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Annual Report 2022

Plain-text annual report

2022 A NN UAL REPORT CORPORATE PROFILE First National Financial is Canada’s non-bank mortgage lender. 2023 marks our company’s 35th anniversary of providing mortgage loan solutions – both insured and conventional – to Canadians to purchase single-family, multi-unit and commercial properties. Our integrated services for customers and mortgage brokers, purpose-built technology, expertise in mortgage origination, underwriting and loan administration and deep sources of liquidity form our competitive strengths. But our values – forged over decades and embraced every day by our talented team – fuel our market leadership and our drive to constantly improve. You can learn more about what’s In Our Nature in this annual report, and in our Sustainability Report found on our website at www.frstnational.ca. STOCK EXCHANGE LISTING Our common shares trade on the S&P/TSX under the symbol FN, and our preferred shares trade under the symbols FN.PR.A and FN.PR.B. First National is a member of the S&P/TSX Canadian Dividend Aristocrats® Index. 1 First National Financial Corporation 2022 ANNUAL REPORT2022 BY THE NUMBERS 2 First National Financial Corporation 2022 ANNUAL REPORT315,700 5,770 1,686 Single family residential customers served. Commercial mortgage loans Our sizeable workforce gives made across multi-unit residential us a boots-on-the-ground and other commercial property presence in all of Canada’s asset classes. major real estate markets. $131B $1.57B $197.7M Mortgages Under Administration Revenue increased 13% over 2021. Net income reached a new record ($3.25 per share). 581% Total shareholder return from our IPO in 2006 to December 31, 2022. (MUA) – the source of most of our earnings – reached this milestone, a 6% increase over 2021. $1.9B The total value of dividends and distributions paid to First National shareholders between 2006 and 2022 (or $31.67 per share). 28% After-tax Pre-Fair Market Value1 return on shareholders’ equity demonstrated the efciency of the First National business model (and has averaged 39% over the past fve years). (1) Non-IFRS measure. See MD&A for more details. First National Financial Corporation | 2022 Annual Report 3 3 First National Financial Corporation 2022 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 Ofcer ROBERT INGLIS Chief Financial Ofcer 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 2022 ANNUAL REPORT MESSAGE TO FELLOW SHAREHOLDERS 2022 was a transitional year. We began with leadership succession: Stephen Smith, our co-founder, took on the role of Executive Chair and I was appointed CEO. For all stakeholders, internal and external, this succession preserved First National’s entrepreneurial roots. Stephen’s ongoing participation in the governance of the company, his unique perspectives as a recognized leader in fnancial services’ innovation and his deep market insight and industry relationships are invaluable to the business and to me in my new role. I am also grateful for the ongoing leadership of Moray Tawse, our other co-founder. As Executive Vice President and a member of the Board, Moray’s expertise in the commercial real estate market continues to beneft our organization. As proven entrepreneurs, Moray and Stephen are leaders by example. Our markets also transitioned as a rapid rise in infation brought with it higher interest rates. This led to a slowdown in housing activity. This was in marked contrast to 2021 when housing activity was elevated on generationally low interest rates which were the result of government-initiated, accommodative monetary policy designed to combat the economic impacts of the Covid-19 pandemic. The impact of this market transition on our fnancial performance is explained in detail in our MD&A. At a high level, annual originations of $29.1 billion were 12% below 2021’s record levels. In turn, operating proftability, measured by Pre-FMV Income, was lower due to several factors including reduced originations and a resulting temporary decline in operating leverage. However, net income, which includes the impact of gains and losses on fnancial instruments grew 2% to $197.7 million ($3.25 per share). Solid proftability enabled our Board – for the 15th time since our initial public ofering – to increase the common share dividend in 2022. It now stands at an annualized rate of $2.40 per share. Mortgages Under Administration (“MUA”), also increased to a record $131.0 billion, 6% above 2021. We consider MUA a key metric as it is an important driver of earnings and is an indicator of our scale and standing in the marketplace as a leading mortgage fnance company. Growing MUA in a challenging environment like the one we experienced in 2022 is a sign of corporate strength that speaks well to First National’s market share, diversifed positioning in residential and commercial markets, and the hard work of our team. 5 First National Financial Corporation 2022 ANNUAL REPORT“The position First National occupies in the marketplace as an independent, customer-focused fnancial services provider sets us apart and makes us an ideal partner for mortgage brokers and other fnancial institutions.” 6 First National Financial Corporation 2022 ANNUAL REPORT CHANGING WITH THE TIMES BUT HOLDING FAST TO OUR BELIEFS First National celebrates its 35th anniversary in 2023. Much has changed in that time. The fnancial services industry has become increasingly complex and diversifed. In particular, the mortgage landscape has evolved with signifcant reforms. These changes contributed to the growth of mortgage brokers as a professional source of independent advice for Canadian homebuyers. Our company navigated these changes successfully as we established First National as a trusted partner for brokers, an efcient user of securitization programs and a leader in technology. We also developed what we consider to be a unique performance culture, one with a highly engaged workforce. As testament to that engagement, First National has earned the title of Great Place to Work® in Canada in each of the past fve years based on independently conducted workforce surveys. Understandably, we want to preserve this advantage. Since culture is a signifcant determinant of long-term success, one of my frst-year priorities was to document the intangibles that make our culture and our organization diferent. At a time when the world has become rightly concerned about the sustainability practices of business, it is also important for us to lay down our cultural markers for external stakeholders to assess before choosing to work with us. These are the principles and characteristics we consider to be central to our approach. We strive for better: Innovation and ambition drive us to strive for better in our processes, technology, service and products. Productive growth comes from taking initiative and consistently redefning what it means to embrace opportunities and adapt to change. We earn trust: Relationships and reputation mean everything to us. Through honesty, transparency and consistency, we build credibility and deliver peace of mind. Our clients know that we invest beyond the business. We invest in them and their dreams. They come to us for trusted advice that allows us to evolve together. We encourage autonomy: For us, growth and development start with owning each and every decision we make. Encouraging diverse perspectives, ideas and voices is the basis for how we do business. But it also extends to how we support each other as a team and build community. We emphasize accountability: We recognize the urgency of getting it right. Rigour, process and setting realistic expectations underlie how we deliver service reliably and consistently. We’re responsive without abandoning structure. These principles – striving for better, trust, autonomy and accountability – form the “it” in “It’s in our Nature,” a phrase we use internally to illustrate our cultural norms. In every case, our statements purposely begin with the word “we” which underscores the importance of teamwork, and of collectively holding deep-seated beliefs, displaying clear intentions and exhibiting consistent behaviours. 7 First National Financial Corporation 2022 ANNUAL REPORT THE WAY FORWARD Moving forward, we will follow these Canadians fnancing homes and precepts and ensure they remain intrinsic commercial properties trust First to the approach we use in managing National based on our 35-year track the business, driving performance and record and the responsive, reliable way assessing progress. 2023 will give us we conduct ourselves as a lender. By another chance to express our principles preserving our cultural norms, we will through action with an agenda purpose strive to maintain our reputation and built for the times but underpinned by the trust of all stakeholders. consistency of purpose and approach. Our proven and ever evolving technology As indicated a year ago when I became and more recently our ability to come CEO, there will be no sudden changes together in our ofces free from the to our strategy. The position First physical distancing demands of recent National occupies in the marketplace years will allow us to recover the as an independent, customer-focused operational leverage that was missing fnancial services provider sets us apart in 2022. In short, we will continue to and makes us an ideal partner for strive for better in 2023. mortgage brokers and other fnancial institutions that wish to invest in Canadian mortgages or beneft from our expertise in third-party underwriting and fulfllment. 8 First National Financial Corporation 2022 ANNUAL REPORT GOVERNANCE MATTERS To stress test our plans, and ensure we move forward as intended, we will once again beneft from strong, dedicated governance. In that regard, we were pleased to welcome Martine Irman and Diane Sinhuber to our Board of Directors in October 2022. These two accomplished leaders bring deep and relevant business and governance experience to the Board and are independent of management. Their biographies appear on page 85 and page 86. We are pleased to add new insight and experience while creating a more diverse Board. We are also marking the retirement of John Brough as a Director. John joined the Board at the time of our IPO in 2006 and played a formative role in the advancement of our company as a publicly-traded enterprise. John deserves and receives our thanks for sharing his wisdom and experience for the betterment of our company and all stakeholders for more than 15 years. 9 First National Financial Corporation 2022 ANNUAL REPORTTHANK YOU Our organizational structure is purposely fat, which means the members of our senior management team (pictured on page four) are deeply involved in operations. This group is comprised of proven First National veterans who have the experience and perspective that are invaluable in confronting challenges and seizing new opportunities. I thank each of them for their contributions. Finally, thanks to our customers, business partners, shareholders and the broader members of the First National team for the sizeable contributions you make to the company’s success. Yours sincerely, Jason Ellis President and Chief Executive Ofcer February 28, 2023 10 First National Financial Corporation 2022 ANNUAL REPORT MORTGAGES UNDER ADMINISTRATION ($ Billions) 118.7 123.9 131.0 106.2 111.4 2022 MUA BY ASSET TYPE C B A 2018 2019 2020 2021 2022 A B C 68% Insured 27% Uninsured single-family residential 5% Uninsured multi-residential and commercial REVENUE ($ Millions) 2022 FUNDING SOURCES 1.33 1.38 1.39 1.18 1.57 C B A 2018 2019 2020 2021 2022 A B 64% Institutional investors 33% Securization C 3% Internal A PRE-FAIR MARKET VALUE INCOME1 ($ Millions) 2022 REVENUE SOURCES PRIOR TO FAIR VALUE GAINS/LOSSES 323.0 257.3 247.1 220.3 D 208.8 C A B A B C D 2018 2019 2020 2021 2022 (1)Non-IFRS measure. See MD&A for more details. 37% Institutional placements 22% Net interest- securitized mortgages 28% B Mortgage servicing 13% Investment income 11 First National Financial Corporation 2022 ANNUAL REPORT 12 First National Financial Corporation 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS The following management’s discussion and analysis (“MD&A”) of fnancial condition and results of operations is prepared as of February 28, 2023. This discussion should be read in conjunction with the audited consolidated fnancial 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, 2022. The audited consolidated fnancial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”). 