ANNUAL
REPORT
2021 CORPORATE
PROFILE
Founded in 1988, First National is a leading non-bank
mortgage lender active across Canada. Our mortgage
loan solutions are used by hundreds of thousands of
borrowers 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, including prime (insured) and
conventional mortgages.
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,
business lines and markets at www.firstnational.ca.
Sustainability Report
Sustainability, It’s In Our Nature is the title of our
initial Public Accountability Statement. This document,
available on our website, explores our approach to
sustainability and provides environmental, social and
governance disclosure that was reviewed and approved
by our Board of Directors.
11
FIRST NATIONAL
BY THE NUMBERS
298,990
$150+B
Single family residential customers
The dollar value of housing loans
served by First National in 2021
First National has made since its IPO
across Canada.
in 2006, including to first-time buyers
to help them realize their dreams of
home ownership.
$123.9B
$1.39B
Mortgages Under Administration (MUA) –
Revenue in 2021 increased
the source of most of the Company’s
1% over 2020.
earnings – reached this milestone at
year-end 2021, a 4% increase over 2020.
2
FIRST NATIONAL FINANCIAL CORPORATION 5,692
#1
1,579
Commercial customers served by
First National in 2021 across Canada.
First National is independently certified
as a Great Place to Work® and proud to
be recognized by the Great Place to
The number of people we employ
at First National grew by 30% year-
over-year in 2021 as we responded
Work institute as one of Canada’s
to record mortgage demand with
top employers since 2017.
record job creation.
$194.6M
39%
Record net income in 2021 ($3.20 per
After-tax Pre-Fair Market Value1
share) was achieved.
return on shareholders’ equity in 2021
demonstrated the efficiency of the First
National business model.
1 Non-IFRS measure. See MD&A for more details.
3
2021 ANNUAL REPORT OUR
LEADERSHIP
TEAM
STEPHEN SMITH
Co-founder, Executive
Chairman of the Board
MORAY TAWSE
Co-founder and
Executive Vice President
JASON ELLIS
President and
Chief Executive 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
THOMAS KIM
Senior Vice President
and Managing Director,
Capital Markets
4
FIRST NATIONAL FINANCIAL CORPORATION A MESSAGE
TO OUR
STAKEHOLDERS
I write this letter to you at an exciting
time in our corporate history. In
January 2022, with the approval of
our Board of Directors, I passed the
First National leadership torch to
Jason Ellis as part of our planned
succession. After serving for 34 years
as founding CEO, I move to the role of
Executive Chairman of the Board.
By no means is this a goodbye letter. Like my partner and First
National co-founder Moray Tawse, we remain actively involved
in the life of our company as major shareholders and Board
members, but now from an organizational perspective, in
governance and advisory capacities.
On the occasion of Jason’s appointment, I will use the opening
of this year’s message to tell you more about him. Part two
describes what I have learned about our business during my
time in the CEO’s chair. Part three comments on what I refer to
as a reset in our markets and its impact on performance. The
last section offers my thoughts on our outlook and business
priorities.
Introducing our New CEO
With Jason’s appointment as Chief Executive Officer, First
National put in place a proven leader who will take us into a new
era of growth, performance and development.
Jason joined us in 2004 as Senior Vice President and Managing
Director, Capital Markets. For 14 years, he managed residential
and commercial mortgage pricing, mortgage securitization
activity, relationships with our institutional investing partners,
liquidity management and fixed income and derivative trading.
These activities grew more complex as First National itself grew
from the time Jason started (about $12 billion in Mortgages
Under Administration) to the time he was promoted to the role
of Chief Operating Officer in October 2018. Jason’s appointment
as our COO was widely and correctly perceived to be the start
of my succession plan. As a further succession signal, Jason
added the title President to his COO duties in 2019.
During my planned transition, Jason’s leadership skills were on
display many times as our senior management team worked
closely together to grow important aspects of our business
including third-party underwriting and fulfillment services, our
residential Excalibur mortgage product, and a new conventional
commercial mortgage program.
A significant test of those leadership qualities was provided by
the pandemic. In March 2020, Jason led the mobilization of the
entire First National team such that we were able to quickly,
safely and effectively sustain operational excellence across the
organization at a time when Canadians counted on us more than
ever to lend and support them through difficult times. I can say
with confidence that all of us, Jason included, have learned a
fair amount about business continuity and remote work since
COVID-19 began.
I am impressed with what has been accomplished by our team
and look forward to seeing what Jason and our leadership group
do for an encore in 2022.
5
2021 ANNUAL REPORT “ When we succeed in
delivering value to
customers, partners
and employees, we
create the opportunity
to reward our
shareholders.”
It’s In Our Nature: Reflections on First National’s Journey
We have always believed that to deliver value for our shareholders, First National must
first create value for employees, partners and customers. This is not a revolutionary
thought but has required constant attention and a balanced management focus.
Starting with our workforce, our approach is to sustain a culture of mutual respect
where our team is challenged in a positive way, given the tools and encouragement
to succeed, and recognized for accomplishing mutually agreed upon goals. We often
hear the term family used to describe our business culture, which reflects the fact that
we strive to care enough to help each other succeed. Our reputation as an employer
that empowers rather than stifles creativity has certainly helped us to recruit and retain
great talent over many years, including in 2021 when we grew our workforce by 30%
or 368 full-time equivalent positions.
As First National grows, we cannot take for granted that our special brand as an
employer will be preserved. The pandemic’s work-from-home contingency is a further
threat to our culture as physical proximity is important for personal connections
and leads to the free-flow exchange of values and perspectives. Our solution to this
problem has been to step up the pace of socially engaging staff activities, enhance
the formal channels we use to communicate with and listen to our team, and innovate
in the use of technology as it applies to skills development and coaching. In 2022,
we will also introduce a Digital by Design movement whereby our workforce, on an
organized basis, will use a hybrid work-in office, work-from-home model. Whether
this is the future of work has yet to be determined, but it certainly offers advantages
in this COVID environment for individual team members and for the preservation of
our culture.
While it is true that our business cannot excel without great employees, it is equally
evident that First National cannot succeed without its mortgage broker partners
who themselves are increasingly important service providers to Canadians. We pride
ourselves on working with independent mortgage brokers who come to First National
for one reason: to get the very best mortgage offer for their clients. We understand
our role in this equation and that brokers have many competitive choices. Our job is to
make First National stand out not just through the design and scope of our products
but in the timely, thoughtful, and respectful way that we respond to broker-created
opportunities. In the past two years, we have substantially grown our workforce, as
noted above, specifically to ensure we have the resources to serve our partners and
our customers.
During our journey from start up to one of Canada’s largest non-bank mortgage
lenders, we have been innovators in the use of information technology as it applies
to service delivery. In many ways, our technology initiatives created First National’s
very first competitive advantage. Through our MERLIN® underwriting system, we
were early enablers of anywhere/anytime broker access to information. By creating
a paperless, 24/7 commitment management platform for mortgage brokers, we have
made their job and ours better and faster. A commonly understood truth is that no
financial institution of the size, scale and complexity of First National can afford to
let its technology atrophy. For that reason, we do our best to innovate every year.
Of course, the most fundamental truth of all is that First National exists only with and
because of our customers. Today, we lend to over 300,000 Canadians and our purpose
is clear: to provide them with the capital they need, when they need it, to buy homes
and commercial properties. We have an obligation and a passion for customer service,
7
2021 ANNUAL REPORT which allows First National to retain mortgage business through renewal opportunities.
We are proud to note that some of our commercial borrowers have financed dozens
of properties with us over several decades as they have found value in the advice and
market intelligence we offer. For residential borrowers, we strive to provide useful
support through the lifecycle of their mortgages and, as in the case of service to
brokers, use technology to create a better customer experience. We are particularly
pleased to note that in 2021, we automated part of First National’s customer-facing
residential mortgage portal known as My Mortgage to reduce manual entry of customer
requests for e-statements. This advancement improved efficiency and customer service.
There are more such opportunities to automate, and they are embedded in
our technology roadmap.
Since First National is not a deposit-taking institution, our funding model is diverse and
includes securitization, placements with institutional investors, and our own balance
sheet. Relationships with institutional customers, whether in funding or servicing, are
therefore critically important to us and have been throughout our journey. We strive
to respond to the needs of institutional clients, provide them with opportunities that
fit within their risk-return requirements and meet the highest standards of servicing
excellence. First National’s capabilities have allowed us to add to and expand our
institutional relationships over the years.
Institutional business includes third-party underwriting and fulfillment processing.
We created this business line in 2014 with one customer and added another
institutional client in 2019. We like this business as it allows us to leverage our skill
sets and our MERLIN system to create value for customers and First National. True to
form, we will look to continue to grow this business which diversifies our revenues –
a sensible objective.
When we succeed in delivering value to customers, partners and employees, we create
the opportunity to reward our shareholders. I am proud to say this opportunity has
arisen every year since our founding. While I will discuss financial performance in part
three of this message, I will note here that First National has:
• Paid $1.6 billion ($29.32 per share) in cumulative dividends and distributions
since our initial public offering in 2006
• Achieved a 609% total shareholder return between our IPO in 2006 and
December 31, 2021
• Generated a five-year average 41% after-tax, Pre-Fair Market Value return on
shareholders’ equity, which demonstrates the efficiency of our business model
As I reflect on performance over many years, I believe First National has achieved a
good balance for all stakeholders. It is now part of our nature to think and act with
everyone in mind.
8
FIRST NATIONAL FINANCIAL CORPORATION A Reset to the Norm
The past two years, starting in March 2020, featured unforeseen events and
unpredictable outcomes. Initially, the pandemic created a sharp and steep drop in
employment and business confidence, but what followed was a steep and sharp ascent
in various economic indicators.
Through this initial period of adjustment, and somewhat paradoxically, demand for
mortgages soared as Canadians moved to purchase real estate even while there was a
noticeable decline in competition for business among some lenders.
In the first waves of COVID-19, First National followed our traditional contrarian
approach and continued to lend. We were rewarded with sizeable mortgage origination
growth, including in the fourth quarter of 2020 when real estate markets typically slow
due to seasonality. A lack of normal competitive intensity also led to abnormally wide
mortgage spreads that year.
As 2021 progressed, conditions reset. While full year-over-year growth in single-family
mortgage originations was extraordinary, originations slowed in the second half. Part of
this deceleration reflected the incredible volumes in the comparative periods of 2020,
but it also became apparent that the demand seen in 2020 and early 2021 was not
sustainable. The reset also affected mortgage spreads as competition returned.
As a result of these factors, First National’s 2021 performance highlights were mixed.
Mortgages Under Administration (“MUA”) increased 4% year over year to $123.9 billion
on a 22% increase in mortgage originations, which stood at a record $23.4 billion.
However, Pre-FMV Income(1) was lower at $257.3 million compared to $323.0 million
in 2020 reflecting the mortgage spread environment and shifts in product mix and
our funding strategy. Our MD&A contains pertinent details of the mortgage spread
environment and our decision to shift commercial segment product from institutional
placement to securitization – which creates revenue in future periods. When reviewing
all of this information, I think the most salient takeaway is this: First National exited 2021
in a strong position, financially and competitively.
(1) Non-IFRS measure. See MD&A for details.
2021 ANNUAL REPORT
9
2021 ANNUAL REPORT Business Outlook and Priorities
The reset in our markets and in the broader economy is likely to be further affected by
a change in monetary policy in 2022 with the Bank of Canada raising the overnight rate.
This rate was lowered in March 2020 to just 0.25% and kept at this level as a monetary
policy-based stimulant throughout 2021. This move contributed to the torrid pace of
home buying activity. Simultaneously, a lack of housing for re-sale sent home prices
up. In the core segments of commercial real estate where First National lends, land and
property values also grew.
It is impossible to tell how consumers will react to increases in borrowing rates, but
we do believe that single-family mortgage originations will be lower to start 2022. This
change or reset was inevitable. We also believe prepayment activity — a profitability
headwind that was elevated in 2021 — will diminish.
Against this backdrop, First National will do what it has done in the past: seek to create
value for its full range of stakeholders. This year, we will again invest in our workforce
through training and on-the-job learning, and look to technology advancements to
enhance service and, wherever possible, improve efficiency. We will work collaboratively
with mortgage brokers, and we will strive to give all customers our best.
It has been my distinct pleasure to serve as Chief Executive Officer of First National
and to assume the role of Executive Chairman of the Board. In my new position, I
will continue to work closely with Jason as he puts his stamp on our business, and
my dedicated fellow Directors as we provide guidance and lend our experience and
expertise.
My thanks to everyone who makes First National a great business. We look forward to
a future of service for all.
Yours sincerely,
Stephen Smith
Executive Chairman of the Board
March 1, 2022
10
FIRST NATIONAL FINANCIAL CORPORATION Mortgages Under Administration ($ Billions)
2021 MUA by Asset Type
140
120
100
80
60
40
20
0
123.9
C
B
A 70%
Insured
B 24%
Uninsured
single-family
residential
C 6%
Uninsured
multi-residential
and commercial
2017
2018
2019
2020
2021
Revenue ($ Millions)
2021 Funding Sources
1.39
A 66%
Institutional investors
C
B 31%
Securitization
B
C 3%
Internal
1.6
1.2
0.8
0.4
0.0
2017
2018
2019
2020
2021
Pre-Fair Market Value Income1 ($ Millions)
2021 Revenue Sources Prior
to Fair Value Gains/Losses
257.3
350
300
250
200
150
100
50
0
2017
2018
2019
2020
2021
(1)Non-IFRS measure. See MD&A for more details.
A 42%
Institutional
placements
B 22%
Net interest –
securitized
mortgages
C 28%
Mortgage servicing
D 8%
Investment income
C
D
B
A
A
A
11
2021 ANNUAL REPORT
MANAGEMENT’S
DISCUSSION
AND ANALYSIS
12
FIRST NATIONAL FINANCIAL CORPORATION The following management’s discussion and analysis
(“MD&A”) of financial condition and results of operations
is prepared as of March 1, 2022. 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, 2021. The audited consolidated
financial statements of the Company have been
prepared in accordance with International Financial
Reporting Standards (“IFRS”).
2021 ANNUAL REPORT
1313
2021 ANNUAL REPORT General Description of the Company
First National Financial Corporation is the parent company of First National Financial
LP (“FNFLP”), a Canadian-based originator, underwriter and servicer of predominantly
prime residential (single-family and multi-unit) and commercial mortgages. With
almost $124 billion in Mortgages Under Administration (“MUA”), First National is one
of Canada’s largest non-bank originators and underwriters of mortgages and is among
the top three in market share in the mortgage broker distribution channel.
2021 Results Summary
Management is pleased with First National’s performance in 2021. Supported by
a robust housing market across Canada, the Company increased single-family
origination 22% year over year. Commercial segment originations were up by 7%
as conventional lending picked up to augment insured mortgage volumes. Total
combined new origination was higher by 17% comparing both years. As a result,
Mortgages Under Administration (MUA), the source of most of the Company’s
earnings, increased to a record high. Profitability measures were solid despite a
significant decline in mortgage spreads, particularly in the final six months of 2021.
In the prior year, such spreads were abnormally wide due to pandemic-related
effects on interest rates and competition.
The following summarizes the performance of the Company’s significant metrics:
• MUA grew to $123.9 billion at December 31, 2021 from $118.7 billion at December
31, 2020, an increase of 4%; the growth from September 30, 2021, when MUA
was $122.3 billion, was 5% on an annualized basis.
This MD&A contains forward-looking
information. Please see “Forward-
Looking Information” on page 41 for a
discussion of the risks, uncertainties and
assumptions relating to these statements.
The selected financial information and
discussion below also refer to certain
measures to assist in assessing financial
performance. These other measures,
such as “Pre-FMV Income” and “After-tax
Pre-FMV Dividend Payout Ratio”, should
not be construed as alternatives to net
income or loss or other comparable
measures determined in accordance with
IFRS as an indicator of performance or
as a measure of liquidity and cash flow.
These measures do not have standard
meanings prescribed by IFRS and
therefore may not be comparable
to similar measures presented by
other issuers.
Unless otherwise noted, tabular amounts
are in thousands of Canadian dollars.
Additional information relating to the
Company is available in First National
Financial Corporation’s profile on the
System for Electronic Data Analysis
and Retrieval (“SEDAR”) website at
www.sedar.com.
