 2019, Mr. Smith was inducted into the
Canadian Business Hall of Fame.
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 Bachelor of Science
(Honours) in Electrical Engineering
from Queen’s University and a M.Sc.
in Economics from the London School
of Economics.
Senior Vice President and Chief Financial
Officer, which he held from 1986 to 1996.
Mr. Brough is an executive with over
40 years of experience in the real estate
industry. He is currently a director and
Chairman of the Audit Committee of
Wheaton Precious Metals Corp.
Mr. Brough was formerly a director and
Chairman of the Audit Committee of
Canadian Real Estate Investment Trust
from 2008 to 2018. He holds a Bachelor
of Arts degree (Economics) from the
University of Toronto and is a Chartered
Professional Accountant and a Chartered
Accountant. He is also a graduate of the
Institute of Corporate Directors – Director
Education Program at the University of
Toronto, Rotman School of Management.
Mr. Brough is a member of the Institute
of Corporate Directors, Chartered
Professional Accountants of Ontario
and Chartered Professional Accountants
of Canada.
—
77
2020 Annual Report DUNCAN JACKMAN
BARBARA PALK
ROBERT PEARCE
Duncan Jackman has been Chairman,
Barbara Palk retired as President of
Robert Pearce serves on the Board of
President and Chief Executive Officer of
TD Asset Management Inc. in 2010,
Directors of Canada Guaranty Mortgage
E-L Financial Corporation, an investment
following a 30-year career in institutional
Insurance Company, First American
and insurance holding company, since
investment and investment management.
Payment Systems, CPI Card Group and
2003. In 2003, he was also elected
She currently serves on the board of
Duo Bank of Canada. Mr. Pearce spent
Chairman of the Board of The Empire
Crombie Real Estate Investment Trust,
26 years with BMO Bank of Montreal,
Life Insurance Company. Mr. Jackman
where she chairs the Human Resources
from 1980 to 2006, most recently
is also Chairman of Algoma Central
Corporation, the largest Great Lakes
Committee. Her previous boards include
Ontario Teachers’ Pension Plan, where
holding the position of President and
Chief Executive Officer, Personal and
bulk shipper, as well as Chairman and
she chaired the Investment Committee;
Commercial Client Group. He also served
President of Economic Investment Trust
TD Asset Management USA Funds
on the Board of Directors of Mastercard
Limited and United Corporations Limited,
Inc.; the Canadian Coalition for Good
International from 1998 to 2006, and
two Canadian listed closed-end funds.
Governance, where she chaired the
as Chairman of the Canadian Bankers’
He also serves as a member of the Board
Governance Committee; Greenwood
Association from 2004 to 2006.
of Directors of several other public and
College School; the Investment
Mr. Pearce holds a Bachelor of Arts from
private companies. Mr. Jackman is a
Counselling Association of Canada; the
the University of Victoria and an MBA
member of the Business Council
Perimeter Institute; the Shaw Festival;
from the University of British Columbia.
of Canada and formerly served on
UNICEF Canada; and Queen’s University,
Mr. Pearce brings to the Board over
the Economic Advisory Council to the
where she was the Chair of the Board
30 years of operational and leadership
Minister of Finance, Government of
of Trustees. Ms. Palk is a member of the
experience in the financial services
Canada. He is also Chair of the Patron’s
Institute of Corporate Directors,
industry.
Council for Community Living Toronto,
a Fellow of the Canadian Securities
which provides support to thousands
Institute and a CFA charterholder.
of individuals with an intellectual
She holds a Bachelor of Arts (Honours) in
disability. Mr. Jackman graduated from
Economics from Queen’s University, and
McGill University in Montreal.
has been named one of Canada’s Top 100
Most Powerful Women (2004).
ROBERT MITCHELL
Robert Mitchell was appointed Executive
Chair and Chair of the Investment
Committee of Dixon Mitchell Investment
Canada Inc., a Vancouver-based
investment management company,
on January 1, 2021. From 2000 to 2020,
he was President of Dixon Mitchell
Investment Counsel Inc. Prior to that,
he was Vice President, Investments
at Seaboard Life Insurance Company.
Mr. Mitchell has an MBA from the
University of Western Ontario and a
Bachelor of Commerce (Finance) from
the University of Calgary, and is a CFA
charterholder. Mr. Mitchell sits on the
board of Equestrian Canada.
—
78
First National Financial Corporation Stakeholder
Information
CORPORATE ADDRESS
LEGAL COUNSEL
First National Financial Corporation
Stikeman Elliott LLP, Toronto, Ontario
100 University Avenue
North Tower, Suite 700
Toronto, Ontario M5J 1V6
Phone: 416.593.1100
Fax: 416.593.1900
INVESTOR RELATIONS WEBSITE
www.firstnational.ca
ANNUAL MEETING
May 6, 2021, 9:30 a.m. EDT
Virtually as provided
by Computershare Investor Services Inc.
SENIOR EXECUTIVES OF FIRST
NATIONAL FINANCIAL CORPORATION
Stephen Smith
Co-founder, Chairman and Chief Executive Officer
Moray Tawse
Co-founder and Executive Vice President
Jason Ellis
President and Chief Operating Officer
Robert Inglis
Chief Financial Officer
Scott McKenzie
https://web.lumiagm.com/291683989
Senior Vice President, Residential Mortgages
Jeremy Wedgbury
Senior Vice President, Commercial Mortgages
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
INVESTOR RELATIONS CONTACTS
Robert Inglis
Chief Financial Officer
rob.inglis@firstnational.ca
Ernie Stapleton
President, Fundamental
ernie@fundamental.ca
AUDITORS
Ernst & Young LLP, Toronto, Ontario
VANCOUVER
CALGARY
TORONTO
MONTREAL
HALIFAX
FIRSTNATIONAL.CA