13 First National Financial Corporation 2022 ANNUAL REPORT This MD&A contains forward-looking information. Please see “Forward-Looking GENERAL DESCRIPTION OF THE COMPANY First National Financial Corporation is the parent company of First National Financial Information” on page 41 for a discussion LP (“FNFLP”), a Canadian-based originator, underwriter and servicer of predominantly of the risks, uncertainties and assumptions prime residential (single-family and multi-unit) and commercial mortgages. With more relating to these statements. The selected than $131 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 lenders in market share in the mortgage broker distribution channel. 2022 RESULTS SUMMARY First National’s performance in 2022 refected rapidly changing market conditions, the result of abrupt increases in Bank of Canada (BoC) policy interest rate increases. With slowing housing activity across Canada, the Company’s single-family origination was 17% lower year over year but about 44% ahead of 2019 (the most recent pre- pandemic period). Commercial segment originations decreased by 1% on continued strength in its insured mortgage products. Total combined new origination was lower by 12% year over year. Mortgages Under Administration (MUA), the source of most of the Company’s earnings, continued to grow and reached another record high. Operating proftability was lower as mortgage origination fell while headcount growth and infationary pressures meant employee costs increased. The rapid pace of increases in short-term interest rates created gains on fnancial instruments but negatively afected the Company’s securitization margins. The following summarizes the performance of the Company’s signifcant metrics: • MUA grew to $131.0 billion at December 31, 2022 from $123.9 billion at December 31, 2021, an increase of 6%; the growth from September 30, 2022, when MUA was $129.3 billion, was 5% on an annualized basis. fnancial information and discussion presented here also refer to certain measures to assist in assessing fnancial 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 fow. 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 profle on the System for Electronic Data Analysis and Retrieval (“SEDAR”) website at www.sedar.com. 14 First National Financial Corporation 2022 ANNUAL REPORT • Total new single-family mortgage featured a rapidly rising interest income taxes and gains and losses origination was $19.5 billion in 2022 rate environment with bond yields compared to $23.4 billion in 2021, and mortgage rates increasing a decrease of 17%. The Company as monetary policy tightened to on fnancial instruments (“Pre-FMV Income”(1)) for 2022 decreased by 19% to $208.8 million from $257.3 attributes this to a slowing real counteract infation risks. These million in 2021. This change was estate market together with a changes led to higher interest largely the result of a 17% drop in more competitive marketplace. revenue earned on securitized new residential origination and Commercial segment origination of mortgages, higher interest revenue a competitive marketplace. As $9.6 billion was 1% lower than the earned on mortgages accumulated mortgage rates rose over the past $9.7 billion originated in 2021. Total for securitization and higher interest nine months, housing transactions new origination decreased by 12% earned on mortgage investments. slowed across the country. With in 2022 compared to 2021. These increases in revenue were the ensuing competition from partially ofset by lower placement other lenders in a smaller market, fees as residential origination the Company increased broker • The Company took advantage of available opportunities in the year to renew $6.8 billion of single- family mortgages, 8% higher than volumes were lower by 17% comparing the two years. $6.3 billion a year ago. For the • Income before income taxes was commercial segment, renewals were $269.1 million in 2022 compared to lower by 19% ($2.2 billion compared $263.8 million in 2021. The increase to $2.7 billion a year ago). • Revenue for 2022 increased by 13% to $1.57 billion from $1.39 billion in 2021. This change was largely the result of higher interest rates. 2022 included the efect of changing capital market conditions in both years. Excluding gains and losses related to fnancial instruments, the Company’s earnings before incentives to boost the referral of residential mortgage transactions. Together with tight funding spreads for securitized foating rate mortgages and employee head count at levels designed to underwrite higher volumes, proftability was lower. (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 fnancial instruments (except those on mortgage investments) and deducting gains on the valuation of fnancial instruments. See Key Performance Indicators section in this MD&A. 15 First National Financial Corporation 2022 ANNUAL REPORT DIVIDEND INCREASE In the fourth quarter of 2022, the Company’s Board of Directors announced an increase to the regular monthly dividend to $2.40 per common share from $2.35 on an annualized basis, efective with the dividend paid on December 15, 2022. SELECTED QUARTERLY INFORMATION Quarterly Results of First National Financial Corporation ($000s, except per share amounts) Revenue Net Income for the Period Pre-FMV Income for the Period(1) Net Income per Common Share $414,785 $392,413 $416,774 $350,321 $339,292 $353,704 $365,118 $336,492 $42,669 $40,145 $61,281 $53,637 $41,971 $47,614 $52,401 $52,575 $59,492 $48,219 $55,864 $45,187 $57,045 $64,867 $71,218 $64,146 $0.70 $0.66 $1.01 $0.88 $0.69 $0.78 $0.86 $0.87 Total Assets $43,763,672 $42,392,225 $42,927,449 $42,386,708 $42,274,158 $40,763,169 $41,727,249 $40,586,601 2022 Fourth quarter Third quarter Second quarter First quarter 2021 Fourth quarter Third quarter Second quarter First quarter (1) This non-IFRS measure adjusts income before income taxes by eliminating the impact of changes in fair value by adding back losses on the valuation of fnancial instruments (except those on mortgage investments) and deducting gains on the valuation of fnancial instruments. See Key Performance Indicators section in this MD&A. 16 First National Financial Corporation 2022 ANNUAL REPORT Reconciliation of Quarterly Determination of Pre-FMV Income ($000s, except per share amounts) 2022 Fourth quarter Third quarter Second quarter First quarter 2021 Fourth quarter Third quarter Second quarter First quarter Income 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) $58,269 $54,645 $83,081 $73,087 $57,111 $65,134 $70,101 $71,475 $1,353 ($5,846) ($27,217) ($27,900) $71 $383 $1,217 ($7,486) ($130) ($580) $— $— ($137) ($650) ($100) $157 $59,492 $48,219 $55,864 $45,187 $57,045 $64,867 $71,218 $64,146 (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 fnancial instruments (except those on mortgage investments) and deducting gains on the valuation of fnancial instruments. See Key Performance Indicators section in this MD&A. With First National’s large portfolio of In the past eight quarters, the Company quickly and continuously beginning on mortgages pledged under securitization, experienced a relatively volatile March 2, 2022, in an attempt to stem quarterly revenue is driven primarily by economic environment. 2021 began infation and short-term interest rates the gross interest earned on mortgages with strong origination and proft rose by 400 basis points between March pledged under securitization. The gross metrics as the pandemic-based era of and December 2022. While spreads on interest on the mortgage portfolio low interest rates and wide spreads new mortgage originations widened is dependent both on the size of the continued. Competition accelerated somewhat, the Company faced the portfolio of mortgages pledged under in mid 2021 on signs of an improving headwinds of a slowing housing market, securitization, as well as mortgage economy and a risk-on environment, and strong competition for employees rates. Recently MUA has increased, such that over the fnal six months and customers such that it earned and revenue followed. Net income is of 2021, spreads returned to pre- comparatively lower Pre-FMV income. partially dependent on conditions in pandemic levels. Spread tightening bond markets, which afect the value of reduced proftability for the Company gains and losses on fnancial instruments in the third and fourth quarters of 2021 arising from the Company’s interest compared to the periods of exceptional rate hedging program. Accordingly, the proftability in most of 2020 and early movement of this measurement between 2021. To start 2022, the economic quarters is related to factors external outlook was positive and there was a to the Company’s core business. By surplus of liquidity for investment in removing this volatility and analyzing fnancial assets. However, late in the frst Pre-FMV Income, management believes quarter, risks associated with infation a more appropriate measurement of became evident as wages and prices the Company’s performance can be increased and companies competed for assessed. employees. The Bank of Canada moved 17 First National Financial Corporation 2022 ANNUAL REPORT OUTSTANDING SECURITIES OF THE CORPORATION At December 31, 2022, and February 28, 2023, 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) 2022 2021 2020 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 fnancial instruments Deduct: unrealized losses regarding mortgage investments Pre-FMV Income(1) Add (deduct): realized and unrealized gains (losses) on fnancial 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 1,574,293 (739,295) (173,290) (392,626) (59,610) (710) 208,762 60,320 (71,350) 197,732 141,423 3.25 2.36 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 43,763,672 42,274,158 39,488,527 Total long-term fnancial liabilities 399,222 398,888 398,554 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 fows from operating, investing and fnancing activities as a measure of liquidity and cash fows. 18 First National Financial Corporation 2022 ANNUAL REPORT VISION AND STRATEGY The Company provides mortgage fnancing solutions to the residential and commercial mortgage markets in Canada. By ofering 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 profle. 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 proftability 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 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 growth in the customer base for marketing initiatives. As at December 31, 2022, MUA totalled $131.0 billion, up from $123.9 billion at December 31, 2021, an increase of 6%. The growth of MUA in the fourth quarter of 2022 was 5% on an annualized basis. 19 First National Financial Corporation 2022 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 fxed-cost single-family (“Excalibur”) mortgage component. As more mortgages are originated, the marginal costs of underwriting products. Alternative lending describes decrease. Increased origination satisfes demand from its institutional customers single-family residential mortgages and produces volume for the Company’s own securitization programs. In 2022, the that are originated using broader Company’s single-family origination decreased by 17% compared to 2021. The Company underwriting criteria than those applied believes this is the result of slowing real estate markets following the unsustainable in originating prime mortgages. These growth experienced early in the pandemic when interest rates were at historical mortgages generally have higher interest lows. As mortgage interest rates rose beginning in the frst quarter of 2022, housing rates than prime mortgages. First afordability diminished, and housing activity declined signifcantly. The commercial National’s relationships with mortgage segment performed relatively well despite the changing market conditions. Total brokers and its underwriting systems commercial volumes were $9.6 billion compared to $9.7 billion in 2021, a decrease of allow for cost efective origination of 1%. On a combined basis (residential and commercial), overall new origination in 2022 signifcant volumes. The product is decreased 12% year over year. Third-Party Mortgage Underwriting and Fulflment Processing Services In 2015, the Company launched its third-party underwriting and fulflment 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 MERLIN 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 oferings. In late 2019, the Company entered into a similar agreement with another Canadian bank. originated primarily for placement with institutional investors, but beginning in April 2019, the Company fnalized an agreement with a bank-sponsored securitization conduit to fund a portion of Excalibur origination. In early 2020, an agreement was reached with another bank-sponsored conduit to provide additional funding for this product. Excalibur was rolled out gradually, beginning in Ontario. Currently the program originates the majority of its mortgages in Ontario with small but growing volumes in Western Canada. 