14
FIRST NATIONAL FINANCIAL CORPORATION • Total new single-family mortgage
• Revenue for 2021 increased by 1%
and losses related to financial
origination was $23.4 billion in 2021
to $1.39 billion from $1.38 billion in
instruments, the Company’s earnings
compared to $19.2 billion in 2020,
2020. This change was the result
before income taxes and gains and
an increase of 22%. The Company
of higher gains related to changes
attributes this to a robust real estate
in fair market value of financial
market and a strong market share
instruments. Largely because of
losses on financial instruments (“Pre-
FMV Income”)(1) for 2021 decreased
by 20% to $257.3 million from $323.0
in the mortgage broker distribution
the financial disruption experienced
million in 2020. This change was
channel which is the result of
at the start of the pandemic, the
largely the result of a return to pre-
the Company’s long-time broker
Company incurred losses on holding
pandemic spread environment and
relationships built on good service,
financial instruments related to
shifts in the commercial segment’s
competitive products and effective
interest rate hedging of $67 million.
product mix and resulting funding
technology. Commercial segment
In 2021, there were gains of $5.8
strategy to allocate more origination
origination of $9.7 billion was 7%
million. Lower revenue was also
volume to securitization as
higher than the $9.1 billion originated
evident in placement transactions.
opposed to institutional placement.
in 2020. Total new origination
This was the result of mortgage
Generally, the increase in commercial
increased by 17% in 2021 compared
spread compression between 2021
origination volume was for uninsured
to 2020.
and 2020. Commercial placement
products which is less profitable
• The Company took advantage of
available opportunities in the year
to renew over $6.3 billion of single-
family mortgages ($6.7 billion a year
ago). For the commercial segment,
renewals were higher by 35% ($2.7
billion compared to $2.0 billion a
fees, in particular, were lower due
than insured origination. Together
to a change in funding mix. With
with increased borrower preference
a greater proportion of insured
for shorter-term insured mortgages,
mortgages being allocated for
per unit placement fee revenue for
securitization, the Company
sacrificed placement fees in 2021
for future net securitization margin.
the commercial segment was lower
than in 2020.
year ago). The Company believes the
• Income before income taxes was
lower single-family results are the
$263.8 million in compared to
result of some borrowers choosing
$258.7 million in 2020. The increase
to refinance to take advantage of
reflected the result of changing
low mortgage rates which reduces
capital market conditions in the
its opportunities.
comparative years. Excluding gains
15
2021 ANNUAL REPORT In the fourth quarter of 2021, the Company’s Board of Directors announced a
special common share dividend in the amount of $1.25 per share, which was paid on
December 15, 2021, to shareholders of record on November 30, 2021. This payment
reflected the Board’s determination that the Company generated excess capital in the
past year and that the capital needed for near-term growth could be generated from
current operations. As a result of an increase in the Company’s monthly common
share dividend in June 2021 – to an annualized rate of $2.35 per share – and this
special dividend, First National declared a record $210.9 million in common share
dividends in 2021.
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
2021
Fourth quarter
Third quarter
Second quarter
First quarter
2020
Fourth quarter
Third quarter
Second quarter
First quarter
$339,292
$353,704
$365,118
$336,492
$387,303
$373,760
$344,581
$274,650
$41,971
$47,614
$52,401
$52,575
$69,123
$72,517
$50,844
($2,255)
$57,045
$64,867
$71,218
$64,146
$94,937
$99,644
$75,506
$52,921
Total Assets
$42,274,158
$40,763,169
$41,727,249
$40,586,601
$39,488,527
$38,314,904
$39,040,298
$0.69
$0.78
$0.86
$0.87
$1.13
$1.20
$0.84
($0.05)
$39,203,792
(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. See Key Performance Indicators section in this MD&A and
reconciliation below.
16
FIRST NATIONAL FINANCIAL CORPORATION Reconciliation of Quarterly Determination of Pre-FMV Income(1)
($000s, except per share amounts)
2021
Fourth quarter
Third quarter
Second quarter
First quarter
2020
Fourth quarter
Third quarter
Second quarter
First quarter
Income (loss)
before income tax
for the Period
Add/deduct
Realized and
unrealized
losses (gains)
Deduct (losses),
add gains related
to mortgage and
loan investments
Pre-FMV Income
for the Period(1)
$57,111
$65,134
$70,101
$71,475
$94,273
$98,767
$68,944
($3,255)
$71
$383
$1,217
($7,486)
($260)
$1,477
$7,562
$58,576
($137)
($650)
($100)
$157
$924
($600)
($1,000)
($2,400)
$57,045
$64,867
$71,218
$64,146
$94,937
$99,644
$75,506
$52,921
With First National’s large portfolio of mortgages pledged under
created large losses on financial instruments and the Company
securitization, quarterly revenue is driven primarily by the gross
reported a small loss. In the final three quarters of 2020, the
interest earned on the mortgages pledged under securitization.
Company benefited from both its business model, which does
The gross interest on the mortgage portfolio is dependent
not rely on face-to-face interactions, and abnormally wide
both on the size of the portfolio of mortgages pledged under
mortgage spreads. The spreads were the result of the aftermath
securitization, as well as mortgage rates. Recently MUA has
of the COVID-19-related financial crisis that began at the end of
increased, and revenue followed. Net income is partially
the 2020 first quarter. These spreads were the basis for growth
dependent on conditions in bond markets, which affect the
in Pre-FMV Income in the last three quarters of 2020. To start
value of gains and losses on financial instruments arising from
2021, net income remained steady as financial markets stabilized
the Company’s interest rate hedging program. Accordingly, the
and the Company earned income from higher origination
movement of this measurement between quarters is related to
volumes and wider spreads locked in its securitization portfolio.
factors external to the Company’s core business. By removing
Competition accelerated in mid-2021 on signs of an improving
this volatility and analyzing Pre-FMV Income, management
economy and a risk-on environment and, over the past six
believes a more appropriate measurement of the Company’s
months, spreads returned to pre-pandemic levels. The ensuing
performance can be assessed.
In the past eight quarters, the Company experienced a relatively
volatile economic environment. In 2019, the economic outlook
was positive and there was a surplus of liquidity for investment
in financial assets. This bred a competitive marketplace but one
in which mortgage funding spreads were relatively steady and
the Company earned consistent revenue and net income. 2020
began slowly and volumes were not particularly strong. COVID-
19-related financial turmoil at the end of 2020’s first quarter
spread tightening reduced profitability for the Company in
the third and fourth quarter of 2021 compared to periods of
exceptional profitability in 2020.
(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. See Key Performance Indicators section in this MD&A.
17
2021 ANNUAL REPORT Outstanding Securities of the Corporation
At December 31, 2021, and March 1, 2022, the Corporation had 59,967,429 common
shares; 2,984,835 Class A preference shares, Series 1; 1,015,165 Class A preference
shares, Series 2; 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)
2021
2020
2019
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
1,394,606
(630,279)
(201,786)
(298,720)
(5,815)
(730)
257,276
6,545
(69,260)
194,561
210,885
3.20
3.52
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
$42,274,158
$39,488,527
$37,685,593
Total long-term financial liabilities
$398,888
$398,554
$374,025
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 have been restated to conform to the 2021 and 2020 presentation.
18
FIRST NATIONAL FINANCIAL CORPORATION
Vision and Strategy
The Company provides mortgage financing solutions to the residential and commercial
mortgage markets in Canada. By offering a full range of mortgage products, with a
focus on customer service and superior technology, the Company believes that it is
a leading non-bank mortgage lender. The Company intends to continue leveraging
these strengths to lead the non-bank mortgage lending industry in Canada, while
appropriately managing risk. The Company’s strategy is built on four cornerstones:
providing a full range of mortgage solutions for Canadian single-family and commercial
customers; growing assets under administration; employing technology to enhance
business processes and service to mortgage brokers and borrowers; and maintaining a
conservative risk profile. An important element of the Company’s strategy is its direct
relationship with the mortgage 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:
• Growth in the portfolio of Mortgages Under Administration;
• Growth in the origination of mortgages;
• Raising capital for operations; and
• Employing innovative securitization transactions to minimize funding costs.
Growth in Portfolio of Mortgages Under Administration
(“MUA”)
Management considers the growth in MUA to be a key element of the Company’s
performance. The portfolio grows in two ways: through mortgages originated by the
Company and through third-party mortgage servicing contracts. Mortgage originations
not only drive revenues from placement and interest from securitized mortgages, but
perhaps more importantly, create longer-term value from servicing rights, renewals and
the growth of the customer base for marketing initiatives. As at December 31, 2021,
MUA totalled $123.9 billion, up from $118.7 billion at December 31, 2020, an increase of
4%. The growth of MUA in the fourth quarter of 2021, was 5% on an annualized basis.
19
2021 ANNUAL REPORT Growth in Origination of Mortgages
Direct Origination by the Company
Excalibur Mortgage Products
The origination of mortgages not only drives the growth of MUA as described above,
The Company originates alternative
but leverages the Company’s origination platform, which has a large fixed-cost
single-family (“Excalibur”) mortgage
component. As more mortgages are originated, the marginal costs of underwriting
products. Alternative lending describes
decrease. Increased origination satisfies demand from its institutional customers
single-family residential mortgages
and produces volume for the Company’s own securitization programs. In 2021, the
that are originated using broader
Company’s single-family origination increased. The Company believes this is the result
underwriting criteria than those applied
of its strong broker relationship and technology, which have both been significant
in originating prime mortgages. These
benefits in the pandemic period. Generally, the Company’s business practices do not
mortgages generally have higher interest
rely on face-to-face interactions. Together with a lower interest rate environment,
rates than prime mortgages. First
the Company’s single-family origination grew by 22% in 2021 compared to 2020. The
National’s relationships with mortgage
commercial segment had a strong year. Total commercial volumes increased by 7% to
brokers and its underwriting systems
$9.7 billion compared to $9.1 billion in 2020. Together, overall new origination for 2021
allow for cost effective origination of
increased 17% year over year.
Third-Party Mortgage Underwriting and Fulfilment Processing Services
In 2015, the Company launched its third-party underwriting and fulfilment processing
services business with a large Canadian schedule I bank (“Bank”). This business is
designed to adjudicate mortgages originated by the Bank through the single-family
residential mortgage broker channel. First National employs a customized software
solution based on its industry-leading MERLINTM 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 under the agreement and retains full 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
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
of the Excalibur origination. In early
2020, an agreement was entered into
with another bank-sponsored conduit
to provide additional funding for this
product. The Excalibur relaunch was
rolled out gradually, beginning in Ontario.
Currently the program originates the
majority of its mortgages in Ontario with
a small but growing amount in Western
Company entered into a similar agreement with another Canadian bank.
Canada.
20
FIRST NATIONAL FINANCIAL CORPORATION Raising Capital for Operations
Bank Credit Facility
The Company has a $1.5 billion revolving line of credit with a syndicate of banks. This
facility enables the Company to fund the large amounts of mortgages accumulated
for securitization. In the second quarter of 2021, the Company extended the term of
the facility by two years to March 2026 and increased the commitment amount by
$250 million. 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
five-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 invested in FNFLP. On settlement, the proceeds were used to pay
down a portion of the indebtedness under the bank credit facility. The Company’s
medium-term debt capital now stands at approximately $400 million.
Preferred Share Issuance
Pursuant to the original prospectus, effective April 1, 2021, the Company reset the
annual dividend rate on the outstanding Class A Series 1 preference shares to 2.895%
for a five-year term to March 31, 2026. After the exercise of shareholder conversion
rights in March 2021, there were 2,984,835 Class A Series 1 shares outstanding and
1,015,165 Class A Series 2 outstanding. The Series 2 shares 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). 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.
21
2021 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
The Company has served as an issuer and administrator of NHA-MBS since 1995.
In December 2007, the Company was approved by Canada Mortgage and Housing
Corporation (“CMHC”) as an issuer of NHA-MBS and as a seller into the Canada
Mortgage Bonds (“CMB”) program. Issuer status provides the Company with direct
and independent access to reliable and low-cost funding.
Mortgage spreads can be illustrated by comparing posted five-year fixed single-family
mortgage rates to a similar-term Government of Canada bond as listed in the table to
the right.
Generally, when this spread is wider, the Company can earn higher returns from its
securitization activities, although funding spreads also affect profitability. Between
2009 and 2019, liquidity issues at financial institutions created by the 2008 financial
crisis diminished and the 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
Period
2006
2007
2008
2009–2016
2017–2018
2019
2020
2021
Average Five-Year
Mortgage Spread
for the Period
1.12%
1.50%
2.68%
1.77%
1.36%
1.42%
1.76%
1.17%
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 as central
Canada Mortgage Bonds
(CMB) Program
banks cut overnight rates significantly. Credit spreads widened and the capital markets
The CMB program is an initiative where
ceased to function normally. In the second quarter of 2020, as financial systems
began to normalize, mortgage coupons remained elevated as other credit spreads,
including those on NHA-MBS, narrowed. The resulting spreads had positive impacts on
2020 results and increased the profitability inherent in the Company’s securitization
Canada Housing Trust (“CHT”) issues
securities to investors in the form of
semi-annual interest-yielding five- and
10-year bonds. As a seller into the CMB,
portfolio. In 2021, spreads narrowed returning to 2018 levels at first and then closing to
the Company is able to make direct
levels not seen since before the 2008 financial crisis. In 2021, the Company originated
and renewed for securitization purposes approximately $8.9 billion of single-family
mortgages and $4.0 billion of multi-unit residential mortgages.
The Company is subject to various regulations put in place by CMHC to control the
amount of NHA-MBS that a single issuer can create. These rules 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 a higher price. The tiered limit of $9.0 billion remains
unchanged for 2022.
sales into the program. The ability to sell
into the CMB has given the Company
access to lower costs of funds on
both single-family and multi-family
mortgage securitizations. Because of
the effectiveness of the CMB, many
institutions have indicated their desire to
participate. As a result, CHT has created
guidelines through CMHC that limit the
amount that can be sold by each seller
into the CMB each quarter. The Company
is subject to these limitations.
22
FIRST NATIONAL FINANCIAL CORPORATION Key Performance Indicators
The principal indicators used to measure
by excluding gains and losses related to the fair value of financial instruments and
the Company’s performance are:
adding back depreciation and amortization. The addbacks of amortization ended in
• 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.
Beginning in 2012, the Company used
Pre-FMV EBITDA as a key performance
measure. This non-IFRS measure was
used to adjust the Company’s earnings
2016 when IPO-related intangible assets were 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 is 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 determined in accordance with
IFRS or to cash flows from operating, investing and financing activities. The Company’s
method of calculating Pre-FMV Income may differ from other issuers and, accordingly,
Pre-FMV Income may not be comparable to measures used by other issuers.
($000s)
For the Period
Revenue
Income before income taxes
Pre-FMV Income(1)
At Period End
Total assets
Quarter Ended
Year Ended
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
339,292
57,111
57,045
387,303
94,273
94,937
1,394,606
1,380,294
263,821
257,276
258,729
323,008
42,274,158
39,488,527
42,274,158
39,488,527
Mortgages Under Administration
123,907,627
118,723,990
123,907,627
118,723,990
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 (except those on mortgage investments).
Since going public in 2006, First National has been considered a high-yielding,
dividend-paying company. With a large MUA that generates continuing income and
cash flow and a business model that is designed to make efficient use of capital,
the Company has been able to pay distributions to its shareholders that represent a
relatively large ratio of its earnings. The Company calculates the dividend payout ratio
as dividends declared on common shares over net income attributable to common
shareholders. This measure is useful to shareholders, as it indicates the percentage of
earnings paid out as dividends. Similar to the performance measurement for earnings,
the Company also calculates the dividend payout ratio on a basis using after-tax Pre-
FMV Income.
23
2021 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 dividends
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,
2021
December 31,
2020
December 31,
2021
December 31,
2020
41,287
68,465
191,866
187,383
110,190
60,717
210,885
148,419
35,231
30,733
135,926
118,435
267%
85%
85%
89%
45%
45%
110%
71%
73%
79%
63%
50%
Note:
(1) This ratio is calculated by excluding the payment of the special dividends declared at the end of the years presented.
(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, 2021, the common share payout ratio was 110%
compared to 79% for the year ended December 31, 2020. However, in both 2021 and
2020, the Company declared a special dividend and recorded gains and losses on
account of the changes in fair value of financial instruments. Gains and losses are
recorded in the period in which the prices on Government of Canada bonds change;
however, the offsetting economic impact is generally reflected in narrower or wider
spreads in the future once the mortgages have been pledged for securitization.
Accordingly, management does not consider such gains and losses to affect its
dividend payment policy in the short term. If the special dividends and gains and losses
on financial instruments in the two years are excluded from the above calculations, the
dividend payout ratio for 2021 would have been 73% compared to 50% in 2020.