20 First National Financial Corporation 2022 ANNUAL REPORTRAISING CAPITAL FOR OPERATIONS Bank Credit Facility Preferred Share Issuance The Company has a $1.5 billion revolving Efective April 1, 2021, pursuant to the line of credit with a syndicate of banks. original prospectus, the Company This facility enables the Company to reset the annual dividend rate on the fund the large amounts of mortgages outstanding Class A Series 1 preference accumulated for securitization. In the shares to 2.895% for a fve-year term second quarter of 2022, the Company to March 31, 2026. After the exercise of extended the term of the facility by shareholder conversion rights in March another year to March 2027. The facility 2021, there were 2,984,835 Class A Series bears interest at foating rates. The 1 shares outstanding and 1,015,165 Class A Company has elected to undertake this Series 2 outstanding. The Series 2 shares debt for a number of reasons: (1) the facility provides the amount of debt bear a foating rate dividend calculated quarterly based on the 90-day T-Bill rate. required to fund mortgages originated Both the Series 1 and Series 2 shares pay for securitization purposes; (2) the debt quarterly dividends, subject to Board of is revolving and can be used and repaid Directors approval, and are redeemable as the Company requires, providing more at the discretion of the Company such fexibility than senior unsecured notes, that after each fve-year term ending on which are fully drawn during their term; March 31, the Company can choose to (3) the four-year remaining term gives extend the shares for another fve-year the Company a committed facility for term at a fxed spread (2.07%) over the the medium term; and (4) the cost of relevant index (fve-year Government borrowing refects the Company’s BBB of Canada bond yield for any Series 1 shares or the 90-day T-Bill rate for any Series 2 shares). While investors in these shares have an option on each fve-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. issuer rating. Note Issuance In November 2020, the Company issued 200,000 2.961% Series 3 senior unsecured notes for a fve-year term pursuant to a private placement under an ofering memorandum. These notes added to the Company’s 2019 issuance of 200,000 3.582% Series 2 senior unsecured notes. The net proceeds of both oferings, 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. 21 First National Financial Corporation 2022 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 In December 2007, the Company was Generally, when this spread is wider, the Company can earn higher returns from approved by Canada Mortgage and its securitization activities, although credit spreads and program fee observed in Housing Corporation (“CMHC”) as an securitization markets also afect proftability. In early 2020, fears of a global pandemic issuer of NHA-MBS and as a seller into led to a dramatic and sudden decrease in bond yields as central banks cut overnight the Canada Mortgage Bonds (“CMB”) rates signifcantly. Credit spreads, including those on mortgages, widened. Later in program. Issuer status provides the 2020, as fnancial systems began to normalize, mortgage coupons remained elevated Company with direct and independent as other credit spreads, including those on NHA-MBS, narrowed. The resulting spreads access to reliable and low-cost funding. had positive impacts on 2020 results and increased the proftability inherent in the Insured mortgage spreads can be Company’s securitization portfolio. In 2021, mortgage spreads narrowed, to levels not illustrated by comparing insured posted fve-year fxed single-family mortgage seen since before the 2008 fnancial crisis as competition increased. In 2022, spreads widened in response to the Bank of Canada’s interest rate policy announcements. If rates to a similar-term Government of such spreads persist, it will be favorable to the Company in future quarters. In 2022, Canada bond as listed in the table below. the Company originated and renewed approximately $12.6 billion of single-family and multi-unit residential mortgages for securitization purposes. Average Five-Year Mortgage Spread for the Period 1.12% 1.50% 2.68% 1.77% 1.38% The Company is subject to various regulations put in place by CMHC. These rules include the amount of CMHC guarantees issued which are required 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 2023. In July 2022, CMHC announced new rules related to the allocation of NHA-MBS guarantee fees between Lenders and Aggregators. These rules commence in 2023 and may have an impact on the Company’s ability to place mortgages with some institutions. 1.76% Canada Mortgage Bonds Program 1.17% 1.59% The CMB program is an initiative where Canada Housing Trust (“CHT”) issues securities to investors in the form of semi-annual interest-yielding fve- and 10-year bonds. As a seller into the CMB, the Company is able to make direct sales into the program. The ability to sell into the CMB has given the Company access to lower costs of funds on both single-family and multi-family mortgage securitizations. Because of the efectiveness 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. In recent years, the Company was able to increase capacity for its participation in the 10-year CMB by including afordability-linked mortgages in the program. CMHC has indicated there may be modifcations as early as 2024 which may reduce the Company’s access to 10-year CMB capacity. Period 2006 2007 2008 2009–2016 2017–2019 2020 2021 2022 22 First National Financial Corporation 2022 ANNUAL REPORT KEY PERFORMANCE INDICATORS The principal indicators used to measure by excluding gains and losses related provides investors with an indication of the Company’s performance are: to the fair value of fnancial instruments income normalized for capital-market • Earnings before income taxes and losses and gains on fnancial 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 indicator. This non-IFRS measure was used to adjust the Company’s earnings and adding back depreciation and fuctuations. Pre-FMV Income should amortization. The addbacks of not be construed as an alternative to net amortization ended in 2016 when IPO- income determined in accordance with related intangible assets were fully IFRS or to cash fows from operating, amortized. Accordingly, efective January investing and fnancing activities. The 1, 2020, the Company elected to simplify Company’s method of calculating the non-IFRS measure it presents to Pre-FMV Income may difer from other adjust only for fair value-related gains issuers and, accordingly, Pre-FMV Income and losses. This measure is reported as may not be comparable to measures “Pre-FMV Income.” Pre-FMV Income is used by other issuers. not recognized under IFRS. However, management believes that Pre-FMV Income is a useful measure that ($000s) For the Period Revenue Income before income taxes Pre-FMV Income(1) At Period End Total assets Quarter Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 414,785 58,269 59,492 339,292 57,111 57,045 1,574,293 1,394,606 269,082 208,762 263,821 257,276 43,763,672 42,274,158 43,763,672 42,274,158 Mortgages under administration 131,000,635 123,907,627 131,000,635 123,907,627 (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 fnancial instruments (except those on mortgage investments) and deducting gains on the valuation of fnancial instruments. 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 fow and a business model that is designed to make efcient 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 First National Financial Corporation 2022 ANNUAL REPORT Determination of Common Share Dividend Payout Ratio ($000s) For the Period Net income attributable to common shareholders Total dividends paid or declared on common shares Dividends paid or declared on common shares, excluding special dividend Total common share dividend payout ratio Regular common share dividend payout ratio(1) After-tax Pre-FMV dividend payout ratio(2) Quarter Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 41,785 41,287 194,693 191,866 35,730 110,190 141,423 210,885 35,730 35,231 141,423 135,926 86% 86% 84% 267% 85% 85% 73% 73% 94% 110% 71% 73% Note: (1) This ratio is calculated by excluding the payment of the special dividends declared at the end of the periods 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 fnancial instruments (except those on mortgage investments) and deducting gains on the valuation of fnancial instruments. The Company uses its aggregate efective tax rate to tax afect the impact of the valuation of fnancial instruments on this ratio. For the year ended December 31, 2022, the regular common share payout ratio (excluding the special dividend declared in 2021) was 73% compared to 71% for the year ended December 31, 2021. However, in 2022 and 2021, the Company recorded gains and losses on account of the changes in fair value of fnancial instruments. Gains and losses are recorded in the period in which the prices on Government of Canada bonds change; however, the ofsetting economic impact is generally refected 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 afect its dividend payment policy in the short term. If the gains and losses on fnancial instruments in the two years are excluded from the above calculations, the dividend payout ratio for 2022 would have been 94% compared to 73% in 2021. The Company also paid $3.0 million of dividends on its preferred shares in 2022 compared to $2.7 million in 2021. 24 First National Financial Corporation 2022 ANNUAL REPORT REVENUES AND FUNDING SOURCES Mortgage Origination Placement Fees and Gain on Deferred Placement Fees The Company derives a signifcant The Company recognizes revenue at the time that a mortgage is placed with amount of its revenue from mortgage an institutional investor. Cash amounts received in excess of the mortgage origination activities. Most mortgages principal at the time of placement are recognized in revenue as “placement originated are funded either by fees”. The present value of additional amounts expected to be received placement with institutional investors or over the remaining life of the mortgage sold (excluding normal market- through securitization conduits, in each based servicing fees) is recorded as a “deferred placement fee”. A deferred case with retained servicing. In general, placement fee arises when mortgages with spreads in excess of a base spread originations are allocated from one are placed. Normally the Company would earn an upfront cash placement fee, funding source to another depending but investors prefer paying the Company over time, as they earn net interest on diferent criteria, including type of margin on such transactions. Upon the recognition of a deferred placement mortgage and securitization limits, with an overall consideration related to fee, the Company establishes a “deferred placement fee receivable” that is amortized as the fees are received by the Company. Of the Company’s $38.1 maintaining diversifed funding sources. billion of new originations and renewals in 2022, $24.4 billion was placed with The Company retains servicing rights on 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. virtually all the mortgages it originates. This provides the Company with servicing fees to complement revenue earned through originations. For the year ended December 31, 2022, new origination volume decreased to $29.1 billion from $33.2 billion, or about 12% compared to 2021. 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 fnancings. These mortgages remain as mortgage assets of the Company for the full term and are funded with securitization-related debt. Of the Company’s $38.1 billion of new originations and renewals in 2022, $12.6 billion was originated for its own securitization programs. 25 First National Financial Corporation 2022 ANNUAL REPORTMortgage Servicing and Administration The Company services virtually all chartered banks that maintain the mortgages generated through its deposit accounts, which has resulted in mortgage origination activities on signifcant additional servicing revenue. 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 signifcant source of continuing income and cash fow. 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 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 fulflment 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 2022 ANNUAL REPORT RESULTS OF OPERATIONS The following table shows the volume of mortgages originated by First National and mortgages under administration for the periods indicated: Quarter Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 ($ millions) Mortgage Originations By Segment New single-family residential New multi-unit and commercial Sub-total Single-family residential renewals Multi-unit and commercial renewals Total origination and renewals Mortgage Originations by Funding Source Institutional investors NHA-MBS/CMB/ABCP securitization Internal Company resources Total Mortgages Under Administration Single-family residential Multi-unit residential and commercial Total 3,594 2,277 5,871 1,908 689 8,468 5,028 3,231 209 8,468 88,590 42,411 131,001 5,218 3,045 8,263 1,491 902 10,656 6,863 3,475 318 10,656 84,896 39,012 123,908 19,479 9,634 29,113 6,840 2,163 38,116 24,343 12,570 1,203 38,116 88,590 42,411 131,001 Total new mortgage origination volumes decreased in 2022 compared to 2021 by 12%. This refected a 17% decrease in single-family volumes and a 1% decrease in commercial segment volumes year over year. Management believes the decrease in the single-family segment was due to a slowing housing market which was the result of higher mortgage rates. The Company’s MERLIN technology continues to support its mortgage origination platform allowing it to underwrite efciently across the country. In the commercial segment, where the Company’s expertise in underwriting multi-unit mortgages is a fundamental competency, 2022 volumes refected demand for insured mortgages, ofset by lower conventional mortgage activity as higher interest rates began to impact real estate valuations. When combined with renewals, total production inclusive of both business segments decreased by 10% to $38.1 billion in 2022 from $42.1 billion in 2021. Origination for direct securitization into NHA-MBS, CMB and ABCP programs remained a large part of the Company’s strategy, with volume of almost $12.6 billion in 2022. 23,414 9,747 33,161 6,306 2,658 42,125 27,813 12,923 1,389 42,125 84,896 39,012 123,908 27 First National Financial Corporation 2022 ANNUAL REPORT Net Interest – Securitized Mortgages Comparing the year ended December 31, 2022, to the year ended December 31, 2021, “net interest – securitized mortgages” (NIM) increased by about 4% to $169.3 million from $163.2 million. The portfolio of mortgages pledged under securitization grew 5% from about $35.4 billion at December 31, 2021 to $37.2 billion at December 31, 2022. This refected growth of 14% in the multi-residential program portfolio and an increase of 1% in single-family programs. Accordingly, commercial segment earnings were up by $8.6 million while residential segment NIM was lower by $2.5 million year over year. The signifcant factors which contributed to this decrease were: (1) comparatively tighter securitized margins on fxed rate mortgages; and (2) spread compression on foating rate pools as short-term interest rates rose. These unfavorable variances were ofset by slower rates of prepayment. Although nominal spreads were wider during 2022, the measurement of NIM was afected by the results of the Company’s economic hedging program and resulting accounting treatment. In the frst and second quarters of 2022, bond yields rose signifcantly, and the value of the Company’s short bond interest rate hedges on its residential commitment pipeline increased in value. The Company recorded gains on fnancial instruments of $66.7 million in its statement of income. As the underlying mortgages closed and were securitized, the mortgages had lower mortgage rates relative to the interest rate on the MBS debt arranged to fund them. Efectively, some of the spread otherwise earned on such transactions was recorded as a gain on fnancial instruments as opposed to future securitization NIM. While difcult to calculate precisely, management believes this treatment reduced comparative NIM in 2022 by about $10 million. Securitization NIM was also afected negatively by the rapid rise of short-term interest rates. As rates rise, there is a temporary compression between the Company’s prime lending rate and its short-term CDOR-based funding costs. Because the Company adjusts its foating mortgage rates for its borrowers in the month subsequent to changes in short-term interest rates, interest spreads are generally tighter in months when CDOR increases in tandem with BoC rate announcements. The Company estimates that residential segment NIM was lower year over year by about $6.0 million because of such NIM compression on its foating rate MBS pools. This negative variance was ofset somewhat by a tempering of prepayment speeds. In 2021 prepayment speed was higher than expected as borrowers took advantage of historically low mortgage rates to refnance mid term. With higher mortgage rates in 2022, prepayment speeds returned to traditional levels. Although the Company received prepayment fees on the prepaying mortgages in both years, in 2021 the fees received by the Company were ofset by indemnities paid to NHA MBS bondholders. In 2022 with higher interest rates, there were virtually no indemnities to pay as bondholders could reinvest proceeds from prepayment at more proftable risk- free rates. Accordingly, in 2022 the Company retained $12.1 million of prepayment fees compared to 2021 when there was a net payout of $1.8 million to fund indemnities. 28 First National Financial Corporation 2022 ANNUAL REPORTPlacement Fees Mortgage Investment Income Placement fee revenue decreased by 12% to $268.6 million from $303.7 million in Mortgage investment income increased the comparative year. The decrease was the result of a 12% decrease in origination 65% to $105.7 million from $63.9 million. volumes sold to institutional investors. Generally, per-unit fees were marginally lower The increase was due primarily to the for residential origination than in the comparable year as product mix changed interest rate environment. Interest rates between investors. In the commercial segment, placement fees increased by 37% as the rose steadily through 2022 as the market Company placed comparatively more insured mortgages with institutional investors as reacted to a cycle of rate hikes by the opposed to through its own securitization programs. Gains on Deferred Placement Fees Gains on deferred placement fees revenue decreased 7% to $15.0 million from $16.1 million. These gains related primarily to multi-unit residential mortgages originated and sold to institutional investors. Volumes for these transactions increased by 33% from 2021 as the Company’s insured origination grew. However, spreads on these mortgages were narrower in 2022 compared to 2021. Mortgage Servicing Income Mortgage servicing income increased 2% to $216.8 million from $211.6 million. This increase was attributable to growing MUA and interest earned on funds held in escrow as a result of higher overnight interest rates. The increase was ofset by lower third- party underwriting fees which was the outcome of a decline in volumes processed. Like the Company’s own origination experience in 2022, slower housing activity across the country afected the Company’s customers in this business line. Bank of Canada to address infation risks. The impact was such that 5-year bond yields increased by about 200 basis points between December 31, 2021 and December 31, 2022. This directly afected mortgage rates ofered by the Company such that it earned comparatively more interest income on its mortgage and loan investment portfolio and mortgages accumulated for securitization. 29 First National Financial Corporation 2022 ANNUAL REPORT Realized and Unrealized Gains (Losses) on Financial Instruments This fnancial 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, a signifcant portion of the Company’s interest rate management program qualifes 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 fnancial 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 difcult to establish a valid hedging relationship. For fnancial reporting purposes, this means that there will still be gains and losses on fnancial 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 Losses on mortgages held at fair value Losses on interest rate swaps Net gains (losses) on fnancial instruments (1,353) Quarter Ended Year Ended December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 (844) (130) (379) 3,155 (137) (3,089) (71) 74,442 (710) (14,122) 59,610 15,397 (730) (8,852) 5,815 2022 featured an infationary environment in which bond yields rose signifcantly as central banks tightened monetary policies. This resulted in increases in both short and long-term interest rates. While interest rates rose in 2021, the scale of increase in 2021 was much smaller than in 2022 as the Bank of Canada raised its key overnight rate by 4.00% between March 2 and December 31, 2022. These changes and the tone of the Bank’s announcements meant that 5- and 10-year term Government of Canada bond yields increased by about 200 basis points between the end of 2021 and the end of 2022. Accordingly, the impact on the Company’s short-bond position used to mitigate interest rate risk on single-family commitments was larger in 2022 ($74.4 million of gains compared to $15.4 million of gains in 2021). 