The Company also paid $2.7 million of dividends on its preferred shares in 2021
($2.8 million in 2020).
24
FIRST NATIONAL FINANCIAL CORPORATION Revenues and Funding Sources
Mortgage Origination
The Company derives a significant amount of its revenue from mortgage origination
activities. Most mortgages originated are funded either by placement with institutional
investors or through securitization conduits, in each case with retained servicing. In
general, originations are allocated from one funding source to another depending on
different criteria, including type of mortgage and securitization limits, with an overall
consideration related to maintaining diversified funding sources. The Company retains
servicing rights on virtually all the mortgages it originates, which provide the Company
with servicing fees to complement revenue earned through originations. For the year
ended December 31, 2021, new origination volume increased to $33.2 billion from $28.3
billion, or about 17%, compared to 2020.
Securitization
The Company securitizes a portion of its origination through various vehicles, including
NHA-MBS, CMB and asset-backed commercial paper (“ABCP”). Although legally
these transactions represent sales of mortgages, for accounting purposes they do not
meet the requirements for sale recognition and instead are accounted for as secured
financings. These mortgages remain as mortgage assets of the Company for the full
term and are funded with securitization-related debt. Of the Company’s $42.1 billion
of new originations and renewals in 2021, $12.9 billion was originated for its own
securitization programs.
25
2021 ANNUAL REPORT Placement Fees and Gain on Deferred Placement Fees
The Company recognizes revenue at the time that a mortgage is placed with an
institutional investor. Cash amounts received in excess of the mortgage principal at the
time of placement are recognized in revenue as “placement fees”. The present value of
additional amounts expected to be received over the remaining life of the mortgage
sold (excluding normal market-based servicing fees) is recorded as a “deferred
placement fee”. A deferred placement fee arises when mortgages with spreads in
excess of a base spread are placed. Normally the Company would earn an upfront cash
placement fee, but investors prefer paying the Company over time, as they earn net
interest margin on such transactions. Upon the recognition of a deferred placement fee,
the Company establishes a “deferred placement fee receivable” that is amortized as the
fees are received by the Company. Of the Company’s $42.1 billion of new originations
and renewals in 2021, $27.8 billion was placed with institutional investors.
For all institutional placements, the Company earns placement fees. Revenues based
on these originations are equal to either (1) the present value of the excess spread, or
(2) an origination fee based on the outstanding principal amount of the mortgage.
This revenue is received in cash at the time of placement. In addition, under certain
circumstances, additional revenue from institutional placements may be recognized as
“gain on deferred placement fees” as described above.
Mortgage Servicing and Administration
The Company services virtually all mortgages generated through its mortgage
origination activities on behalf of a wide range of institutional investors. Mortgage
servicing and administration is a key component of the Company’s overall business
strategy and a significant source of continuing income and cash flow. In addition
to pure servicing revenues, fees related to mortgage administration are earned by
the Company throughout the mortgage term. Another aspect of servicing is the
administration of funds held in trust, including borrowers’ property tax escrows, reserve
escrows and mortgage payments. As acknowledged in the Company’s agreements, any
interest earned on these funds accrues to the Company as partial compensation for
administration services provided. The Company has negotiated favourable interest rates
on these funds with the chartered banks that maintain the deposit accounts, which has
resulted in significant additional servicing revenue.
In addition to the interest income earned on securitized mortgages and deferred
placement fees receivable, the Company also earns interest income on mortgage-
related assets, including mortgages accumulated for sale or securitization, mortgage
and loan investments, and purchased mortgage servicing rights.
The Company provides underwriting and fulfilment processing services to 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.
26
FIRST NATIONAL FINANCIAL CORPORATION Results of Operations
The following table shows the volume of mortgages originated by First National and
Mortgages Under Administration for the periods indicated:
($ millions)
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,
2021
December 31,
2020
December 31,
2021
December 31,
2020
5,218
3,045
8,263
1,491
902
5,962
2,723
8,685
1,648
558
23,414
9,747
33,161
6,306
2,658
19,165
9,112
28,277
6,668
1,962
Total origination and renewals
$10,656
$10,891
$42,125
$36,907
Mortgage Originations
by Funding Source
Institutional investors
NHA-MBS/CMB/ABCP securitization
Internal Company resources/CMBS
6,863
3,475
318
8,011
2,547
333
27,813
12,923
1,389
25,019
11,036
852
Total
$10,656
$10,891
$42,125
$36,907
Mortgages Under Administration
Single-family residential
Multi-unit residential and commercial
Total
84,896
39,012
$123,908
83,601
35,123
$118,724
84,896
39,012
$123,908
83,601
35,123
$118,724
Total new mortgage origination volumes increased in 2021 compared to 2020 by 17%.
Single-family volumes increased by 22% and commercial segment volumes increased
by 7% year over year. Management believes the growth in the single-family segment
was due to several factors that include its strong broker and investor relationships,
robust market conditions, and its MERLIN technology and operating systems, which
support physical distancing and allowed the Company to continue to underwrite
efficiently during the pandemic. Lower mortgage rates also encouraged home
purchasing across the country. In the commercial segment, the Company’s expertise in
underwriting multi-unit mortgages is a fundamental competency. After a slow start to
2021, commercial origination volumes increased 7% in 2021 compared to 2020. When
combined with renewals, total production for both business segments increased by 14%
to $42.1 billion in 2021 from $36.9 billion in 2020. Origination for direct securitization
into NHA-MBS, CMB and ABCP programs remained a large part of the Company’s
strategy, with volume of $12.9 billion in 2021.
27
2021 ANNUAL REPORT Net Interest – Securitized Mortgages
Comparing the year ended December 31, 2021, to the year ended
December 31, 2020, “net interest – securitized mortgages”
increased by about 26% to $163.2 million from $129.4 million. The
portfolio of mortgages pledged under securitization grew 4%
from about $34.1 billion at December 31, 2020, to $35.4 billion at
December 31, 2021. The growth in profitability was due to several
factors: the reduction in the amount of indemnities payable
to MBS bondholders, growth in the commercial portfolio
which grew at rate of 24% in 2021, and the performance of the
Excalibur securitization program. These growth factors were
offset by the prime residential program which experienced
higher than expected rates of prepayment. Higher prepayment
activity appears to be a function of a pandemic-related drop in
interest rates as borrowers took advantage of lower mortgage
rates to refinance their mortgages. This roll off resulted in
a premature loss of income-producing assets and, as these
mortgages prepaid, the Company’s exposure to the cost
of indemnities payable to MBS debtholders increased. The
indemnities are calculated to make whole NHA-MBS debtholders
and assume the prepayment principal is reinvested at risk free
reinvestment rates. With the decrease in such interest rates
in 2020, the cost of such indemnities increased significantly.
While still relevant for the Company, indemnity costs slowed
as interest rates stabilized. The Company has determined that
indemnity costs in 2021 were lower by $15.9 million compared
to those in 2020. Accordingly, Net Interest – Securitized
Mortgages was higher by that amount in 2021. The Company’s
prime ABCP programs’ securitization margins were tighter in
2020 as the cost of funds reacted negatively to the financial
turmoil produced by the pandemic such that profitability was
decreased. In comparison, 2021 interest costs were stable and
securitization margins increased comparatively.
28
FIRST NATIONAL FINANCIAL CORPORATION Placement Fees
Mortgage Servicing Income
Placement fee revenue decreased by 9% to $303.7 million from $333.7 million in
Mortgage servicing income increased
the comparative year. The decrease was the result of several factors. Despite an 11%
21% to $211.6 million from $175.0 million.
increase in origination volumes sold to institutional investors, mortgage spreads
This increase was attributable to growing
returned to pre-pandemic levels. Accordingly, mortgages sold on a funded basis
administration revenue on growing MUA
attracted a lower per unit placement fee. For the residential segment, average per-unit
and growth in the Company’s third-party
fees were lower by about 13% year over year. For the commercial segment, mortgage
underwriting business unit. Much like the
spreads were also tighter than in 2020 and funding decisions had a significant impact
Company’s experience in single-family
on placement fees. Commercial placement fees were lower by $40.1 million year over
origination, First National’s third-party
year on tighter spreads and a shift of funding strategy from placement to securitization
underwriting customers benefited from
for 10-year insured mortgage origination. In 2021, the Company benefited from
the Company’s MERLIN technology.
CMHC programs that increased CMB access for issuers who lend on affordability-
Management believes this technology
linked real estate. This program is limited to 10-year insured mortgages, such that the
and First National’s business model have
Company elected to securitize a larger percentage of its insured commercial mortgage
been advantageous during the pandemic
origination and there was less insured product available to place with institutional
investors the Company. By shifting these mortgages to its own securitization, the
Company has foregone placement fees for future net securitization margin. While
arguably economically superior, the value of this securitization is recognized in income
and led to increased origination volumes.
Mortgage Investment Income
over 10 years as opposed to a placement where much of the value is recognized in the
Mortgage investment income decreased
current period. In 2021, the Company securitized $2.7 billion and placed about $2.6
billion of its five- and 10-year insured origination. In 2020, the Company securitized
$1.3 billion and placed about $4.6 billion of its five- and 10-year insured mortgage
origination. The Company estimates that the economic value of the additional $1.4
billion of mortgages securitized is approximately $26 million. 2021 also featured a shift
within insured origination from 10-year term product to five-year term product. In
2021, with a changing interest rate market, underwriting rules made it more difficult for
borrowers to qualify for 10-year terms such that five-year term origination increased to
the detriment of 10-year origination. Placement fees are directly linked to the term of
mortgages, such that five-year mortgages provide approximately 50% lower revenue
on a per-unit basis. This shift was magnified by the Company’s securitization strategy.
Lastly, in 2020, spreads were abnormally wide for about 9 months of the year after
mortgage lenders reacted to the financial impact of the pandemic. As the Company
placed these mortgages with institutional investors, it earned larger per-unit placement
7% to $63.9 million from $69.0 million.
The decrease was due primarily to the
interest rate environment. Short-term
rates fell significantly in March 2020 as
the Bank of Canada cut its overnight
rate by 1.5%. Accordingly, most of the
decrease was related to the first quarter
of each year such that 2021’s revenue
was lower than 2020 by about $7 million.
After the 2020 first quarter, the Company
decreased its offered mortgage rates.
The result was lower amounts of interest
earned on mortgages while they are
accumulated for securitization on the
fees than typical. In 2021, spreads returned to pre-pandemic levels about mid year such
balance sheet.
that spreads were between 15 to 50% lower than just 12 months prior.
Gains on Deferred Placement Fees
Gains on deferred placement fees revenue decreased 50% to $16.1 million from $32.4
million. These gains related primarily to multi-unit residential mortgages originated
and sold to institutional investors. Volumes for these transactions decreased by 30%
from 2020 as the Company elected to securitize directly more of the mortgages
that support this revenue. Spreads on these mortgages were also narrower in 2021
compared to 2020 as described in the Placement Fees section above.
29
2021 ANNUAL REPORT Realized and Unrealized Gains (Losses) on Financial Instruments
This financial statement line item consists of three primary components: (1) gains and
losses related to the Company’s economic hedging of single-family commitments, (2)
gains and losses related to holding a portfolio of mortgage and loan investments at
fair value, and (3) gains and losses on interest rate swaps used to mitigate interest rate
risk on its CMB activity. With the adoption of IFRS 9 in 2018, a significant portion of the
Company’s interest rate management program qualifies as “hedging” for accounting
purposes. The Company has elected to document hedging relationships for virtually
all of the multi-residential commitments and mortgages it originates for its own
securitization programs. It has also done the same for funded single-family mortgages
and the swaps used in its ABCP programs. This decision has reduced the volatility of
gains and losses on financial instruments otherwise recorded in the Company’s regular
earnings, as gains and losses on hedged items are generally deferred and amortized
into income over the term of the related mortgages. The Company has not documented
a hedging relationship for its interest mitigation program for its single-family mortgage
commitments. The Company believes, given the optional nature of these commitments,
it is difficult to establish a valid hedging relationship. For financial reporting purposes,
this means that there will still be gains and losses on financial instruments, but these
should be limited to those on the bonds sold short used to mitigate such risk. The
following table summarizes these gains and losses by category in the periods indicated:
Summary of Realized and Unrealized Gains (Losses) on Financial Instruments
($000s)
Gains (losses) on short bonds used
for the economic hedging program
Gains (losses) on mortgages held at
fair value
Gains (losses) on interest rate swaps
Net gains (losses) on financial instruments
Quarter Ended
Year Ended
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
3,155
(137)
(3,089)
(71)
114
924
(778)
260
15,397
(75,689)
(730)
(8,852)
5,815
(3,076)
11,410
(67,355)
In the first quarter of 2020, there were significant financial repercussions related to
the pandemic. After the significant disruption in that quarter, bond yields continued
to fall but at a slower pace. The impact on the Company’s short-bond position used
to mitigate interest rate risk on single-family commitments was $75.7 million of
losses in the full year 2020. In contrast, 2021 was a more stable period where bond
yields remained relatively flat with a slow rise toward the end of the fourth quarter as
economic predictions suggested an inflationary environment. For 2021, the Company
recorded $15.4 million of gains related to short bonds used to manage the interest rate
risk of residential mortgage commitments.
30
FIRST NATIONAL FINANCIAL CORPORATION Brokerage Fees Expense
Brokerage fees expense increased 27% to $201.8 million from $159.0 million. This
increase reflected higher origination volumes of single-family mortgages for
institutional investors, which increased by almost $3.7 billion or 28% year over year.
The growth was offset by lower commercial segment broker fees and moderated
by more Excalibur broker fees which are lower due to the shorter terms of these
mortgages. Unit broker fees for prime residential mortgages were about 1% higher
in 2021 compared to 2020.
Salaries and Benefits Expense
Salaries and benefits expense increased 23% to $177.0 million from $143.5 million.
Salaries were higher as overall headcount increased by 30% (1,579 employees at
December 31, 2021, compared to 1,211 at December 31, 2020). Headcount growth is
primarily in the residential underwriting departments. If the impact of commercial
underwriting compensation is taken out of the figures above, salaries and benefits
increased by 29% between 2020 and 2021. Management salaries were paid to the two
senior executives (co-founders) who together control about 71% of the Company’s
common shares. The current period expense is a result of the compensation
arrangement executed on the closing of the initial public offering (“IPO”) in 2006.
Interest Expense
Interest expense decreased 8% to $48.9 million from $53.2 million. As discussed in the
“Liquidity and Capital Resources” section of this analysis, the Company warehouses a
portion of the mortgages it originates prior to settlement with the investor or funding
with a securitization vehicle. The Company used senior unsecured notes together with
a $1.5 billion credit facility with a syndicate of banks and 30-day repurchase facilities
to fund the mortgages during this period. The overall interest expense decreased from
2020 due to lower prevailing interest rates on the Company’s debt, particularly when
comparing the first quarter of 2021 to the pre-pandemic first quarter of 2020 when
interest rates were higher.
Other Operating Expenses
Other operating expenses increased by 26% to $72.8 million from $57.6 million. The
primary change in other operating expenses was a $5.8 million increase in hedging
costs associated with a larger notional hedging program to support the company’s
securitization programs and a steepening bond yield curve which makes hedging more
expensive. Expenses for depreciation were also higher than in 2020 as the Company
invested in equipment to support its growing workforce and work-from-home business
continuity strategy. Discretionary costs, including promotion, travel and entertainment
were lower as a result of government-mandated measures related to the pandemic.