30 First National Financial Corporation 2022 ANNUAL REPORT Brokerage Fees Expense Brokerage fees expense decreased 14% to $173.3 million from $201.8 million. This decrease refected an 18% year-over-year decrease in origination volumes of single- family mortgages for institutional investors, which decreased by about 18% year over year. The Company increased broker incentives during 2022 in order to grow volumes in a slow and competitive market. These incentives increased average per-unit broker fees by about 5%, otherwise total brokerage fee expenses would have been even lower in 2022 than in 2021. These increases where apparent particularly in the last six months of the year. Brokerage fees expense was also negatively afected by the under absorption of the higher per unit fees upon securitization. Efectively, higher fees related to the referral of securitized mortgages were expensed in the year. Lower mortgage default insurance fees also afected the change in this expense year over year. Salaries and Benefts Expense Interest Expense Salaries and benefts expense increased Interest expense increased 95% to $136.0 9% to $193.0 million from $177.0 million. million from $69.7 million. As discussed Salaries were higher as overall headcount in the “Liquidity and Capital Resources” increased by 7% (1,686 employees at section of this analysis, the Company December 31, 2022 compared to 1,579 warehouses a portion of the mortgages at December 31, 2021). Headcount it originates prior to settlement with the growth was highest in the residential investor or funding with a securitization underwriting departments. Commercial vehicle. The Company used its $1.5 underwriting compensation was lower billion syndicated bank line together in the year by about $5.2 million due to with repurchase agreements to fund the tighter origination spreads compared mortgages during this period. The overall to 2021 (primarily related to the frst two interest expense increased from 2021 due quarters of 2021). Management salaries to higher prevailing interest rates on the were paid to the two senior executives Company’s foating rate debt as short- (co-founders) who together control term rates increased signifcantly with about 71% of the Company’s common monetary tightening from central banks shares. The current period expense is a to address infation. Interest expense also result of the compensation arrangement includes the cost of carry related to the executed on the closing of the initial Company’s economic hedging program public ofering (“IPO”) in 2006. where costs increased by $8.6 million year over year. 31 First National Financial Corporation 2022 ANNUAL REPORTOther Operating Expenses Income Tax Expense Other operating expenses increased by 23% to $63.6 million from $51.9 million, The provision for taxes increased by 3% primarily due to occupancy related costs and depreciation of computer equipment. to $71.4 million from $69.3 million. The The costs to occupy the Company’s new Toronto headquarters, including the provision increased proportionately with amortization of new leaseholds are higher than incurred at the previous head ofce. net income before income taxes. Other expenses including business travel and discretionary spending also increased as travel restrictions lifted as 2022 progressed. Income before Income Taxes and Pre-FMV Income Other Comprehensive Income For the commercial segment, the Company hedges the interest rate Income before income taxes increased 2% to $269.1 million from $263.8 million risk associated with insured multi- in 2021. This increase was partially the result of changing capital markets. The residential mortgages. This hedging Company’s results include gains and losses on account of fnancial instruments used begins on commitment and ends when to economically hedge residential mortgage commitments. As described previously the Company either securitizes the in this MD&A, the Company recorded $60.3 million of gains on fnancial instruments mortgages or places the mortgage with (excluding losses related to mortgage and loan investments) in 2022. Comparatively, in an institutional investor. As the Company 2021, the Company recorded $6.5 million of gains on fnancial instruments (excluding determined that these cash fow hedges the losses related to mortgage and loan investments). The change in these values were efective, the Company recorded accounted for a $53.8 million increase in comparative income before income taxes. $123.3 million of pre-tax net gains on Pre-FMV Income, which excludes these changes, decreased by 19% to $208.8 million such hedges in OCI in 2022. In the year, from $257.3 million. This change was largely the result of a 17% drop in new residential the Company amortized a portion of the origination and lower fees related to third-party underwriting. As mortgage rates rose gains and losses in accumulated OCI into over the past nine months, housing transactions slowed across the country. As lenders regular earnings in the amount of $30.5 competed in a smaller market, the Company increased broker incentives to increase million. The remaining OCI amount will referrals. Together with tight funding spreads for securitized foating rate mortgages be amortized into net income in future and employee headcount designed to underwrite higher volumes, proftability was periods. lower. During the pandemic, the Company increased originations by a factor of about 30%. At the same time, the volumes that it processed in its third-party underwriting department also increased signifcantly. In 2021, the Company increased headcount to underwrite the large volumes originated particularly in the residential segment. Together with a competitive environment for skilled underwriters in an infationary environment, salary costs per employee increased. In 2022, head count remained relatively constant while related revenues fell. These unfavorable changes were ofset by favorable results in the commercial segment where originations increased, and the Company earned higher securitization NIM from the increased securitization activity in the past several years. 32 First National Financial Corporation 2022 ANNUAL REPORT OPERATING SEGMENT REVIEW The Company aggregates its business from two segments for fnancial 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, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Originations and renewals 26,319,422 29,719,176 11,796,939 12,404,946 Percentage change Revenue Percentage change Income before income taxes Percentage change As at Identifable assets (11%) 1,115,222 8% 172,541 (13%) 1,030,550 199,366 (5%) 459,071 26% 96,541 50% 364,056 64,455 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 28,923,269 28,813,695 14,810,627 13,430,687 39,011,848 Mortgages under administration 88,589,805 84,895,778 42,410,830 RESIDENTIAL SEGMENT COMMERCIAL SEGMENT Overall residential origination volumes 2021, or by 42%. This is the outcome of 2022 commercial revenues were higher including renewals decreased by 11% lower revenues on placement activity, compared to 2021 and segment income between 2022 and 2021 while residential higher per-unit broker fees combined before income taxes increased by 50% revenues increased by 8%. Revenue with higher headcount which created year over year. The increase in revenue beneftted from the impact of fnancial a comparatively more expensive is largely attributable to higher interest instruments. Excluding the impact operating environment. Identifable income generated by the securitized of these revenues, adjusted revenue assets increased from December 31, 2021, portfolio. Income growth refected increased by 3%. Revenue was afected as the Company’s pledged mortgages increased placement fees derived from in 2022 by lower origination which under securitization increased by about funding a greater portion of mortgage translated into lower placement fees. $300 million. This was ofset with lower origination through institutional However, higher interest earned on the amounts of mortgages accumulated for investors in the year compared to securitized portfolio and mortgages securitization. accumulated for securitization ofset the decrease in placement fees. Net income before tax was also afected by fair value-related revenues. Without the impact of these revenues, net income before tax decreased to $112.2 million in 2022 from $192.8 million in 2021. Higher interest revenue earned on mortgage investments and escrow deposits were also favorable to both revenue and income. Identifable assets increased from those at December 31, 2021, as the Company increased its portfolio of securitized mortgages by about $1.5 billion. 33 First National Financial Corporation 2022 ANNUAL REPORT LIQUIDITY AND CAPITAL RESOURCES The Company’s fundamental liquidity strategy has been to originate and invest in prime Canadian mortgages. Management’s belief has always been that these mortgages are attractive to investors and should always be well bid and highly liquid. This strategy proved efective during the turmoil experienced in 2007 through 2009, and once again in the 2020 pandemic, when capital markets were disrupted and the demand for high-quality assets increased. As the Company’s results in those years demonstrated, First National was able to attract investors to purchase its mortgage origination at proftable margins. Originating prime mortgages also allows the Company to securitize in the capital markets; however, this activity requires signifcant cash resources to purchase and hold mortgages prior to arranging for term debt through the securitization markets. For this purpose, the Company uses the combination of unsecured notes and the Company’s revolving bank credit facility. This aggregate indebtedness is typically used to fund: (1) mortgages accumulated for sale or securitization (2) the origination costs associated with securitization and, (3) mortgage and loan investments. The Company has a credit facility with a syndicate of fnancial institutions for total credit of $1.5 billion. This facility was extended in April 2022 for a fve-year term maturing in March 2027. As at December 31, 2022, the Company had entered into repurchase transactions with fnancial institutions to borrow $1.4 billion related to $1.4 billion of mortgages held in “mortgages accumulated for sale or securitization” on the balance sheet. At December 31, 2022, outstanding bank indebtedness was $1,065.9 million (December principal of the mortgage. The three 31, 2021 – $965.4 million). This debt was used to fund $833.2 million (December 31, 2021 mortgage default insurers approved – $951.3 million) of mortgages accumulated for sale or securitization. At December 31, these steps, permitting the deferrals to 2022, the Company’s other interest-yielding assets included: (1) deferred placement occur without any impact on subsequent fees receivable of $64.6 million (December 31, 2021 – $64.4 million) and (2) mortgage claims under the mortgage insurance and loan investments of $190.1 million (December 31, 2021 – $192.3 million). Company policies. In turn, First National has been considers the portion of bank indebtedness and the senior unsecured notes that fund required to make “timely payments” on assets other than mortgages accumulated for sale or securitization a proxy for true the NHA-MBS securities. This means leverage. This leverage has increased between December 31, 2021, and December that despite not receiving payments 31, 2022, and now stands at $631.9 million (December 31, 2021 – $413.0 million). This from borrowers on the mortgages that represents a debt-to-equity ratio of approximately 0.90:1. This ratio is higher than support the NHA-MBS, the Company the ratio of 0.72:1 at December 31, 2021. In general, the increase was the result of the has been required to pay the interest investment of $143 million in cash collateral and subordinate notes for the Company’s and amortizing principal on the debt. Alt-A securitization program. The Company believes the ratio is appropriate given the In efect, the Company de-leveraged its nature of the assets which the debt is funding. Since being approved as an issuer of NHA-MBS, the Company has funded the diference 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. balance sheet by paying of the debt while the related mortgages did not as amortize as quickly. At December 31, 2022, the Company estimates that it had reduced its NHA MBS debt by approximately $18 million (December 31, 2021 - $46 million) because of the impact of deferred payments. This has been funded by the Company’s available cash resources. In cases of extended hardship, the Company provided a second three-month deferral The Company funds a portion of its after the initial deferral period ended. During this deferral period, a portion of such mortgage originations for institutional mortgages ceased to amortize and interest otherwise payable was capitalized to the placement on the same day as the 34 First National Financial Corporation 2022 ANNUAL REPORT advance of the related mortgage. The investments return cash, it will be used For purposes of the enhanced dividend remaining originations are funded by to pay down this bank indebtedness. tax credit rules contained in the Income the Company on behalf of institutional The syndicate has also provided credit Tax Act (Canada) and any corresponding investors or pending securitization by to fnance a portion of the Company’s provincial and territorial tax legislation, all the Company. On specifed days, the deferred placement fees receivable dividends (and deemed dividends) paid Company aggregates all mortgages and the origination costs associated by the Company to Canadian residents warehoused to date for an institutional with securitization, as well as other on both common and preference shares investor and transacts a settlement miscellaneous longer-term fnancing 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. with that institutional investor. A similar needs. 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. 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 signifcant portion of cash collateral is the investment made on behalf of the Company’s ABCP programs. As at December 31, 2022, the investment in cash collateral was $160.7 million The Company also invests in short-term (December 31, 2021 – $105.1 million). mortgages, usually for 6 to 18-month terms, to bridge existing borrowers in the interim period before long-term fnancing. The banking syndicate has provided credit facilities to partially fund these investments. As these 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. 35 First National Financial Corporation 2022 ANNUAL REPORTFINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company records mortgages accumulated for sale and a portion of mortgage and loan investments as fnancial assets measured at “fair value through proft 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, efect 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 foating 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 specifc 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. The Company designates hedging relationships such that the results of any efective hedging does not afect 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, 2022, the Company had $1.5 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, 2022, the Company had entered into $0.6 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, 2022, the aggregate value of these swaps, maturing between December 2023 and September 2026, was a $13.4 million liability. During 2022, the fair value of these swaps decreased by $14.1 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 efectively as originally intended. Despite entering into efective 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, 2022, the Company had various exposures to changing credit spreads. In particular, in mortgages accumulated for sale or securitization, there were approximately $2.3 billion of mortgages that were susceptible to some degree of changing credit spreads. 36 First National Financial Corporation 2022 ANNUAL REPORTCAPITAL EXPENDITURES SUMMARY OF CONTRACTUAL OBLIGATIONS A signifcant portion of First National’s The Company’s long-term obligations include leases of premises with terms up to business model is the origination and 15 years for its ofces across Canada, and its obligations for the ongoing servicing placement or securitization of fnancial of mortgages sold to securitization conduits and mortgages related to purchased assets. Generally, placement activities servicing rights. The Company sells its mortgages to securitization conduits on a do not require any capital investment. fully serviced basis and is responsible for the collection of the principal and interest Securitization transactions may require payments on behalf of the conduits, including the management and collection of the investment of signifcant amounts mortgages in arrears. of the Company’s own capital. This capital is provided in the form of cash collateral, credit enhancements, and the upfront funding of broker fees and other origination costs. These are ($000s) Total 0–1  years 1–3  years 4–5  years After 5 years Payments Due By Period described more fully in the “Liquidity and Lease obligations 122,862 10,268 18,707 18,179 75,708 Capital Resources” section above. The business requires capital expenditures on technology (both software and hardware), leasehold improvements, and ofce furniture. During the year ended December 31, 2022, the Company purchased new computer equipment and software and made leasehold improvements. In the long term, the Company expects capital expenditures on fxed assets will be approximately $10 million annually. 2021 expenditures were much higher as the Toronto head ofce moved to new premises and invested in new leasehold improvements. 37 First National Financial Corporation 2022 ANNUAL REPORT CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company prepares its fnancial are prepayment rates and the discount of the change in value of the hedged statements in accordance with IFRS, rate used to present value future mortgages. The Company’s assets and which requires management to make expected cash fows. The annual rate liabilities are such that the Company estimates, judgments and assumptions of unscheduled principal payments must use valuation techniques based on that management believes are is determined by reviewing portfolio assumptions that are not fully supported reasonable based upon the information prepayment experience on a monthly by observable market prices or rates available. These estimates, judgments basis. The Company assumes there is in most cases. Much like the valuation and assumptions afect the reported virtually no prepayment on multi-unit of deferred placement fees receivable amounts of assets and liabilities and residential fxed-rate mortgages. described above, the Company’s method disclosure of contingent assets and liabilities at the date of the fnancial statements, and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates on historical experience and other assumptions that it believes to be reasonable under the circumstances. Management also evaluates its estimates on an ongoing basis. The signifcant accounting policies of First National are described in Note 2 to the Company’s annual consolidated fnancial statements as at December 31, 2022. The policies that First National believes are the most critical to aid in fully understanding and evaluating its reported fnancial results include the determination of the gains on deferred placement fees and the impact of fair value accounting on fnancial 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 refected on the Company’s balance sheet as deferred placement fees receivable. The key assumptions used in the valuation of gains on deferred placement fees 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 refect 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, 2022, are consistent with of determining the fair value of the assets listed above are subject to Company estimates. The most signifcant would be implicit in the valuation of mortgage and loan investments. These are generally non-homogeneous mortgages where it is difcult to fnd independent valuation comparatives. The Company uses information in its underwriting fles, regional real estate information and other internal measures to determine the fair value of these assets. those used for the year ended December As a mortgage lender, the Company 31, 2021 and quarters ended September invests in uninsured mortgages. When 30, June 30 and March 31, 2022. it funds these mortgages through The Company elects to treat certain of its fnancial assets and liabilities, including mortgages accumulated for sale, mortgage and loan investments and bonds sold short, at fair value through proft 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 efective hedge, and accordingly, a portion of the change in the short bonds’ fair value may be recorded in Other Comprehensive Income or deferred against hedge assets. This accounting has reduced the volatility in earnings as changes in the value on short bonds have been matched to the recognition securitization debt, it continues to be liable for any credit losses. The key inputs in the measurement of any expected credit loss (“ECL”) include probability of default, loss given default and forecast of future economic conditions, which involves signifcant judgment. Upon application of IFRS 9 with respect to impairment, there has been no impact on the Company’s earnings. Because of the high proportion of government-insured mortgages in its securitized portfolio and the low historical loss rates on the uninsured mortgages on which the Company lends, just $2.7 million of credit losses were recorded in 2022. 38 First National Financial Corporation 2022 ANNUAL REPORT DISCLOSURE CONTROLS AND INTERNAL CONTROL OVER FINANCIAL REPORTING ESG The Company’s disclosure controls and procedures are designed to provide reasonable Accountability Statement in the fall assurance that information required to be disclosed by the Company in reports fled of 2021. In October 2022, it issued an under Canadian securities laws is recorded, processed, summarized and reported within updated report which explores First the time periods specifed under those laws, and include controls and procedures National’s approach to sustainability that are designed to ensure that information is accumulated and communicated to and provides environmental, social management, including the Chief Executive Ofcer and Chief Financial Ofcer, to and governance disclosure that has The Company issued its initial Public been reviewed and approved by the Board of Directors. It complements our Management Information Circular, Annual Information Form, Management Discussion and Analysis and Annual Report, all of which ofer information about the fnancial position, priorities, responsibilities and commitments of the consolidated operations of First National. allow timely decisions regarding required disclosure. As of December 31, 2022, management evaluated, under the supervision of and with the participation of the Chief Executive Ofcer and Chief Financial Ofcer, the efectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, management concluded that the Company’s disclosure controls and procedures, as defned by National Instrument 52-109, Certifcation of Disclosure in Issuers’ Annual and Interim Filings, were efective as of December 31, 2022. Management is responsible for establishing and maintaining adequate internal control over fnancial reporting. Internal control over fnancial reporting is designed to provide reasonable assurance regarding the reliability of fnancial reporting and the preparation of fnancial statements for external purposes in accordance with reporting standards; however, because of its inherent limitations, internal control over fnancial reporting may not prevent or detect misstatements on a timely basis. Management evaluated, under the supervision of and with the participation by the Chief Executive Ofcer and Chief Financial Ofcer, the efectiveness of the Company’s internal control over fnancial 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 fnancial reporting was efective as of December 31, 2022, and that no material weaknesses have been identifed in the Company’s internal control over fnancial reporting as of December 31, 2022. No changes were made in the Company’s internal control over fnancial reporting during the year ended December 31, 2022, that have materially afected, or are reasonably likely to materially afect, the Company’s internal control over fnancial reporting. 39 First National Financial Corporation 2022 ANNUAL REPORT RISKS AND UNCERTAINTIES AFFECTING THE BUSINESS The business, fnancial condition and results of operations of the Company are institution may decide not to renew the subject to a number of risks and uncertainties and are afected by a number of existing contract with First National or factors outside the control of management of the Company. In addition to the risks to exercise termination clauses within addressed elsewhere in this discussion and the fnancial statements, these risks the agreement. In the event of non- include: ability to sustain performance and growth, reliance on sources of funding, renewal or termination, the Company’s concentration of institutional investors including third-party servicing customers, MUA will decrease. For a more complete reliance on independent mortgage brokers, changes in interest rates, repurchase discussion of the risks afecting the obligations and breach of representations and warranties on mortgage sales, risk Company, reference should be made to of servicer termination including the impact of trigger events on cash collateral and the Company’s Annual Information Form. 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, insufcient 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 fuctuate 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 diferently than the Company’s fling positions. Risk and risk exposure are managed through a combination of insurance, a system of internal controls and sound operating practices. The Company’s key business model is to originate primarily prime mortgages and fnd funding through various channels to earn ongoing servicing or spread income. For the single-family residential segment, the Company relies on independent mortgage brokers for origination and several large institutional investors for sources of funding. These relationships are critical to the Company’s success. The total of one investor’s activities with the Company account for approximately 13% of the Company’s total revenues. 