31
2021 ANNUAL REPORT Income before Income Taxes and Pre-FMV Income(1)
Income before income taxes increased by 2% to $263.8 million from $258.7 million in
2020. This increase was largely the result of changing capital markets. The Company’s
results include gains or losses on account of financial instruments used to economically
hedge residential mortgage commitments. As described previously in this MD&A, the
Company’s results include gains or losses on account of financial instruments used
to economically hedge residential mortgage commitments. Because of the financial
disruption related to the pandemic, large losses were recorded in 2020. All told, the
Company recorded $64.3 million of losses on financial instruments (excluding losses
related to mortgage and loan investments). Comparatively, in 2021, the Company
recorded $6.5 million of gains on financial instruments (excluding the losses related to
mortgage and loan investments). The change in these values, excluding the losses on
mortgage investments, accounted for a $70.8 million increase in comparative income
before income taxes. Pre-FMV Income, which excludes these changes, decreased by
20% to $257.3 from $323.0 million. Early in 2020, bond yields dropped significantly
and rapidly. This had a direct and immediate effect on the financial instruments the
Company uses to hedge its residential mortgage commitments. However, as those
mortgage commitments transformed into funded mortgages, the Company originated
mortgages with comparatively high mortgage coupons. These mortgages together with
mortgages subsequently originated in the wider spread environment, produced larger
placement fees as the Company placed these mortgages with investors. Management
believes that the Company comparatively earned about $30 million of additional
revenue from such placements. The decrease in Pre-FMV Income was also the result of
the commercial segment. In 2021, earnings were affected by tighter mortgage spreads
and a shift in funding sources. Because of favourable CMB treatment, the Company
securitized about $1.4 billion more of its five- and 10-year insured commercial segment
mortgage origination volume compared to 2020. Although perhaps economically
superior, this election delays the recognition of earnings for the Company. As described
previously, placement fees in the commercial segment were lower by approximately
$26.0 million from the shift to securitization. This decrease directly impacted earnings
as the compensation to the Company’s underwriters generally does not change when
mortgages are securitized as opposed to placed. Higher headcount was another
unfavourable factor on earnings. In order to support the record volumes of residential
mortgage origination, historically high third-party underwriting volumes and demands
on information technology, headcount increased by 30% comparing 2021 to 2020.
Growth in the Company’s securitization portfolio and higher origination in third-party
underwriting had favourable impacts on Pre-FMV Income in 2021.
(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. See Key Performance Indicators section in this MD&A.
32
FIRST NATIONAL FINANCIAL CORPORATION Income Tax Expense
The provision for taxes increased by 1%
to $69.3 million from $68.5 million. The
provision increased proportionately with
net income before income taxes.
Other Comprehensive Income
(“OCI”)
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
$31.2 million of pre-tax net gains on
such hedges in OCI in 2021. These gains
would have been recorded as gains on
financial instruments under the previous
IFRS standard. In the year, the Company
amortized a portion of the gains and
losses in accumulated OCI into regular
earnings. In 2021, this amortization
totalled $3.7 million. The remaining
OCI amount will be amortized into net
income in future periods.
33
2021 ANNUAL REPORT 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,
2021
December 31,
2020
December 31,
2021
December 31,
2020
Originations and renewals
29,719,176
25,833,197
12,404,946
11,075,085
Percentage change
Revenue
Percentage change
Income before income taxes
Percentage change
As at
Identifiable assets
15%
1,030,550
975,979
6%
199,366
41%
141,085
12%
364,056
(10%)
64,455
(45%)
404,315
117,644
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
28,813,695
28,945,884
13,430,687
39,011,848
10,512,867
35,123,122
Mortgages Under Administration
84,895,778
83,600,868
Residential Segment
Overall residential origination volumes including renewals increased by 15% between
2021 and 2020 while residential revenues increased by 6%. Revenue was affected by
the impact of financial instruments. Excluding the impact of these revenues, adjusted
revenue decreased by 2%. Revenue was negatively affected in 2021 by tighter mortgage
spreads and lower mortgage rates. Narrower spreads affected placement fees which
were up 4% or $10 million despite 15% growth in origination. The Company’s portfolio
of securitized mortgages decreased by $0.8 billion from 2020 to 2021. This change
represented new mortgages added in the year of almost $9 billion offset by run-off and
prepayment of almost $10 billion. The effect was the replacement of older mortgages
with higher coupons with new mortgages at lower coupons reflective of the current
intertest rate environment. Accordingly, revenue in this area was lower by $54 million.
Lower interest rates also affected mortgage investment income and, partially, mortgage
servicing revenue. Net income before tax was also affected by fair value-related
revenues. Without the impact of these revenues, net income before tax decreased to
$192.8 million in 2021 from $205.4 million in 2020, or by 6%. This is the outcome of the
lower per-unit revenues on placement activity combined with higher headcount which
has created comparatively higher operating expenses. Identifiable assets decreased
from December 31, 2020, as the Company’s residential portfolio of mortgages
pledged under securitization decreased by about $0.8 billion. Increases in mortgages
accumulated for sale and related hedge assets offset most of this decrease.
34
FIRST NATIONAL FINANCIAL CORPORATION Commercial Segment
Liquidity and Capital Resources
2021 commercial revenues were lower
The Company’s fundamental liquidity strategy has been to invest in prime Canadian
compared to 2020 largely because of
mortgages. Management’s belief has always been that these mortgages are considered
a shift in the product mix in mortgage
“AAA” by investors and should always be well bid and highly liquid. This strategy proved
origination and a tighter mortgage
effective during the turmoil experienced in 2007 through 2009, and once again in the
spread environment. Despite the growth
COVID-19 crisis, when capital markets were disrupted and the demand for high-quality
in origination of 12%, all of this growth
assets increased. As the Company’s results in those years demonstrated, First National
has been used in securitization which
was able to attract investors to purchase its mortgage origination at profitable margins.
produces revenue over a longer period
Originating prime mortgages also allows the Company to securitize in the capital
as opposed to placement transactions.
markets; however, this activity requires significant cash resources to purchase and hold
The Company elected to securitize a
mortgages prior to arranging for term debt through the securitization markets. For this
larger percentage of its commercial
purpose, the Company uses the combination of unsecured notes and the Company’s
mortgage origination, specifically 10-year
revolving bank credit facility. This aggregate indebtedness is typically used to fund: (1)
term insured mortgages. This has shifted
mortgages accumulated for sale or securitization, (2) the origination costs associated
the most profitable product from one
that earns the Company current period
with securitization, and (3) mortgage and loan investments. The Company has a credit
facility with a syndicate of financial institutions for total credit of $1.5 billion. This facility
placement fees to one that creates future
was extended in June 2021 for a five-year term maturing in March 2026. At December
net securitization margin. Income before
31, 2021, the Company had entered into repurchase transactions with financial
income taxes decreased by 45% year
institutions to borrow $1.8 billion related to $1.8 billion of mortgages held in “mortgages
over year. The decrease is due to lower
accumulated for sale or securitization” on the balance sheet.
placement fee revenues as described and
higher comparative compensation paid
to the Company’s in-house underwriters.
Despite mortgages being placed or
securitized, these employees are paid
on funding of the mortgage such that
overall employee costs increased 12%
in this department. Identifiable assets
increased from those at December
31, 2020, as the Company increased
securitized mortgages by about $2.1
billion, mortgages accumulated for
securitization by $0.2 billion, and hedging
related assets by $0.6 billion.
At December 31, 2021, outstanding bank indebtedness was $965.4 million (December
31, 2020 – $682.8 million). Together with the unsecured notes of $399 million
(December 31, 2020 – $399 million), this “combined debt” was used to fund $951.3
million (December 31, 2020 – $805.7 million) of mortgages accumulated for sale or
securitization. At December 31, 2021, the Company’s other interest-yielding assets
included: (1) deferred placement fees receivable of $64.4 million (December 31, 2020
– $62.5 million) and (2) mortgage and loan investments of $192.3 million (December
31, 2020 – $213.3 million). The difference between “combined debt” and the mortgages
accumulated for sale or securitization funded by it, which the Company considers a
proxy for true leverage, increased between December 31, 2020, and December 31, 2021,
and now stands at $413.0 million (December 31, 2020 – $275.8 million). This represents
a debt-to-equity ratio of approximately 0.72:1. This ratio is higher than the ratio of 0.48:1
at December 31, 2020. In general, the increase was the result of investing $157 million
in investments in mortgages pledged for securitization, largely to support its Alt-A
securitization program. The Company believes the ratio is appropriate given the nature
of the assets which the debt is funding.
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 2020-related national unemployment pursuant to the COVID-19
pandemic, this funding requirement increased as borrowers requested mortgage
payment deferrals. In such situations, the Company determined to grant mortgage
payment deferrals. Qualifying borrowers received three months of payment deferral.
In cases of extended hardship, the Company provided a second three-month deferral
after the initial deferral period ended. During this deferral period, a portion of such
mortgages ceased to amortize and interest otherwise payable was capitalized to
the principal of the mortgage. The three mortgage default insurers approved these
35
2021 ANNUAL REPORT steps, permitting the deferrals to occur without any impact
The Company also invests in short-term mortgages, usually
on subsequent claims under the mortgage insurance policies.
for six- to 18-month terms, to bridge existing borrowers in
In turn, First National has been required to make “timely
the interim period before long-term financing. The banking
payments” on the NHA-MBS securities. This means that despite
syndicate has provided credit facilities to partially fund these
not receiving payments from borrowers on the mortgages that
investments. As these investments return cash, it will be used
support the NHA-MBS, the Company has been required to pay
to pay down this bank indebtedness. The syndicate has also
the interest and amortizing principal on the debt. In effect, the
provided credit to finance a portion of the Company’s deferred
Company de-leveraged its balance sheet by paying off the debt
placement fees receivable and the origination costs associated
while the related mortgages did not amortize as quickly. At
with securitization, as well as other miscellaneous longer-term
December 31, 2021, the Company estimates that it had reduced
financing needs.
its NHA-MBS debt by approximately $46 million (December
31, 2020 - $64 million) because of the impact of deferred
payments. This has been funded by the Company’s available
cash resources.
The Company funds a portion of its mortgage originations
for institutional placement on the same day as the advance
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, 2021, the investment in cash collateral was $105.1 million
of the related mortgage. The remaining originations are
(December 31, 2020 – $88.2 million).
funded by the Company on behalf of institutional investors or
pending securitization by the Company. On specified days, the
Company aggregates all mortgages warehoused to date for
an institutional investor and transacts a settlement with that
institutional investor. A similar process occurs prior to arranging
for funding through securitization. The Company uses a portion
of the committed credit facility with the banking syndicate to
fund the mortgages during this warehouse period. The credit
facility is designed to be able to fund the highest balance of
warehoused mortgages in a month and is normally only partially
drawn.
36
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.
FIRST NATIONAL FINANCIAL CORPORATION Financial Instruments and Risk Management
Commencing January 1, 2018, the Company has recorded mortgages accumulated
for sale and mortgage and loan investments as financial assets measured at “fair
value through profit or loss” such that changes in market value are recorded in the
consolidated statement of income. The mortgages accumulated for sale are held
for very short periods, and any change in value due to changing interest rates is the
obligation of the ultimate institutional investor. Accordingly, the Company believes
there will be little, if any, effect on its income related to the change in fair value of
these mortgages. The majority of mortgages in mortgage and loan investments are
uninsured commercial segment bridge loans. These are primarily floating rate loans
that have mortgage terms of 18 months or less. As the mortgages do not conform
to conventional mortgage 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.
The Company believes its hedging policies are suitably designed such that the interest
rate risk of holding mortgages prior to securitization is mitigated. Prior to 2018, the
Company did not attempt to adopt hedge accounting; however, with the introduction
of IFRS 9 on January 1, 2018, the Company began designating hedging relationships
such that the results of any effective hedging will not affect the Company’s statement
of income. See previous discussion in this MD&A under “Realized and Unrealized Gains
(Losses) on Financial Instruments”. As at December 31, 2021, the Company had $1.4
billion of notional forward bond positions related to its single-family programs. For
multi-unit residential and commercial mortgages, the Company assumes all mortgages
committed will fund, and hedges each mortgage individually. This includes mortgages
committed for the CMB program as well as mortgages to be sold to the Company’s
other securitization vehicles. As at December 31, 2021, the Company had entered into
$1.1 billion of notional value forward bond sales for this segment. The Company is also
a party to three interest rate swaps that economically hedge the interest rate exposure
related to certain CMB transactions in which the Company has replacement obligations.
As at December 31, 2021, the aggregate notional value of these swaps, maturing
between December 2023 and September 2026, was $195 million. During 2021, the value
of these swaps decreased by $8.9 million.
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 mortgages originated
with a funding source as effectively as originally intended. Despite entering into
effective interest rate hedges, the Company’s exposure to credit spreads will remain.
This risk is inherent in the Company’s business model and the Company believes it
cannot be economically hedged. As at December 31, 2021, the Company had various
exposures to changing credit spreads. In particular, in mortgages accumulated for
sale or securitization, there were approximately $2.7 billion of mortgages that were
susceptible to some degree of changing credit spreads.
37
2021 ANNUAL REPORT Capital Expenditures
Critical Accounting Policies and Estimates
A significant portion of First National’s business model is
The Company prepares its financial statements in accordance
the origination and placement or securitization of financial
with IFRS, which requires management to make estimates,
assets. Generally, placement activities do not require any
judgments and assumptions that management believes are
capital investment. Securitization transactions may require the
reasonable based upon the information available. These
investment of significant amounts of the Company’s own capital.
estimates, judgments and assumptions affect the reported
This capital is provided in the form of cash collateral, credit
amounts of assets and liabilities and disclosure of contingent
enhancements, and the upfront funding of broker fees and
assets and liabilities at the date of the financial statements,
other origination costs. These are described more fully in the
and the reported amounts of revenue and expenses during
“Liquidity and Capital Resources” section above. The business
the reporting period. Management bases its estimates on
requires capital expenditures on technology (both software and
historical experience and other assumptions that it believes
hardware), leasehold improvements, and office furniture. During
to be reasonable under the circumstances. Management also
the year ended December 31, 2021, the Company purchased
evaluates its estimates on an ongoing basis. The significant
new computer equipment and software and made leasehold
accounting policies of First National are described in Note 2 to
improvements. In the long term, the Company expects capital
expenditures on fixed assets will be approximately $10 million
the Company’s annual consolidated financial statements as at
December 31, 2021. The policies that First National believes are
annually. 2021 expenditures were much higher at $32 million as
the most critical to aid in fully understanding and evaluating
the Toronto office moved to its new premises and invested in
its reported financial results include the determination of the
new leasehold improvements.
gains on deferred placement fees and the impact of fair value
Summary of Contractual Obligations
The Company’s long-term obligations include leases of
premises with terms up to 15 years 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.
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 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
Payments Due By Period
assumes there is virtually no prepayment on multi-unit
($000s)
0–1
1–3
4–5
Total
years
years
years
After
5 years
Lease obligations
134,426 10,339 18,966 17,639 87,482
residential fixed-rate mortgages.
On a quarterly basis, the Company reviews the estimates used
to ensure their appropriateness and monitors the performance
statistics of the relevant mortgage portfolios to adjust and
improve these estimates. The estimates used reflect the
expected performance of the mortgage portfolio over the lives
of the mortgages. The method of determining the assumptions
underlying the estimates used for the year ended December
31, 2021, are consistent with those used for the year ended
December 31, 2020, and the quarters ended September 30,
June 30 and March 31, 2021.
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,
38
FIRST NATIONAL FINANCIAL CORPORATION 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 has reduced
the volatility in earnings as changes in the value on short bonds
have been matched to the recognition of the change in value of
the hedged 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
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.
be implicit in the valuation of mortgage and loan investments.
As of December 31, 2021, management evaluated, under the
These are generally non-homogeneous mortgages where it
supervision of and with the participation of the Chief Executive
is difficult to find independent valuation comparatives. The
Officer and Chief Financial Officer, the effectiveness of the
Company uses information in its underwriting files, regional real
Company’s disclosure controls and procedures. Based on
estate information and other internal measures to determine the
this evaluation, management concluded that the Company’s
fair value of these assets.
As a mortgage lender, the Company invests in uninsured
mortgages. When it funds these mortgages through
disclosure controls and procedures, as defined by National
Instrument 52-109, Certification of Disclosure in Issuers’ Annual
and Interim Filings, were effective as of December 31, 2021.
securitization debt, it continues to be liable for any credit losses.
Management is responsible for establishing and maintaining
The key inputs in the measurement of any expected credit
adequate internal control over financial reporting. Internal
loss (“ECL”) include probability of default, loss given default
control over financial reporting is designed to provide
and forecast of future economic conditions, which involves
reasonable assurance regarding the reliability of financial
significant judgment. Upon application of IFRS 9 with respect
reporting and the preparation of financial statements for
to impairment, there has been no impact on the Company’s
external purposes in accordance with reporting standards;
earnings. Because of the high proportion of government-insured
however, because of its inherent limitations, internal control over
mortgages in its securitized portfolio and the low historical loss
financial reporting may not prevent or detect misstatements on
rates on the uninsured mortgages on which the Company lends,
a timely basis.
no significant amount of credit losses were recorded in 2021.
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, 2021, and that no material weaknesses have
been identified in the Company’s internal control over financial
reporting as of December 31, 2021. No changes were made in
the Company’s internal controls over financial reporting during
the year ended December 31, 2021, that have materially affected,
or are reasonably likely to materially affect, the Company’s
internal controls over financial reporting.