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 The COVID-19 crisis was 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 increased. Although the virus has not been entirely eradicated, the Company no longer views this as a crisis. Recent rate hikes by the Bank of Canada have raised short-term interest rates by 425 basis points in the past ten months. In that same period mortgage rates for 5-year term mortgages have increased by approximately 300 basis points and bank prime lending rates have risen by 425 basis points with the latest change occurring in late January 2023. These are signifcant changes that have taken place over a short period of time. Higher borrowing rates will directly afect consumers across the country. Management believes these changes may impact the Company negatively in future periods. Related losses could be material. 40 First National Financial Corporation 2022 ANNUAL REPORTFORWARD-LOOKING INFORMATION Forward-looking information is included in this MD&A. In some cases, forward-looking information can be identifed 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 fnancial position, business strategy and strategic goals, product development activities, projected costs and capital expenditures, fnancial 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 difer 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 Afecting the Business” section. In evaluating this information, the reader should specifcally consider various factors, including the risks outlined in the “Risk and Uncertainties Afecting the Business” section, that may cause actual events or results to difer materially from any forward-looking information. The forward-looking information contained in this discussion represents management’s expectations as of February 28, 2023, 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 First National Financial Corporation 2022 ANNUAL REPORTOUTLOOK 2022 was a year that featured a competitive marketplace and reduced origination term efcacy of the government and activity which was largely the result of the Bank of Canada’s (“BoC”) policy decisions central bank interventions. It is still not to reduce infation by increasing overnight lending rates which, in turn, led to increased possible to reliably estimate the length mortgage rates. Between March 2, 2022 and January 25, 2023, the overnight rate and severity of these developments increased eight times from 0.25% at the beginning of March to 4.50% at the writing of and the impact on the fnancial results this MD&A. Throughout most of these increases (except the most recent), the BoC’s and condition of the Company and its statements indicated the likelihood of more interest rate hikes to follow. The Company operating subsidiaries in future periods. believes these increases contributed to signifcantly higher mortgage rates and reduced the afordability of housing across the country. Despite this uncertain business environment, the Company successfully grew MUA and continued to build its portfolio of mortgages pledged under securitization. First National will beneft from this growth in the future: earning income from mortgage administration, and net securitization margin and improving its position to capture increased renewal opportunities. In the short term, the expectation for the start of 2023 is for lower origination as First National is well prepared to execute its business plan. The Company expects to enjoy the value of its continued goodwill with broker partners earned over the last 35+ years and reinforced during the pandemic. With diverse relationships over an array of institutional higher mortgage rates continue to dampen activity across the country, particularly in investors and solid securitization markets, comparison to the frst quarter of 2022 which was seasonally very strong. However, the Company has access to consistent when it announced its latest interest rate increase in January 2023, the BoC indicated and reliable sources of funding. that it would now hold its policy rate at the current level while it assesses the cumulative impact of recent increases. This may signal the end to its rate hiking cycle designed to manage infationary risks. In turn, the Company hopes this will provide confdence to prospective buyers that mortgage rates will not increase going forward such that home buying activity will return to traditional levels. Accordingly, the Company foresees improving origination volumes through the second half of 2023. This positive change will not likely represent a return to the unsustainable volumes recorded in most of 2020 and 2021, but instead a return to pre-pandemic activity exhibited in 2019. Higher immigration will also support the housing market. Management is confdent that First National will remain competitive and a leader in the marketplace. Management anticipates commercial origination will also slow as the market digests changing property valuations given the new underlying fnancial environment. 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. The economic efects 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- The Company is confdent 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 fow from its $37 billion portfolio of mortgages pledged under securitization and $91 billion servicing portfolio and focus on the value inherent in its signifcant single- family renewal book. 42 First National Financial Corporation 2022 ANNUAL REPORT 43 First National Financial Corporation 2022 ANNUAL REPORTMANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The management of First National cannot be fnalized with certainty The Board of Directors oversees that Financial Corporation (the “Company”) is until future periods. Estimates and management fulfls its responsibility for responsible for the integrity, consistency assumptions are based on historical fnancial reporting and internal control. and reliability of the consolidated experience and current conditions, and The fnancial statements have been fnancial statements and Management’s Discussion and Analysis (“MD&A”). The consolidated fnancial statements have been prepared by Management in accordance with International Financial Reporting Standards. are believed to be reasonable. We are responsible for establishing and maintaining internal control over fnancial reporting for the Company. We have designed such internal control over fnancial reporting, or caused it to We certify that we have reviewed the be designed under our supervision, to fnancial statements and information provide reasonable assurance regarding contained in the MD&A, and, based on the reliability of fnancial reporting and our knowledge, they do not contain any the preparation of fnancial statements untrue statement of a material fact or for external purposes. We evaluated, omit to state a material fact required to or caused to be evaluated under our be stated or that is necessary to make a supervision, the efectiveness of the statement not misleading in light of the Company’s internal control over fnancial circumstances under which it was made, reporting at the fnancial year end 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 fnancial 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. with respect to the period covered by and the Company has disclosed in its the statements and the annual report. annual MD&A our conclusion about the Jason Ellis President and Chief Executive Ofcer Based on our knowledge, the fnancial efectiveness of internal control over statements together with MD&A and fnancial reporting at the fnancial year- other fnancial information included in end based on that evaluation. We have the annual report fairly present in all also disclosed in the MD&A any change material respects the fnancial condition, in our internal control over fnancial results of operations and cash fows of reporting that occurred during the the Company as of the dates and for the year that has materially afected, or is periods presented. The preparation of reasonably likely to materially afect, our fnancial statements involves transactions internal control over fnancial reporting. afecting the current period which Robert Inglis Chief Financial Ofcer February 28, 2023 44 First National Financial Corporation 2022 ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT To the Shareholders of First National Financial Corporation Report on the audit of the consolidated fnancial statements Opinion Basis for opinion Key audit matters We have audited the consolidated We conducted our audit in accordance Key audit matters are those matters fnancial statements of First National with Canadian generally accepted that, in our professional judgment, were Financial Corporation and its subsidiaries (collectively, the “Company”), which auditing standards. Our responsibilities under those standards are further of most signifcance in the audit of the fnancial statements of the current comprise the consolidated statements described in the Auditor’s responsibilities period. These matters were addressed in of fnancial position as at December 31, for the audit of the consolidated fnancial the context of the audit of the fnancial 2022 and December 31, 2021, and the statements section of our report. We statements as a whole, and in forming consolidated statements of income, are independent of the Company in the auditor’s opinion thereon, and we do comprehensive income, changes in accordance with the ethical requirements not provide a separate opinion on these equity and cash fows for the years then that are relevant to our audit of the matters. For each matter below, our ended, and notes to the consolidated consolidated fnancial statements in description of how our audit addressed fnancial statements, including a Canada, and we have fulflled our ethical the matter is provided in that context. summary of signifcant accounting responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufcient and appropriate to provide a basis for our opinion. policies. In our opinion, the accompanying consolidated fnancial statements present fairly, in all material respects, the consolidated fnancial position of the Company as at December 31, 2022 and December 31, 2021, and its consolidated fnancial performance and its consolidated cash fows for the years then ended in accordance with International Financial Reporting Standards (“IFRSs”). We have fulflled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated fnancial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated fnancial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated fnancial statements. 45 First National Financial Corporation 2022 ANNUAL REPORTMEASUREMENT OF ESTIMATED CREDIT LOSSES OTHER INFORMATION As more fully described in Note 2 and We obtained an understanding of Management is responsible for the Note 3 to the fnancial statements, the management’s controls over exposure other information. The other information Company is exposed to credit risk on its to credit risk, including mortgage comprises: mortgage assets. In 2022 the Company underwriting policies and processes has recorded an allowance for credit used to assess borrower capacity, losses of $3,485 thousand. The Company income verifcation, creditworthiness manages credit risk by employing and collateral. We tested the operating underwriting policies and procedures efectiveness of these controls by designed to minimize exposure to credit assessing for a sample of mortgages losses, and by acquiring insurance originated and funded, compliance with against borrower default on substantially management’s underwriting policy and all its mortgages. The Company’s processes and eligibility, when arranged, expected credit loss (“ECL”) impairment for insurance against borrower default analysis considers a range of possible outcomes supported by past loss events, based on criteria of the mortgage default insurer. current conditions and an expectation of future possible outcomes. For the purpose of auditing the allowance for credit losses, among The allowance for credit losses was other procedures, • Management’s Discussion and Analysis • The information, other than the consolidated fnancial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated fnancial 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 fnancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated fnancial statements or our knowledge obtained in the audit • We tested the accuracy of the Company’s historic default and write-of data and evaluated management’s ECL impairment analysis, by obtaining the Company’s or otherwise appears to be materially historical data. misstated. • 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 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 management’s estimate of allowance nothing to report in this regard. for credit losses. • We also assessed the adequacy of the Company’s disclosures on the management of credit risk. The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. identifed as a key audit matter due to the number 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 efectiveness 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 efect on the measurement of ECL for each loan underwritten by the Company. 