39
2021 ANNUAL REPORT ESG
The Company issued its initial Public Accountability Statement in the fall of 2021. This
report explores First National’s approach to sustainability and provides environmental,
social and governance (ESG) disclosure that has been reviewed and approved by our
Board of Directors. It complements our Management Information Circular, Annual
Information Form, Management Discussion and Analysis, and Annual Report, all of
which offer more information about the financial position, priorities, responsibilities and
commitments of the consolidated operations of First National.
Risks and Uncertainties Affecting the Business
The business, financial condition and results of operations of the Company are subject
to a number of risks and uncertainties and are affected by a number of factors outside
the control of management of the Company. In addition to the risks addressed
elsewhere in this discussion and the financial statements, these risks include: ability
to sustain performance and growth, reliance on sources of funding, concentration
of institutional investors including third-party servicing customers, reliance on
independent mortgage brokers, changes in interest rates, repurchase obligations and
breach of representations and warranties on mortgage sales, risk of servicer termination
including the impact of trigger events on cash collateral and retained interests,
reliance on multi-unit residential and commercial mortgages, general economic
conditions, legislation and government regulation (including regulations imposed by
the Department of Finance and CMHC and the policies set by and for mortgage default
insurance companies), potential for losses on uninsured mortgages, competition,
reliance on mortgage insurers, reliance on key personnel and the ability to attract
and retain employees and executives, conduct and compensation of independent
mortgage brokers, failure or unavailability of computer and 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 with such legislation. Among the risks of all potential tax
matters, there is a risk that tax legislation changes are detrimental to the Company or
that Canadian tax authorities interpret tax legislation differently than the Company’s
filing positions. Risk and risk exposure are managed through a combination of
insurance, a system of internal controls, and sound operating practices. The Company’s
residential segment, the Company relies
on independent mortgage brokers for
origination and several large institutional
investors for sources of funding.
These relationships are critical to the
Company’s success. In October 2019, the
sale transaction involving an institution
for which the Company administers a
large portfolio of third-party originated
mortgages was completed. The new
owners of the institution may decide
not to renew the existing contract with
First National or to exercise termination
clauses within the agreement. In the
event of non-renewal or termination,
the Company’s MUA will decrease. For
a more complete discussion of the risks
affecting the Company, reference should
be made to the Company’s Annual
Information Form.
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 Company is
prepared for a hybrid return to office
in 2022 subject to health guidelines
but as of the date of this MD&A, the
contingency plan remains in effect. The
COVID-19 crisis has been the cause of
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
key business model is to originate primarily prime mortgages and find funding through
material.
various channels to earn ongoing servicing or spread income. For the single-family
40
FIRST NATIONAL FINANCIAL CORPORATION Forward-Looking Information
Forward-looking information is included in this MD&A. In some cases, forward-looking
information can be identified by the use of terms such as “may”, “will”, ‘“should”,
“expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”,
“continue” or other similar expressions concerning matters that are not historical
facts. Forward-looking information may relate to management’s future outlook and
anticipated events or results, and may include statements or information regarding the
future financial position, business strategy and strategic goals, product development
activities, projected costs and capital expenditures, financial results, risk management
strategies, hedging activities, geographic expansion, licensing plans, taxes and
other plans and objectives of or involving the Company. Particularly, information
regarding growth objectives, any increase in Mortgages Under Administration,
future use of securitization vehicles, industry trends and future revenues is forward-
looking information. Forward-looking information is based on certain factors and
assumptions regarding, among other things, interest rate changes and responses to
such changes, the demand for institutionally placed and securitized mortgages, the
status of the applicable regulatory regime, and the use of mortgage brokers for single-
family residential mortgages. This forward-looking information should not be read
as providing guarantees of future performance or results, and will not necessarily be
an accurate indication of whether or not, or the times by which, those results will be
achieved. While management considers these assumptions to be reasonable based on
information currently available to it, they may prove to be incorrect. Forward-looking
information is subject to certain factors, including risks and uncertainties, which could
cause actual results to differ materially from what management currently expects.
These factors include reliance on sources of funding, concentration of institutional
investors, reliance on independent mortgage brokers, and changes in interest rates as
outlined in the “Risk and Uncertainties Affecting the Business” section. In evaluating
this information, the reader should specifically consider various factors, including the
risks outlined in the “Risk and Uncertainties Affecting the Business” section, that may
cause actual events or results to differ materially from any forward-looking information.
The forward-looking information contained in this discussion represents management’s
expectations as of March 1, 2022, and is subject to change after such date. However,
management and the Company disclaim any intention or obligation to update or revise
any forward-looking information, whether as a result of new information, future events
or otherwise, except as required under applicable securities regulations.
41
2021 ANNUAL REPORT 42
FIRST NATIONAL FINANCIAL CORPORATION Outlook
2021 saw a return to a fully competitive marketplace and mortgage spreads tightened
Effective January 12, 2022, subsequent
to pre-pandemic levels. In some periods, spreads tightened to levels not seen since
to year end, the Company announced
before the 2008 financial crisis. The Company successfully grew MUA despite the
the appointments of Stephen Smith as
competitive environment and built a larger portfolio of mortgages pledged under
Executive Chairman of the Board and
securitization. First National will benefit from this growth in the future: earning
Jason Ellis as President, Chief Executive
income from mortgage administration, net securitization margin and increased
Officer and Director. Mr. Smith co-
renewal opportunities. In the short term, the expectation for the start of 2022 is lower
founded First National in 1988 with
origination. There are indications of slowing origination as housing inventories fall and
Moray Tawse. Since taking First National
as mortgage rates rise driven by an expected change in the Bank of Canada’s monetary
public in 2006, Mr. Smith served as the
policy in 2022. Generally, higher interest rates will decrease affordability and dampen
Company’s founding Chairman and
activity. Management estimates that residential origination will be lower than the almost
Chief Executive Officer and now will
$4.4 billion recorded in the comparative 2021 first quarter. Management recognizes that
continue to provide strategic guidance
home purchasing in the past two years has been at levels that are likely unsustainable
to the management team in the newly
and that while drivers such as higher immigration are strong, a market slowdown seems
inevitable. However, it is confident that First National will remain competitive and a
created role of Executive Chairman.
Mr. Ellis joined First National in 2004
leader in the marketplace. Management anticipates commercial origination will remain
with responsibility for First National’s
strong in 2022 based on the current pipeline.
During the pandemic, the value of First National’s business model has been
demonstrated. By designing systems that do not rely on face-to-face interactions, the
Company’s business practices have resonated with mortgage brokers and borrowers
alike during this period. The economic effects of COVID-19 are expected to slowly
diminish although the duration and impact of the pandemic is unknown at this time,
as is the long-term efficacy of the government and central bank interventions. It is still
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.
First National is well prepared to execute its business plan. In 2022, the Company
treasury and capital markets activities,
was appointed Chief Operating Officer in
2018 and added the title of President in
2019. Mr. Ellis will be responsible for day-
to-day operations and the design and
maintenance of strategy in the pursuit
of business excellence. Although just
recently appointed as CEO, Mr. Ellis has
played increasingly important strategic
roles within the business for over 15
years and is dedicated to leading the
organization through the next stage of
expects to enjoy the value of its goodwill with broker partners earned over the last 30+
growth.
years and reinforced during the pandemic. The funding side shows strong demand for
the Company’s mortgages from institutional investors due to the substantial amount
of liquidity in the financial system. Securitization markets are robust and provide
consistent and reliable sources of funding.
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 $33 billion
portfolio of mortgages pledged under securitization and $88 billion servicing portfolio
and focus on the value inherent in its significant single-family renewal book.
43
2021 ANNUAL REPORT MANAGEMENT’S
RESPONSIBILITY
FOR FINANCIAL
REPORTING
The management of First National Financial Corporation (the “Company”) is
The Board of Directors oversees that
responsible for the integrity, consistency and reliability of the consolidated financial
management fulfils its responsibility for
statements and Management’s Discussion and Analysis (“MD&A”). The consolidated
financial reporting and internal control.
financial statements have been prepared by Management in accordance with
The financial statements have been
International Financial Reporting Standards.
We certify that we have reviewed the financial statements and information contained in
the MD&A, and, based on our knowledge, they do not contain any untrue statement of
a material fact or omit to state a material fact required to be stated or that is necessary
to make a statement not misleading in light of the circumstances under which it was
made, with respect to the period covered by the statements and the annual report.
Based on our knowledge, the financial statements together with MD&A and other
financial information included in the annual report fairly present in all material respects
the financial condition, results of operations and cash flows of the Company as of the
dates and for the periods presented. The preparation of financial statements involves
transactions affecting the current period which cannot be finalized with certainty until
future periods. Estimates and assumptions are based on historical experience and
current conditions, and are believed to be reasonable.
We are responsible for establishing and maintaining internal control over financial
reporting for the Company. We have designed such internal control over financial
reporting, or caused it to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes. We evaluated, or caused to be evaluated under
our supervision, the effectiveness of the 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.
reviewed by the Audit Committee and
approved by the Board of Directors.
Ernst & Young LLP, the independent
auditors appointed by the shareholders,
has performed an independent audit of
the Company’s consolidated financial
statements and provide their report
which follows. The auditors have full
and free access to, and meet at least
quarterly with, the Audit Committee to
discuss their audit and related matters.
Jason Ellis
President and Chief Executive Officer
Robert Inglis
Chief Financial Officer
March 1, 2022
44
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
Key audit matters
We have audited the consolidated financial statements of First National Financial
Key audit matters are those matters
Corporation and its subsidiaries [collectively, the “Company”], which comprise the
that, in our professional judgment, were
consolidated statements of financial position as at December 31, 2021 and December 31,
of most significance in the audit of
2020, and the consolidated statements of income, comprehensive income, changes in
the financial statements of the current
equity and cash flows for the years then ended, and notes to the consolidated financial
period. These matters were addressed in
statements, including a summary of significant accounting policies.
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, 2021 and December 31, 2020, and its consolidated financial performance and its
consolidated cash flows for the years then ended in accordance with International
Financial Reporting Standards [“IFRSs”].
Basis for opinion
the context of the audit of the financial
statements as a whole, and in forming
the auditor’s opinion thereon, and we do
not provide a separate opinion on these
matters. For each matter below, our
description of how our audit addressed
the matter is provided in that context.
We have fulfilled the responsibilities
described in the Auditor’s responsibilities
We conducted our audit in accordance with Canadian generally accepted auditing
for the audit of the financial statements
standards. Our responsibilities under those standards are further described in the
section of our report, including in relation
Auditor’s responsibilities for the audit of the consolidated financial statements section
to these matters. Accordingly, our audit
of our report. We are independent of the Company in accordance with the ethical
included the performance of procedures
requirements that are relevant to our audit of the consolidated financial statements
designed to respond to our assessment
in Canada, and we have fulfilled our ethical responsibilities in accordance with these
of the risks of material misstatement
requirements. We believe that the audit evidence we have obtained is sufficient and
of the financial statements. The results
appropriate to provide a basis for our opinion.
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.
45
2021 ANNUAL REPORT Measurement of estimated credit losses
Other information
As more fully described in Note 2 and Note 3 to the financial statements, the Company
Management is responsible for the
is exposed to credit risk on its mortgage assets. In 2021 the Company has recorded
other information. The other information
an allowance for credit losses of $766 thousand. The Company manages credit risk
comprises:
by employing underwriting policies and procedures designed to minimize exposure to
credit losses, and by acquiring insurance against borrower default on substantially all its
mortgages. 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.
• Management’s Discussion and
Analysis
• The information, other than the
consolidated financial statements
and our auditor’s report thereon,
The allowance for credit losses was identified as a key audit matter due to the number
in the Annual Report
of key data inputs and criteria being assessed as part of the underwriting process. The
availability and observability of data inputs and judgmental assumptions are key factors
in the susceptibility of the allowance for credit losses being exposed to variances in
the probability of default and loss given default. Management judgment was involved
in selecting appropriate values for key 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 assess 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 key data inputs described can have a
material effect on the measurement of ECL for each loan underwritten by the Company.
We obtained an understanding of management’s controls over exposure to credit
risk, including mortgage underwriting policies and processes used to assess borrower
capacity, income verification, creditworthiness and collateral. We tested the operating
effectiveness of these controls by assessing for a sample of mortgages originated
and funded, compliance with management’s underwriting policy and processes and
eligibility, when arranged, for insurance against borrower default based on criteria of
the mortgage default insurer.
For the purpose of auditing the allowance for credit losses, among 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.
• We tested management’s data and model by obtaining contrary 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.
Our opinion on the consolidated financial
statements does not cover the other
information and we do not express any
form of assurance 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 financial statements or
our knowledge obtained in the audit
or otherwise appears to be materially
misstated.
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 also assessed the adequacy of the Company’s disclosures on the management
we conclude that there is a material
of credit risk.
misstatement of this other information,
we are required to report that fact to
those charged with governance.
46
FIRST NATIONAL FINANCIAL CORPORATION Responsibilities of
management and those
charged with governance
for the consolidated
financial statements
Management is responsible for the
preparation and fair presentation of
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
statements that are free from material
misstatement, whether due to fraud
or error.
In preparing the consolidated financial
statements, management is responsible
for assessing the Company’s ability to
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.
Those charged with governance are
responsible for overseeing the Company’s
financial reporting process.
Auditor’s responsibilities for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated
financial statements as a whole are free from material misstatement, whether due to
fraud 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.
As part of an audit in accordance with Canadian generally accepted auditing standards,
we exercise professional judgment and maintain professional skepticism throughout the
audit. We also:
• Identify and assess the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement 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.
• Obtain an understanding of internal control relevant to the audit in order to
design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Company’s
internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt
on the Company’s ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if
such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Company to cease to continue as a
going concern.
47
2021 ANNUAL REPORT • Evaluate the overall presentation, structure, and content of the consolidated
financial statements, including the disclosures, and whether the consolidated
financial statements represent the underlying transactions and events in a manner
that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of
the entities or business activities within the Company to express an opinion on the
consolidated financial statements. We are responsible for the direction, supervision
and performance of the Company’s audit. We remain solely responsible for our
audit opinion.
We communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably be
thought to bear on our independence, and where applicable, related safeguards.
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, in extremely rare circumstances, we determine
that a matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is
Humayun Jafrani.
Toronto, Canada
March 1, 2022
48
FIRST NATIONAL FINANCIAL CORPORATION Consolidated Statements of Financial Position
As at December 31
[in thousands of Canadian dollars]
Notes
2021
2020
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
Income taxes recoverable
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
18
15
7
9
15
16
14
10
12
18
18
17
17
815,807
105,108
97,602
2,757,640
35,435,455
64,370
192,340
8,735
2,677,972
119,129
669,219
88,206
119,531
2,250,519
34,137,421
62,535
213,301
—
1,884,811
62,984
42,274,158
39,488,527
965,420
682,832
1,768,029
222,369
2,677,689
1,418,445
185,772
1,888,049
35,576,353
34,265,504
398,888
—
88,000
398,554
11,470
67,100
41,696,748
38,917,726
122,671
97,394
364,974
(7,629)
577,410
122,671
97,394
383,993
(33,257)
570,801
42,274,158
39,488,527
49
2021 ANNUAL REPORT
Consolidated Statements of Income
Years ended December 31
[in thousands of Canadian dollars, except earnings per share]
Notes
2021
2020
Revenue
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement fees
Gains on deferred placement fees
Mortgage investment income
Mortgage servicing income
Realized and unrealized gains (losses) on financial instruments
Expenses
Brokerage fees
Salaries and benefits
Interest
Other operating
Income before income taxes
Income tax expense
Net income for the year
Earnings per share
Basic
See accompanying notes
793,507
(630,279)
163,228
303,694
16,126
63,875
211,589
5,815
764,327
201,786
177,038
48,909
72,773
500,506
263,821
69,260
194,561
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
3.20
3.12
3
4
6
19
18
17
50
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 gains (losses) from change in fair value of cash flow hedges
Reclassification of net losses to income
Income tax recovery (expenses)
Total other comprehensive income (loss)
Total comprehensive income
See accompanying notes
Notes
18
2021
194,561
31,206
3,712
34,918
(9,290)
25,628
220,189
2020
190,229
(73,147)
32,524
(40,623)
10,800
(29,823)
160,406
Consolidated Statements of Changes in Equity
Years ended December 31
[in thousands of Canadian dollars]
Common
shares
Preferred
shares
Retained
earnings
Accumulated other
comprehensive loss Total equity
Balance as at January 1, 2021
122,671
97,394
383,993
(33,257)
570,801
Net income for the year
Other comprehensive income
Dividends paid or declared
—
—
—
—
—
—
194,561
—
(213,580)
—
194,561
25,628
25,628
—
(213,580)
Balance as at December 31, 2021
122,671
97,394
364,974
(7,629)
577,410
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
51
2021 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
2021
2020
194,561
190,229
11,610
(16,040)
(146,588)
(4,400)
(31,320)
12,377
Net investment in mortgages pledged under securitization
(1,359,472)
(2,077,042)
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 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
Repayment of lease liabilities
Issuance of senior unsecured notes
Repayment of matured senior unsecured notes
Cash provided by financing activities
Net decrease (increase) in bank indebtedness during the year
Bank indebtedness, beginning of year
Bank indebtedness, end of year
Supplemental cash flow information
Interest received
Interest paid
Income taxes paid
52
1,372,287
(793,161)
855,759
14,205
9,182
(37,507)
104,836
(507,730)
(402,894)
(31,956)
(16,902)
(1,420,147)
1,456,265
(12,740)
(212,305)
349,584
(4,233)
—
—
133,046
(282,588)
(682,832)
(965,420)
957,742
647,049
77,855
1,954,756
530,024
(621,315)
10,831
7,660
63,082
34,882
(281,946)
(247,064)
(3,585)
(4,619)
(817,101)
971,138
145,833
(150,621)
346,383
(3,895)
199,290
(175,000)
216,157
114,926
(797,758)
(682,832)
999,551
735,830
66,194
FIRST NATIONAL FINANCIAL CORPORATION NOTES TO
CONSOLIDATED
FINANCIAL
STATEMENTS
[in thousands of Canadian dollars,
unless otherwise indicated]
December 31, 2021 and 2020
1. General organization and business of
First National Financial Corporation
2. Significant accounting policies
First National Financial Corporation [the “Corporation” or
[a] Basis of preparation
“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 almost $124
billion in mortgages under administration as at December 31,
2021, FNFLP is a significant participant in the mortgage broker
distribution channel.
The Corporation is incorporated under the laws of the Province
of Ontario, Canada and has its registered office and principal
place of business located at 16 York Street, Toronto, Ontario.
The Corporation’s common and preferred shares are listed on
the Toronto Stock Exchange under the symbols FN, FN.PR.A
and FN.PR.B, respectively.
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
[“IFRS”]. The consolidated financial statements have been
prepared on a historical cost basis, except for derivative
financial instruments and certain financial assets and financial
liabilities that are recorded at fair value through profit or loss
[“FVTPL”] and measured at fair value. The carrying values of
recognized assets and liabilities that are designated as hedged
items in fair value hedges, and that would otherwise be carried
at amortized cost, are adjusted to record changes in fair value
attributable to the risks that are being mitigated in effective
hedge relationships. The consolidated financial statements are
presented in Canadian dollars and all values are rounded to
the nearest thousand except when otherwise indicated. The
consolidated financial statements were authorized for issue by
the Board of Directors on March 1, 2022.
53
2021 ANNUAL REPORT [b] Basis of consolidation
[c] Use of estimates
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.
FNAM is a wholly owned subsidiary of the GP, and an indirect
subsidiary of the Company. FNAM is a NHA approved lender and
NHA-MBS issuer in the capacity of an “aggregator”. Its business
model is to purchase mortgages from mortgage originators in
order to create NHA-MBS pools, and subsequently sell these
into the Canada Mortgage Bonds programs [“CMB”].
The Company did not consolidate, in its financial statements,
four 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, 2021, the Company recorded, on its consolidated
statements of financial position, its portion of the assets of
the SPEs amounting to $2,227 million [2020 – $1,565 million].
The Company also recorded, in its consolidated statements of
income, interest revenue – securitized mortgages of $55,551
[2020 – $51,141] and interest expense – securitized mortgages
of $36,969 [2020 – $39,371] 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.
The preparation of consolidated financial statements in
conformity with IFRS requires management to make estimates
and assumptions that affect the reported amounts of assets
and liabilities, including contingencies, at the date of the
consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results may differ from those estimates. Major areas requiring
use of estimates by management are those that require
reporting of financial assets and financial liabilities at fair value.
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 and severity of these developments
and the impact on the consolidated financial results and
condition of the Company and its operating subsidiaries 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.
54
FIRST NATIONAL FINANCIAL CORPORATION [d] Significant Accounting Policies
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:
Securities purchased under resale agreements
Mortgages accumulated for securitization
Mortgages accumulated for sale
Mortgages pledged under securitization
Mortgage and loan investments
Deferred placement fees receivable
Amortized cost
Amortized cost
FVTPL
Amortized cost
FVTPL
Amortized cost
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
Debt related to securitized mortgages
Servicing liabilities
Senior unsecured notes
Amortized Cost
FVTPL
Amortized cost
Amortized cost
Amortized cost
55
2021 ANNUAL REPORT Impairment
The expected credit loss [“ECL”] impairment model applies to all debt instruments
Cash flow hedges
within financial assets classified as amortized cost or FVOCI, as well as certain off-
balance sheet loan commitments. The IFRS 9 ECL approach has three stages: Stage
1 – the credit risk has not increased significantly since initial recognition such that an
allowance for credit loss is recognized and maintained 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 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 cash flows on the anticipated
future debt to be arranged through
securitization of these mortgages
The Company assesses the credit risk of the mortgages based on the expected
obtained through CMB, disclosed as debt
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 a lifetime ECL for Stage 2 mortgages. 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’s ECL impairment model is built on an unbiased and probability-
weighted method, determined by evaluating a range of possible outcomes supported
by past loss events and expectation of future possible outcomes, discounted to reflect
the time value of money. The key inputs in the measurement of ECL include Probability
of Default, Loss Given Default and forecast of future economic conditions, which
involve significant judgement.
Hedge accounting
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.
related to securitized mortgages. The
Company also uses the same hedging
strategy when placing mortgages with
institutional investors who plan to use
CMB funding. The effective portion of the
change in the fair value of the designated
hedging instrument qualifying as
a cash flow hedge is recognized in
other comprehensive 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 the
consolidated statements of income.
56
FIRST NATIONAL FINANCIAL CORPORATION 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.
In the case of the swaps and short
bonds used to hedge funded mortgages,
changes in fair value of the hedged
item, to the extent that the hedging
relationship is effective, are offset by
changes in the fair value of the hedging
instrument, both of which are recognized
in the consolidated statements of
income. At hedge unwind, the realized
Revenue recognition
The Company earns revenue from placement, securitization and servicing activities
related to its mortgage business. The majority of originated mortgages are sold
to institutional investors through the placement of mortgages or funded through
securitization conduits. The Company retains servicing rights on substantially all of
the mortgages it originates, providing the Company with servicing fees.
Interest revenue and expense from mortgages pledged under securitization
The Company enters into securitization transactions to fund a portion of 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.
For securitized mortgages that do not meet the criteria for derecognition, no gain
or loss is recognized at the time of the transaction. Instead, net interest income is
recognized over the term of the mortgages. Interest revenue – securitized mortgages
represents the interest portion of mortgage payments received and accrued by
borrowers and 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.
change in the value of the hedging
Capitalized origination fees and debt discounts or premiums are amortized on an
instrument is adjusted to the carrying
effective yield basis over the term of the related mortgages or debt.
value of the hedged 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 recorded in the
consolidated statements of income.
57
2021 ANNUAL REPORT
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.
Placement fees and deferred placement fees receivable
The Company enters into placement agreements with institutional investors to
purchase the mortgages it originates. When mortgages are placed with institutional
investors, the Company transfers the contractual right to receive mortgage cash flows
to the investors. Because it has transferred substantially all the risks and rewards of
these mortgages, it derecognizes these assets. The Company retains a residual interest
representing the rights and obligations associated with servicing the mortgages.
Placement fees are earned by the Company for its origination and underwriting
activities on a completed transaction basis when the mortgage is funded. Amounts
Servicing income related to mortgages
placed with institutional investors is
recognized in income over the life of
the servicing obligation as payments
are received from mortgagors. Interest
income earned by the Company from
holding cash in trust related to servicing
activities is classified as mortgage
servicing income. The amortization of
any servicing liabilities is also recorded
as mortgage servicing income.
The Company provides underwriting
and fulfillment 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
immediately collected or collectible in excess of the mortgage principal are recognized
been funded.
as placement fees. When placement fees and associated servicing fees are earned over
the term of the related mortgages, the Company determines the present value of the
future stream of placement fees and records a gain on deferred placement fees and
Mortgage investment income
a deferred placement fees receivable. Since quoted prices are generally not available
The Company earns interest income
for retained interests, the Company estimates values based on the net present value
from its interest-bearing assets including
of future expected cash flows, calculated using management’s best estimates of key
deferred placement fees receivable,
assumptions related to expected prepayment rates and discount rates commensurate
mortgage and loan investments and
with the risks involved.
Mortgage servicing income
mortgages accumulated for sale or
securitization. Mortgage investment
income is recognized on an accrual basis.
The Company services substantially all of the mortgages that it originates whether
the mortgage is placed with an institutional investor or transferred to a securitization
vehicle. In addition, mortgages are serviced on behalf of third-party institutional
investors and securitization structures. For all mortgages administered for investors or
third parties, the Company recognizes servicing income when services are rendered.
For mortgages placed under deferred placement arrangements, the Company retains
the rights and obligations to service the mortgages. The deferred placement fees
receivable is the present value of the excess retained cash flows over market servicing
fee rates and is reported as deferred placement revenue at the time of placement.
58
FIRST NATIONAL FINANCIAL CORPORATION Brokerage fees
Brokerage fees are primarily fees paid to external mortgage
Securities sold short and securities
purchased under resale agreements
brokers. Brokerage fees relating to mortgages placed with
Securities sold short consist typically of the short sale of
institutional investors are expensed as incurred, and those
Government of Canada bonds. Bonds purchased under
relating to mortgages recorded at amortized cost are capitalized
resale agreements consist of the purchase of a bond with
to the carrying cost of the related mortgages and amortized
the commitment from the Company to resell the bond to
over the term of the mortgages.
Mortgages pledged under securitization
Mortgages pledged under securitization are mortgages that
the Company has originated and funded with debt raised
through the securitization markets, and have been classified at
amortized cost. The Company has a continuous involvement
in these mortgages, including the right to receive future cash
flows arising from these mortgages. Origination costs, such as
brokerage fees and bulk insurance premiums that are directly
attributable to the acquisition of such assets, are deferred
and amortized over the term of the mortgages on an effective
yield basis.
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.
the original seller at a specified price. The Company uses
the combination of bonds sold short and bonds purchased
under resale agreements to economically hedge its mortgage
commitments and the portion of funded mortgages that it
intends to securitize in subsequent periods.
Bonds sold short are classified as FVTPL and are recorded
at fair value. The effective yield payable on bonds sold short
is recorded as hedge expense in other operating expenses.
Bonds purchased under resale agreements are carried at cost
plus accrued interest, which approximates their market value.
The difference between the cost of the purchase and the
predetermined proceeds to be received on a resale agreement
is recorded over the term of the hedged mortgages as an offset
to hedge expense. Transactions are recorded on a settlement
date basis.
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.
Leases
The Company measures right-of-use assets at cost. The right-
of-use assets are subsequently amortized using the straight-line
method. The right-of-use assets are also subject to impairment.
Lease liabilities are calculated using the present value of future
lease payments, discounted at the Company’s incremental
borrowing rate. After the commencement date, the amount of
lease liabilities is increased to reflect the accretion of interest
and reduced for the lease payments made.
The Company’s major leases are for premises at its Toronto head
office and four regional offices. The Company has elected not to
recognize right-of-use assets and a lease liability for its various
office equipment leases, which are insignificant for application
of the standard.
59
2021 ANNUAL REPORT Property, Plant and Equipment
Servicing liability
Property, plant and equipment are recorded at cost, less accumulated amortization,
at the following annual rates and bases:
The Company places mortgages with
third-party institutional clients, and
retains the rights and obligations to
service these mortgages. When the
30% declining balance
20% declining balance
service-related fees are paid upfront by
Computer equipment
Office equipment
Leasehold improvements
Straight-line over the term of the lease
Computer software
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
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
Goodwill represents the price paid for the Company’s business in excess of the fair
related to expected prepayment rates
value of the net tangible assets and identifiable intangible assets acquired in connection
and discount rates commensurate with
with the IPO. Goodwill is reviewed annually for impairment or more frequently when an
the risks involved. The Company earns
the related servicing fees over the
term of the mortgages on an effective
yield basis.
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.
60
FIRST NATIONAL FINANCIAL CORPORATION Income taxes
The Company accounts for income taxes in accordance with the liability method of
tax allocation. Under this method, the provision for income taxes is calculated based
on income tax laws and income tax rates substantively enacted as at the dates of the
consolidated statements of financial position. The income tax provision consists of
current income taxes and deferred income taxes. Current and deferred taxes relating
to items in the Company’s equity are recorded directly against equity.
Current income taxes are amounts expected to be payable or recoverable as the result
of operations in the current year and any adjustment to tax payable 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.
Earnings per common share
3. Mortgages pledged
under securitization
The Company securitizes residential
and commercial mortgages in order
to raise debt to fund these mortgages.
Most of these securitizations consist of
the transfer of fixed and floating rate
mortgages into securitization programs,
such as ABCP, NHA-MBS and 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
The Company presents earnings per share [“EPS”] amounts for its common shares.
by the rating agencies. Credit exposure to
EPS is calculated by dividing the net earnings attributable to common shareholders of
securitized mortgages is generally limited
the Company by the weighted average number of common shares outstanding during
to this cash collateral. The principal and
the year.
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, 2021, the cash held as
collateral for securitization was $105,108
[2020 – $88,206].
61
2021 ANNUAL REPORT The following table compares the carrying amount of mortgages pledged for
securitization and the associated debt:
Carrying amount of
securitized mortgages ($)
Carrying amount of
associated liabilities ($)
2021
Securitized mortgages
Capitalized amounts related to
hedge accounting
Capitalized origination costs
Debt discounts
Add
Principal portion of payments
recorded in restricted cash
Securitized mortgages
Capitalized amounts related to
hedge accounting
Capitalized origination costs
Debt discounts
Add
Principal portion of payments
recorded in restricted cash
35,186,217
50,880
198,358
—
35,435,455
—
766,118
36,201,573
(35,659,675)
(46,933)
—
130,255
(35,576,353)
—
—
(35,576,353)
Carrying amount of
securitized mortgages ($)
Carrying amount of
associated liabilities ($)
2020
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)
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.
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.
62
FIRST NATIONAL FINANCIAL CORPORATION
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
During the year ended December 31, 2021, the Company invested in mortgages
that were transferred into the securitization vehicles with principal balances as at
December 31, 2021 of $8,940,445 [2020 – $7,638,054].
2021
184,818
114,789
(101,249)
$198,358
2020
175,702
95,849
(86,733)
$184,818
The contractual maturity profile of the
The following table summarizes the mortgages pledged under securitization that are
mortgages pledged under securitization
31 days or more past due as at December 31:
programs is summarized as follows:
2022
2023
2024
2025
5,737,486
5,233,694
5,056,830
7,039,026
2026 and thereafter
12,119,181
$35,186,217
Arrears days
31 to 60
61 to 90
Greater than 90
2021
2022
1,086
447
752
$2,285
4,555
1,946
4,050
$10,551
All the mortgages pledged under securitization in arrears are insured, except for six
mortgages which are uninsured and have a total principal balance of $1,505 as at
December 31, 2021 [2020 – nine mortgages, $2,572]. The Company’s exposure to credit
loss is limited to uninsured mortgages with principal balances totaling $3,094,301
[2020 – $2,312,549], 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 $766 for the year ended December 31, 2021
[2020 – $862].
In order to assist its borrowers during the COVID-19 pandemic, in the first quarter of
2020, the Company started providing up to three months of payment deferrals to all
single-family mortgagors applying for payment relief because of temporary hardship
resulting from the pandemic. In the second and third quarters, the Company granted
extensions to the original three months period to qualified borrowers based on
additional due diligence. The payment deferral program ended September 30, 2020.
Interest continues to accrue on these mortgages 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.
63
2021 ANNUAL REPORT 4. Deferred placement fees receivable
The Company enters into transactions with institutional investors to sell primarily fixed-
rate mortgages in which placement fees are received over time as well as at the time
of the mortgage placement. These mortgages are derecognized when substantially all
of the risks and rewards of ownership are transferred and the Company has minimal
exposure to the variability of future cash flows from these mortgages. The investors
have no recourse to the Company’s other assets for failure of mortgagors to make
payments when due.
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.
2021
Mortgages placed with institutional investors
1,018,328
2,421,410
Gains on deferred placement fees created
Cash receipts on deferred placement fees received
1,442
97
14,684
16,775
Residential ($)
Commercial ($)
2020
Mortgages placed with institutional investors
Gains on deferred placement fees created
Cash receipts on deferred placement fees received
Residential ($)
Commercial ($)
—
—
—
3,461,154
32,365
13,008
Total ($)
3,439,738
16,126
16,872
Total ($)
3,461,154
32,365
13,008
64
FIRST NATIONAL FINANCIAL CORPORATION The Company estimates that the expected undiscounted cash flows to be received on
the deferred placement fees receivable will be as follows:
Residential
Commercial
2022
427
2023
361
15,449
13,534
2024
305
11,685
2025
257
2026 and
thereafter
126
Total
1,476
9,520
21,080
71,268
$15,876
$13,895
$11,990
$9,777
$21,206
$72,744
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
2021
2020
2,726,697
30,943
$2,757,640
2,200,484
50,035
$2,250,519
The Company’s exposure to credit loss is limited to $299,446 [2020 – $216,667]
of principal balances of uninsured mortgages within mortgages accumulated for
securitization, before consideration of the value of underlying collateral. As at
December 31, 2021, 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.
65
2021 ANNUAL REPORT 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 loss of $730 [2020 – $3,076] for the year ended December 31, 2021.
The following table discloses the composition of the Company’s portfolio of mortgage
and loan investments by geographic region as at December 31, 2021:
Province/Territory
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and Labrador
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Quebec
Saskatchewan
Yukon
Portfolio balance
Percentage of portfolio
6,210
44,578
3,460
504
152
765
40
114,386
237
21,639
203
166
$192,340
3.23
23.18
1.80
0.26
0.08
0.40
0.02
59.46
0.12
11.25
0.11
0.09
100.00%
66
FIRST NATIONAL FINANCIAL CORPORATION 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
2021
884
397
14,015
$15,296
2020
5,363
112
33,666
$39,141
The portfolio contains $12,723 [December 31, 2020 – $5,544] of insured mortgages and
$179,617 [December 31, 2020 – $207,757] of uninsured mortgage and loan investments
as at December 31, 2021. Of the uninsured mortgages, approximately $10,712
[December 31, 2020 – $34,738] have principal balances in arrears of more than 30 days.
One of these mortgages is non-performing and the Company has stopped accruing
interest. This mortgage currently has a nil carrying value as at December 31, 2021. The
mortgage had an original principal balance of $13,605 [December 31, 2020 – three
mortgages, original principal balance of $38,423, and fair value of $9,655].
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
2022
37,266
2023
2,081
2024
2025
2026 and
thereafter
Total
Total
2,774
10,545
16,016
68,682
75,280
92,506
21,765
22,832
167
—
137,270
166,790
$129,772
$23,846
$25,606
$10,712
$16,016
$205,952
$242,070
2021
2020
Interest income earned for the year was $14,292 [2020 – $14,337] and is included in
mortgage investment income on the consolidated statements of income.
67
2021 ANNUAL REPORT 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
2021
36,968
52,385
29,776
$119,129
2020
10,483
22,725
29,776
$62,984
The right-of-use assets pertain to five premises leases for the Company’s office space.
The leases have remaining terms of one to fifteen years. The related lease liability of
$52,871 as at December 31, 2021 [2020 – $22,922] 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.
68
FIRST NATIONAL FINANCIAL CORPORATION 8. Mortgages Under Administration
As at December 31, 2021, the Company managed mortgages under administration
of $123,907,627 [2020 – $118,723,990], 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, 2021, the Company administered 325,399 mortgages [2020 – 342,871]
for 119 institutional investors [2020 – 105] with an average remaining term to maturity
of 43 months [2020 – 42 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
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, 2021 was $806,268 [2020 – $852,361]. As at December 31, 2021,
the Company has included in accounts receivable and sundry $702 [2020 – $374] of
uninsured non-performing mortgages.
9. Bank indebtedness
Bank indebtedness includes a revolving credit facility of $1,500,000 [2020 –
$1,250,000] maturing in March 2026. At December 31, 2021, $965,420 [2020 –
$682,832] was drawn, of which the following have been pledged as collateral:
[a] a general security agreement over all assets, other than real property, of the
Company; and
[b] a general assignment of all mortgages owned by the Company.
The credit facility bears a variable rate of interest based on prime and bankers’
acceptance rates.
2021
84,184,863
2,969,617
35,186,217
1,566,930
2020
80,725,722
2,495,926
33,827,022
1,675,320
$123,907,627
$118,723,990
69
2021 ANNUAL REPORT 10. Debt related to securitized mortgages
11. Swap contracts
Debt related to securitized mortgages represents the funding
Swaps are over-the-counter contracts in which two
for mortgages pledged under the NHA-MBS, CMB and ABCP
counterparties exchange a series of cash flows based on
programs. As at December 31, 2021, debt related to securitized
agreed-upon rates to a notional amount. The Company uses
mortgages was $35,576,353 [2020 – $34,265,504], net of
interest rate swaps to manage interest rate exposure relating
unamortized discounts of $130,255 [2020 – $74,425]. A
to variability of interest earned on mortgages pledged under
comparison of the carrying amounts of the pledged mortgages
securitization. The swap agreements that the Company enters
and the related debt is summarized in note 3.
into are interest rate swaps where two counterparties exchange
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 are amortized over
the term of each debt on an effective yield basis. Debt related
to securitization mortgages had a similar contractual maturity
profile as the associated mortgages in mortgages pledged
under securitization.
a series of payments based on different interest rates applied
to a notional amount in a single currency.
The following tables present, by remaining term to maturity, the notional amounts and fair values of the swap contracts outstanding
as at December 31, 2021 and 2020:
2021
Interest rate
swap contracts
2020
Interest rate
swap contracts
Less than
3 years
3 to 5 years
6 to 10 years
Total
notional amount
Fair value
$2,403,943
$990,683
—
$3,394,626
$17,444
Less than
3 years
3 to 5 years
6 to 10 years
Total
notional amount
Fair value
$2,634,822
$1,102,126
$44,983
$3,781,931
$(35,163)
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.
70
FIRST NATIONAL FINANCIAL CORPORATION 12. Senior unsecured notes
The Company has two note issuances outstanding. $200 million of five year term
Series 2 senior unsecured notes bearing interest at 3.582% payable in equal semi-
annual payments maturing in November 2024. $200 million of five year Series 3 senior
unsecured notes bearing interest at 2.961% payable in equal semi-annual payments
maturing in November 2025.
13. Commitments, guarantees and contingencies
The Company’s commitments for premises listed above have remaining terms of one
As at December 31, 2021, the Company
to fifteen years, and have been accounted in right-of-use assets and recorded as other
has the following operating lease
assets on the consolidated statements of financial position.
commitments for its office premises:
Outstanding commitments for future advances on mortgages with terms of one to
10 years amounted to $1,939,420 as at December 31, 2021 [2020 – $2,456,591]. The
commitments generally remain open for a period of up to 90 days. These commitments
have credit and interest rate risk profiles similar to those mortgages that are currently
under administration. Certain of these commitments have been sold to institutional
investors while others will expire before being drawn down. Accordingly, these amounts
do not necessarily represent future cash requirements of the Company.
2022
2023
2024
2025 and thereafter
10,339
9,840
9,126
105,121
$134,426
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
The Company’s outstanding securities purchased under resale agreements and
securities sold under repurchase agreements have a remaining term to maturity of
less than three months.
15. Obligations related to securities and mortgages sold
under repurchase agreements
The Company uses repurchase agreements to fund specific mortgages included in
mortgages accumulated for sale or securitization. The current contracts are with
financial institutions, are based on bankers’ acceptance rates and mature on or
before January 31, 2022.
71
2021 ANNUAL REPORT 16. Accounts payable and accrued liabilities
The major components of accounts payable and accrued liabilities are as follows as at December 31:
2021
72,508
12,427
46,763
37,800
52,871
$222,369
2020
70,514
11,153
51,187
29,996
22,922
$185,772
Accrued liabilities
Accrued dividends payable
Accrued interest on securitization debt
Servicing liability
Lease liability
17. Shareholders’ equity
[a] Authorized
Unlimited number of common shares
Unlimited number of cumulative 5-year rate reset preferred shares, Class A Series 1
Unlimited number of cumulative 5-year rate reset preferred shares, Class A Series 2
[b] Capital Stock
Balance, December 31, 2021 and 2020
Common shares
Preferred shares
[c] Preferred Shares
#
$
59,967,429
$122,671
4,000,000
$97,394
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. On March 31, 2021, 399,700 of the outstanding Series 1
Preference Shares were tendered for conversion, on a one-for-one basis, into Series 2
Preference Shares, while 497,388 of the outstanding Series 2 Preference Shares were
tendered for conversion, on a one-for-one basis, into Series 1 Preference Shares. As at
December 31, 2021, there were 2,984,835 Series 1 Preferred Shares [2020 – 2,887,147]
and 1,015,165 Series 2 Preferred Shares [2020 – 1,112,853] outstanding with an aggregate
carrying value of $97,394.
72
FIRST NATIONAL FINANCIAL CORPORATION 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 2.895%
annually for a new five-year term ending March 31, 2026.
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
18. Income taxes
2021
$
194,561
2020
$
190,229
(2,695)
(2,846)
191,866
187,383
59,967,429
59,967,429
3.20
3.12
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 years ended December 31 consists of the following:
the following:
Related to
origination
and reversal
of temporary
differences
Decrease in future
tax rates
2021
2020
2021
2020
Income taxes
relating to the
current year
Income taxes
related to the
prior year
11,610
(3,971)
—
$11,610
(429)
$(4,400)
57,650
72,800
—
$57,650
100
$72,900
73
2021 ANNUAL REPORT The effective income tax rate reported in the consolidated statements of income
varies from the Canadian tax rate of 26.42% for the year ended December 31, 2021
[2020 – 26.47%] 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
2021
26.42%
263,821
69,702
193
—
(457)
(178)
2020
26.47%
258,729
68,486
200
(429)
100
143
$69,260
$68,500
The movement in significant components of the Company’s deferred income tax
liabilities and assets for the years ended December 31, 2021 and 2020 are as follows:
Deferred Income Tax
Deferred placement fees receivable
Deferred costs - securitization
Carrying values of mortgages pledged under
securitization in excess of tax values
Other
Right-of-use asset
Lease liability
Unrealized gains on interest rate swaps
Cumulative eligible capital property
Servicing liability
Fair value adjustments not deducted for tax purposes
Total
As at
January 1, 2021
Recognized
in income and OCI
As at
December 31, 2021
16,553
67,890
2,629
811
6,015
(6,067)
(2,863)
(3,662)
(7,940)
(6,266)
$67,100
454
16,996
(2,445)
2,711
7,825
(7,901)
981
263
(2,047)
4,063
17,007
84,886
184
3,522
13,840
(13,968)
(1,882)
(3,399)
(9,987)
(2,203)
$20,900
$88,000
74
FIRST NATIONAL FINANCIAL CORPORATION 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)
The amount of deferred tax expense recorded in income and OCI consists of an
expense of $11,610 [2020 – recovery of $4,400] recorded in net income and an
expense of $9,290 [2020 – recovery of $10,800] 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.
16,553
67,890
(2,863)
811
6,015
(6,067)
2,629
(3,662)
(7,940)
(6,266)
$67,100
75
2021 ANNUAL REPORT 19. Financial instruments and risk management
Risk management
The various risks to which the Company is exposed and the Company’s policies and
processes to measure and manage them individually are set out below:
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial
For single-family mortgages, only a
instrument will fluctuate because of changes in market interest rates. The Company’s
portion of the commitments issued
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 interest rate spreads from the point that
a mortgage commitment is issued to the transfer of the mortgage to the related
securitization vehicle or sale to an institutional investor. Primary among these strategies
is the Company’s decision to sell mortgages at the time of commitment, passing on
interest rate risk that exists prior to funding to institutional investors. The Company
uses synthetic bond forwards [consisting of bonds sold short and bonds purchased
under resale agreements] to manage interest rate exposure between the time a
by the Company eventually fund. The
Company must assign a probability of
funding to each mortgage in the pipeline
and estimate how that probability
changes as mortgages move through
the various stages of the pipeline. The
amount that is actually economically
hedged is the expected value of the
mortgages funding within the future
commitment period.
mortgage rate is committed to the borrower and the time the mortgage is sold to a
The table below provides the financial
securitization vehicle and the underlying cost of funding is set. As interest rates change,
impact that an immediate and sustained
the values of these interest rate dependent financial instruments vary inversely with the
100 basis point and 200 basis point
values of the mortgage contracts. As interest rates increase, a gain will be recorded on
increase and decrease in short-term
the economic hedge which will be offset by the reduced future spread on mortgages
interest rates would have had on the net
pledged under securitization as the mortgage rate committed to the borrower is fixed
income of the Company in 2021 and 2020.
at the point of commitment.
Decrease in
interest rate(1)
Increase in
interest rate
2021
2020
2021
2020
100 Basis Point Shift
Impact on net income
$13,180
$4,255
$(7,959)
$(4,255)
200 Basis Point Shift
Impact on net income
$29,760
$15,995
$(15,919)
$(8,511)
(1) Interest rate is not decreased below 0%.
76
FIRST NATIONAL FINANCIAL CORPORATION Credit risk
Market risk
Credit risk is the risk of loss associated with a counterparty’s inability or unwillingness
Market risk is the risk of loss that may
to fulfill its payment obligations. The Company’s credit risk is mainly lending related in
arise from changes in market factors
the form of mortgage default. The Company uses stringent underwriting criteria and
such as interest rates and credit spreads.
experienced adjudicators to mitigate this risk. The Company’s approach to managing
The level of market risk to which the
credit risk is based on the consistent application of a detailed set of credit policies
Company is exposed varies depending
and prudent arrears management. As at December 31, 2021, 91% [2020 – 93%] of the
on market conditions, expectations of
pledged mortgages were insured mortgages. See details in note 3. The Company’s
future interest rates and credit spreads.
exposure is further mitigated by the relatively short period over which a mortgage is
held by the Company prior to securitization.
The maximum credit exposures of the financial assets are their carrying values as
reflected on the consolidated statements of financial position. The Company does not
have significant concentration of credit risk within any particular geographic region or
group of customers.
The Company is at risk that the underlying mortgages default and the servicing cash
flows cease. The large portfolio of individual mortgages that underlies these assets is
diverse in terms of geographical location, borrower exposure and the underlying type
of real estate. This diversity and the priority ranking of the Company’s rights mitigate
the potential size of any single credit loss.
Securities purchased under resale agreements are transacted with large regulated
Canadian institutions such that the risk of credit loss is very remote. Securities
transacted are all Government of Canada bonds and, as such, have virtually no risk
of credit loss.
Liquidity risk and capital resources
Liquidity risk is the risk that the Company will be unable to meet its financial obligations
as they come due.
The Company’s liquidity strategy has been to use bank credit to fund working capital
requirements and to use cash flow from operations to fund longer-term assets. The
Company’s credit facilities are typically drawn to fund: [i] mortgages accumulated
for sale or securitization, [ii] origination costs associated with mortgages pledged
under securitization, [iii] cash held as collateral for securitization, [iv] costs associated
with deferred placement fees receivable, [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 $1,500,000 in financing.
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.
Customer concentration risk
Placement fees and mortgage servicing
income from one Canadian financial
institution represent approximately 19.6%
[2020 – 13.1%] of the Company’s total
revenue.
Fair value measurement
The Company uses the following
hierarchy for determining and disclosing
the fair value of financial instruments
recorded at fair value in the consolidated
statements of financial position:
Level 1 – quoted market price
observed in active markets for identical
instruments;
Level 2 – quoted market price observed
in active markets for similar instruments
or other valuation techniques for which
all significant inputs are based on
observable market data; and
Level 3 – valuation techniques in which
one or more significant inputs are
unobservable.
77
2021 ANNUAL REPORT Valuation methods and assumptions
Carrying value and fair value of
selected financial instruments
The Company uses valuation techniques to estimate fair values, including reference to
third party valuation service providers using proprietary pricing models and internal
The fair value of the financial assets
valuation models such as discounted cash flow analysis. The valuation methods and
and financial liabilities of the Company
key assumptions used in determining fair values for the financial assets and financial
approximates its carrying value, except for
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 management’s best
estimate of the net realizable value.
[b] Deferred placement fees receivable
mortgages pledged under securitization,
which has a carrying value of $35,435,455
[2020 – $34,137,421] and a fair value of
$36,515,923 [2020 – $36,212,226]; debt
related to securitized mortgages, which
has a carrying value of $35,576,353
[2020 – $34,265,504] and a fair value
of $35,864,253 [2020 – $34,909,488];
and senior unsecured notes, which have
The fair value of deferred placement fees receivable is determined by internal valuation
a carrying value of $398,888 [2020 –
models using market data inputs, where possible. The fair value is determined by
$398,554] and a fair value of $409,056
discounting the expected future cash flows related to the placed mortgages at
[2020 – $412,786]. These fair values are
market interest rates. The expected future cash flows are estimated based on certain
estimated using valuation techniques in
assumptions which are not supported by observable market data.
which one or more significant inputs are
unobservable [Level 3].
[c] Securities owned and sold short
The fair values of securities owned and sold short used by the Company to hedge its
interest rate exposure are determined by quoted prices on a secondary market.
[d] Servicing liability
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.
[e] Other financial assets and financial liabilities
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.
[f] Fair value of financial instruments not carried at fair value
The fair value of these financial instruments are determined by discounting projected
cash flows using 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.
78
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:
2021
Financial Assets
Mortgages accumulated for sale
Mortgage and loan investments
Interest rate swaps
Total Financial Assets
Financial Liabilities
Securities sold short
Total Financial Liabilities
2020
Financial Assets
Mortgages accumulated for sale
Mortgage and loan investments
Interest rate swaps
Total Financial Assets
Financial Liabilities
Securities sold short
Total Financial Liabilities
Level 1
Level 2
Level 3
Total
—
—
—
—
—
—
30,943
—
688
—
192,340
—
30,943
192,340
688
$31,631
$192,340
$223,971
2,677,689
$2,677,689
—
—
2,677,689
$2,677,689
Level 1
Level 2
Level 3
Total
—
—
—
—
—
—
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
In estimating the fair value of financial assets and financial liabilities using valuation
Transfers between levels in the fair value
techniques or pricing models, certain assumptions are used, including those that
hierarchy are deemed to have occurred
are not fully supported by observable market prices or rates [Level 3]. The amount
at the beginning of the period in which
of the change in fair value recognized by the Company in net income for the year
the transfer occurred. Transfers between
ended December 31, 2021 that was estimated using a valuation technique based on
levels can occur as a result of additional
assumptions that are not fully supported by observable market prices or rates was
or new information regarding valuation
approximately a gain of $15,157 [2020 – loss of $3,076]. Although the Company’s
inputs and changes in their observability.
management believes that the estimated fair values are appropriate as at the date of
During 2021 and 2020, the Company did
the consolidated statements of financial position, those fair values may differ if other
not have any transfers between levels.
reasonably possible alternative assumptions are used.
79
2021 ANNUAL REPORT The following table presents changes in the fair values, including realized gains of
$10,666 [2020 – losses of $112,015] of the Company’s financial assets and financial
liabilities for the years ended December 31, 2021 and 2020, all of which have been
classified as FVTPL:
FVTPL mortgages
Securities sold short
Interest rate swaps
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, 2021 and 2020. The Company
classifies financial instruments to Level 3 when there is reliance on at least one
significant unobservable input in the valuation models.
2021
(730)
15,397
(8,852)
$5,815
2020
(3,076)
(75,689)
11,410
$(67,355)
Fair value as at
January 1, 2021
Investments
Losses recorded
in income
Payment and
amortization
Fair value as at
December 31, 2021
Financial Assets
Mortgage and
loan investments
Financial Assets
Mortgage and
loan investments
$213,301
$608,109
$(730)
$(628,340)
$192,340
Fair value as at
January 1, 2020
Investments
Unrealized losses
recorded in income
Payment and
amortization
Fair value as at
December 31, 2020
$370,414
$130,165
$(3,076)
$(284,202)
$213,301
Following the financial crisis, the reform and replacement of benchmark interest rates
and other derivatives that are referenced
such as CDOR and other interbank offered rates [“IBORs”] became a priority for global
to CDOR. All of these instruments are
regulators. The Canadian Alternative Reference Rate Working Group [“CARR”] was
with large Canadian financial instruments
created to identify and seek to develop a new risk-free Canadian dollar interest rate
and the Company will rely on those
benchmark. An enhanced Canadian Oversight Repo Rate Average [“CORRA”] has
institutions to amend the agreements
been designed to comply with recommendations of the Financial Stability Board as
part of a global effort to reform benchmark interest rates. There is some uncertainty
as required to incorporate the new
reference rate. The Company believe this
about how the Canadian dollar benchmark rates will evolve and the speed at which
transition will have only a small, if any,
CORRA will become a dominant benchmark for Canadian dollar borrowings. For NHA
impact of the Company’s operations.
MBS purposes, CMHC announced that pools with a reference rate based on CDOR will
transition to CORRA based securities on May 1, 2022. The Company has many swaps
80
FIRST NATIONAL FINANCIAL CORPORATION 20. Capital management
The Company’s objective is to maintain a capital base so as to maintain investor,
creditor and market confidence and sustain future development of the business.
Management defines capital as the Company’s common share capital and retained
earnings. FNFLP has a minimum capital requirement as stipulated by its bank credit
facility. The agreement limits the debt under bank indebtedness together with the
unsecured notes to four times FNFLP’s equity. As at December 31, 2021, the ratio
was 2.21:1 [2020 – 1.77:1]. The Company was in compliance with the bank covenant
throughout the year.
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.
2021
Revenue
Interest revenue – securitized mortgages
Interest expense – securitized mortgages
Net interest – securitized mortgages
Placement and servicing
Mortgage investment income [note 6]
Realized and unrealized gains (losses) on financial instruments
Expenses
Amortization
Interest
Other operating
Income Before Income Taxes
Identifiable assets
Goodwill
Total Assets
Capital Expenditures
Residential
Commercial
Total
538,317
(422,707)
115,610
444,658
41,050
6,525
255,190
(207,572)
47,618
86,751
22,825
(710)
793,507
(630,279)
163,228
531,409
63,875
5,815
$607,843
$156,484
$764,327
8,065
37,476
362,936
$408,477
$199,366
1,117
11,433
79,479
$92,029
$64,455
9,182
48,909
442,415
$500,506
$263,821
28,813,695
13,430,687
42,244,382
—
—
29,776
$28,813,695
$13,430,687
$42,274,158
$22,380
$9,576
$31,956
81
2021 ANNUAL REPORT 2020
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 instruments
Expenses
Amortization
Interest
Other operating
Income Before Income Taxes
Identifiable assets
Goodwill
Total Assets
Capital Expenditures
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
$2,510
$1,075
$3,585
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 $119,005 of new mortgages for the related
parties. The related parties also funded several progress draws totaling $22,360
on existing mortgages originated by the Company. All such mortgages, which are
administered by the Company, have a balance of $213,648 as at December 31, 2021
[December 31, 2020 – $179,320]. As at December 31, 2021, two 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 2021 was $1,966 [2020 – $3,212], net of third-party investor reimbursement.
A senior executive and shareholder of the Company has a significant investment in a
Canadian bank. In the first quarter of 2021, the Company entered into an agreement
to originate and adjudicate applications for secured credit cards for the bank. These
applications are originated from the Company’s mortgage broker relationships. The
Company receives a fee for successfully adjudicating such credit.
82
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,
shareholders and employees — and are the basis of our
culture of accountability and responsibility across the
organization.
83
2021 ANNUAL REPORT Policies
Committees
The Board supervises and evaluates
The Board of Directors has established an Audit Committee and a Governance
the management of the Company,
Committee to assist in the efficient functioning of the Company’s corporate
oversees matters related to our strategic
governance strategy.
direction and assesses results relative
to our goals and objectives. As such,
the Board has adopted several policies
that reflect recommended practices
in governance and disclosure. These
include a Disclosure Policy, a Code of
Business Ethics and Conduct Policy,
a Whistleblower Policy and an Insider
Trading Policy. These policies follow
Audit Committee
The Audit Committee’s responsibilities include:
• Management of the relationship with the external auditor, including the oversight
and supervision of the audit of the Company’s financial statements;
• Oversight and supervision of the quality and integrity of the Company’s financial
statements; and
the corporate governance guidelines
• Oversight and supervision of the adequacy of the Company’s internal accounting
of Canadian securities regulators. As a
controls and procedures, as well as its financial reporting practices.
public company, First National’s Board
continues to update, develop and
implement appropriate governance
policies and practices as appropriate.
The Audit Committee consists of three independent directors, all of whom
are considered financially literate for the purposes of the Canadian Securities
Administrators’ Multilateral Instrument 52-110 – Audit Committees.
Committee Members
John Brough (Chair), Robert Mitchell and Robert Pearce
Governance Committee
The Governance Committee’s responsibilities include:
• Periodically assessing and making recommendations on the Company’s approach
to governance issues;
• Assisting in the development of governance policies, practices and procedures for
approval by the Board of Directors;
• Reviewing conflicts of interest and transactions involving related parties of the
Company; and
• Periodically reviewing the composition and effectiveness of the Board of Directors.
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.
Committee Members
Barbara Palk (Chair), Duncan Jackman and Robert Pearce
84
FIRST NATIONAL FINANCIAL CORPORATION BOARD OF
DIRECTORS
Stephen Smith
Moray Tawse
Stephen Smith, one of Canada’s leading financial services
Moray Tawse is Executive Vice President and Secretary of the
entrepreneurs, is the Executive Chairman and Co-founder of
Corporation, and Executive Vice President and Co-founder of
First National Financial Corporation. He has been an innovator
First National. Mr. Tawse directs the operations of all of First
in the development and utilization of various securitization
National’s commercial mortgage origination activities. With
techniques to finance mortgage assets, as well as a leader in
over 30 years of experience in the real estate finance industry,
the development and application of information technology
Mr. Tawse is one of Canada’s leading experts on commercial
in the mortgage industry.
From 2006 to January 12, 2022, Mr. Smith was Chief Executive
Officer of First National Financial Corporation.
Mr. Smith is Chairman of Canada Guaranty Mortgage Insurance
Company, 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 an M.Sc. in
Economics from the London School of Economics.
real estate and is often called upon to deliver keynote
addresses at national real estate symposiums.
Jason Ellis (effective January 12, 2022)
Jason Ellis is the President and Chief Executive Officer for First
National and is responsible for the design and maintenance of
strategy and operational excellence across the organization.
Mr. Ellis joined First National in 2004 as Director, Capital
Markets responsible for leading First National’s capital markets’
activities, including interest rate risk management, funding,
and securitization for all commercial and residential mortgage
origination. Mr. Ellis was appointed Chief Operating Officer in
2018 and President in 2019. On January 12, 2022, Mr. Ellis was
appointed Chief Executive Officer. Prior to joining First National
in 2004, Mr. Ellis was with the Asset/Liability Management
group at Manulife Financial and with RBC Dominion Securities
in Toronto and New York where he traded fixed income and
interest rate derivatives. Mr. Ellis holds a BA degree from the
University of Western Ontario, an MBA degree from McMaster
University and is a CFA charterholder.
85
2021 ANNUAL REPORT John Brough
Robert Mitchell
John Brough is an executive with over 40 years of experience
Robert Mitchell was appointed Executive Chair and Chair of the
in the real estate industry. Mr. Brough was President of both
Investment Committee of Dixon Mitchell Investment Canada
Torwest, Inc. and Wittington Properties Limited, real estate
Inc., a Vancouver-based investment management company,
development companies, from 1998 to December 31, 2007.
on January 1, 2021. From 2000 to 2020, he was President of
Prior thereto, from 1996 to 1998, Mr. Brough was Executive
Dixon Mitchell Investment Counsel Inc. Prior to that, he was Vice
Vice President and Chief Financial Officer of iSTAR Internet,
President, Investments at Seaboard Life Insurance Company.
Inc. From 1974 to 1996, he held a number of positions with
Mr. Mitchell has an MBA from the University of Western Ontario
Markborough Properties, Inc., his final position being Senior
and a Bachelor of Commerce (Finance) from the University
Vice President and Chief Financial Officer, which he held from
of Calgary, and is a CFA charterholder. Mr. Mitchell sits on the
1986 to 1996. He is currently a director and Chairman of the
board of Equestrian Canada.
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.
Barbara Palk
Mr. Brough was formerly a director and Chair of the Audit
and Risk Committee of Kinross Gold Corporation from 1994
to 2020. 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.
Duncan Jackman
Barbara Palk retired as President of TD Asset Management Inc.
in 2010, following a 30-year career in institutional investment
and investment management. She currently serves on the
board of directors of Crombie Real Estate Investment Trust,
where she chairs the Human Resources Committee. Her
experience on boards of directors include the Ontario Teachers’
Pension Plan, where she chaired the Investment Committee;
TD Asset Management USA Funds Inc.; Canadian Coalition
for Good Governance, where she chaired the Governance
Committee; Greenwood College School; the Investment
Counselling Association of Canada; the Perimeter Institute;
the Shaw Festival; UNICEF Canada; and Queen’s University,
where she was the Chair of the Board of Trustees. Ms. Palk is
Duncan Jackman has been Chairman, President and Chief
a member of the Institute of Corporate Directors, a Fellow of
Executive Officer of E-L Financial Corporation, an investment
the Canadian Securities Institute and a CFA charterholder. She
and insurance holding company, since 2003. In 2003, he
holds a Bachelor of Arts (Honours) in Economics from Queen’s
was also elected Chairman of the board of directors of The
University, and has been named one of Canada’s Top 100 Most
Empire Life Insurance Company. Mr. Jackman is also Chairman
Powerful Women (2004).
of Algoma Central Corporation, the largest Great Lakes bulk
shipper, as well as Chairman and President of Economic
Investment Trust Limited and United Corporations Limited, two
Canadian listed closed-end funds. He also serves as a member
of the board of directors of several other public and private
companies. Mr. Jackman is a member of the Business Council
of Canada and formerly served on the Economic Advisory
Council to the Minister of Finance, Government of Canada.
He is also Chair of the Patron’s Council for Community Living
Toronto, which provides support to thousands of individuals
with an intellectual disability. Mr. Jackman graduated from
McGill University in Montreal.
Robert Pearce
Robert Pearce serves on the board of directors of Canada
Guaranty Mortgage Insurance Company, CPI Card Group and
Duo Bank of Canada. Mr. Pearce spent 26 years with BMO
Bank of Montreal from 1980 to 2006, most recently holding
the position of President and Chief Executive Officer, Personal
and Commercial Client Group. He also served on the board of
directors of MasterCard International from 1998 to 2006 and
as Chairman of the Canadian Bankers’ Association from 2004
to 2006. Mr. Pearce holds a BA from the University of Victoria
and an MBA from the University of British Columbia. Mr. Pearce
brings over 40 years of operational and leadership experience
in the financial services industry to the Board of Directors.
86
FIRST NATIONAL FINANCIAL CORPORATION STAKEHOLDER
INFORMATION
Corporate Address
First National Financial Corporation
16 York Street, Suite 1900
Toronto, Ontario M5J 0E6
Phone: 416.593.1100
Fax: 416.593.1900
Investor Relations Website
www.firstnational.ca
Annual Meeting
May 5, 2022, 9:30 a.m. EDT
Virtually as provided
by Computershare Investor Services Inc.
https://meetnow.global/MVHWATC
Registrar and
Transfer Agent
Computershare Investor Services Inc.
Toronto, Ontario
1.800.564.6253
Exchange Listing
and Symbols
Common shares: (TSX) FN
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
Legal Counsel
Stikeman Elliott LLP, Toronto, Ontario
Senior Executives of First
National Financial Corporation
Stephen Smith
Co-founder, Executive Chairman
Moray Tawse
Co-founder and Executive Vice President
Jason Ellis
President and Chief Executive Officer
Robert Inglis
Chief Financial Officer
Class A Series 1 Preference Shares: (TSX) FN.PR.A
Thomas Kim
Class A Series 2 Preference Shares: (TSX) FN.PR.B
Senior Vice President and Managing Director,
Capital Markets
Scott McKenzie
Senior Vice President, Residential Mortgages
Jeremy Wedgbury
Senior Vice President, Commercial Mortgages
Hilda Wong
Senior Vice President and General Counsel
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Calgary
Toronto
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Halifax
FIRSTNATIONAL.CA