46 First National Financial Corporation 2022 ANNUAL REPORT RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated fnancial 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 Management is responsible for the assurance is a high level of assurance, but is not a guarantee that an audit conducted preparation and fair presentation of in accordance with Canadian generally accepted auditing standards will always detect the consolidated fnancial statements a material misstatement when it exists. Misstatements can arise from fraud or error in accordance with IFRSs, and for and are considered material if, individually or in the aggregate, they could reasonably such internal control as management be expected to infuence the economic decisions of users taken on the basis of these determines is necessary to enable the consolidated fnancial statements. preparation of consolidated fnancial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated fnancial 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 fnancial reporting process. 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 fnancial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufcient 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 efectiveness 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 signifcant 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 fnancial 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 First National Financial Corporation 2022 ANNUAL REPORT • Evaluate the overall presentation, structure, and content of the consolidated fnancial statements, including the disclosures, and whether the consolidated fnancial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufcient appropriate audit evidence regarding the fnancial information of the entities or business activities within the Company to express an opinion on the consolidated fnancial 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 signifcant audit fndings, including any signifcant defciencies 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 signifcance in the audit of the consolidated fnancial 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 benefts of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Humayun Jafrani. Toronto, Canada February 28, 2023 48 First National Financial Corporation 2022 ANNUAL REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31 (in thousands of Canadian dollars) Notes 2022 2021 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 Deferred income tax liabilities Total liabilities Common shares Preferred shares Retained earnings Accumulated other comprehensive income loss Total equity Total liabilities and equity See accompanying notes On behalf of the Board: ROBERT MITCHELL Director ROBERT PEARCE Director 3 3 5 3 4 6 18 15 7 9 15 16 14 10 12 18 17 17 605,708 160,712 114,675 2,251,194 815,807 105,108 97,602 2,757,640 37,285,822 35,435,455 64,648 190,122 18,460 2,953,188 119,143 43,763,672 64,370 192,340 8,735 2,677,972 119,129 42,274,158 1,065,868 965,420 1,360,947 246,486 2,954,374 1,768,029 222,369 2,677,689 36,888,395 35,576,353 399,222 149,400 398,888 88,000 43,064,692 41,696,748 122,671 97,394 418,244 60,671 698,980 122,671 97,394 364,974 (7,629) 577,410 43,763,672 42,274,158 49 First National Financial Corporation 2022 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME Years ended December 31 (in thousands of Canadian dollars, except earnings per share) Notes 2022 2021 REVENUE Interest revenue – securitized mortgages Interest expense – securitized mortgages Net interest – securitized mortgages Placement fees Gains on deferred placement fees Mortgage investment income Mortgage servicing income Realized and unrealized gains on fnancial instruments EXPENSES Brokerage fees Salaries and benefts Interest Other operating Income before income taxes Income tax expense Net income for the year EARNINGS PER SHARE Basic See accompanying notes 908,569 (739,295) 169,274 268,640 15,043 105,655 216,776 59,610 834,998 173,290 192,989 136,009 63,628 565,916 269,082 71,350 197,732 793,507 (630,279) 163,228 303,694 16,126 63,875 211,589 5,815 764,327 201,786 177,038 69,734 51,948 500,506 263,821 69,260 194,561 3.25 3.20 3 4 6 19 18 17 50 First National Financial Corporation 2022 ANNUAL REPORT CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31 (in thousands of Canadian dollars) NET INCOME FOR THE YEAR OTHER COMPREHENSIVE INCOME ITEMS THAT MAY BE SUBSEQUENTLY RECLASSIFIED TO INCOME Net gains from change in fair value of cash fow hedges Reclassifcation of net losses (gains) to income Income tax expense Total other comprehensive income Total comprehensive income See accompanying notes CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Years ended December 31 Notes 18 2022 197,732 123,327 (30,477) 92,850 (24,550) 68,300 266,032 2021 194,561 31,206 3,712 34,918 (9,290) 25,628 220,189 (in thousands of Canadian dollars) Common shares Preferred shares Retained earnings Accumulated other comprehensive income Total equity BALANCE AS AT JANUARY 1, 2022 122,671 97,394 364,974 (7,629) 577,410 Net income for the year Other comprehensive income Dividends paid or declared — — — — — — 197,732 — 197,732 — 68,300 68,300 (144,462) — (144,462) BALANCE AS AT DECEMBER 31, 2022 122,671 97,394 418,244 60,671 698,980 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 51 First National Financial Corporation 2022 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 2022 2021 197,732 194,561 36,850 (14,490) 210,099 11,610 (16,040) (146,588) Net investment in mortgages pledged under securitization (1,953,607) (1,359,472) 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 gains on fnancial instruments Net change in non-cash working capital balances related to operations Cash provided by (used in) operating activities INVESTING ACTIVITIES Additions to property, plant and equipment Investment of cash held as collateral for securitization Investment in mortgage and loan investments Repayment of mortgage and loan investments Cash used in investing activities FINANCING ACTIVITIES Dividends paid Obligations related to securities and mortgages sold under repurchase agreements Repayment of lease liabilities Cash provided by (used in) fnancing activities Net 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 1,415,282 (275,216) 420,370 14,212 13,622 (49,607) 15,247 493,910 509,157 1,372,287 (793,161) 855,759 14,205 9,182 (37,507) 104,836 (507,730) (402,894) (12,380) (55,604) (31,956) (16,902) (1,306,771) (1,420,147) 1,321,883 (52,872) 1,456,265 (12,740) (144,012) (407,082) (5,639) (556,733) (100,448) (965,420) (1,065,868) 1,073,914 773,905 44,225 (212,305) 349,584 (4,233) 133,046 (282,588) (682,832) (965,420) 957,742 647,049 77,855 First National Financial Corporation 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [in thousands of Canadian dollars, unless otherwise indicated] December 31, 2022 and 2021 1. GENERAL ORGANIZATION AND BUSINESS OF FIRST NATIONAL FINANCIAL CORPORATION First National Financial Corporation [the “Corporation” or “Company”] is the parent company of First National Financial LP [“FNFLP”], a Canadian-based originator, underwriter and servicer of predominantly prime residential [single family and multi unit] and commercial mortgages. With over $131 billion in mortgages under administration as at December 31, 2022, FNFLP is a signifcant participant in the mortgage broker distribution channel. The Corporation is incorporated under the laws of the Province of Ontario, Canada and has its registered ofce 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. 2. SIGNIFICANT ACCOUNTING POLICIES [A] BASIS OF PREPARATION The consolidated fnancial statements have been prepared in accordance with International Financial Reporting Standards [“IFRS”]. The consolidated fnancial statements have been prepared on a historical cost basis, except for derivative fnancial instruments and certain fnancial assets and fnancial liabilities that are recorded at fair value through proft 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 efective hedge relationships. The consolidated fnancial statements are presented in Canadian dollars and all values are rounded to the nearest thousand except when otherwise indicated. The consolidated fnancial statements were authorized for issue by the Board of Directors on February 28, 2023. 53 First National Financial Corporation 2022 ANNUAL REPORT [B] BASIS OF CONSOLIDATION [C] USE OF ESTIMATES The consolidated fnancial statements Company does not control. The SPEs The preparation of consolidated fnancial comprise the fnancial statements of the are sponsored by third-party fnancial statements in conformity with IFRS Company and its subsidiaries, including institutions which acquire assets from requires management to make estimates FNFLP, First National Financial GP various sellers including mortgages and assumptions that afect the reported Corporation [“GP”, the general partner of from the Company. As at December amounts of assets and liabilities, FNFLP], FNFC Trust, a special purpose 31, 2022, the Company recorded, on its including contingencies, at the date of entity [“SPE”] which is used to manage consolidated statements of fnancial the consolidated fnancial statements and undivided co ownership interests in position, its portion of the assets of the the reported amounts of revenue and mortgage assets funded with Asset- SPEs amounting to $3,119 million [2021 expenses during the reporting period. Backed Commercial Paper [“ABCP”], – $2,227 million]. The Company also Actual results may difer from those First National Asset Management Inc. recorded, in its consolidated statements estimates. Major areas requiring use of [“FNAM”], and First National Mortgage of income, interest revenue – securitized estimates by management are those that Corporation. mortgages of $87,258 [2021 – $55,551] require reporting of fnancial assets and FNAM is a wholly owned subsidiary of the GP, and an indirect subsidiary of the Company. FNAM is a NHA approved and interest expense – securitized mortgages of $62,816 [2021 – $36,969] related to its interest in the SPEs. fnancial liabilities at fair value. lender and NHA-MBS issuer in the The consolidated fnancial statements capacity of an “aggregator”. Its business have been prepared using consistent model is to purchase mortgages from accounting policies for like transactions mortgage originators in order to create and other events in similar circumstances. NHA-MBS pools, and subsequently sell All intercompany assets and liabilities, these into the Canada Mortgage Bonds equity, income, expenses and cash fows programs [“CMB”]. The Company earns interest income from the retained interest related to mortgages transferred to four special purpose entities which the relating to transactions between these companies are eliminated in full on consolidation. 54 First National Financial Corporation 2022 ANNUAL REPORT [D] SIGNIFICANT ACCOUNTING POLICIES Financial Instruments The Company accounts for its fnancial assets and liabilities in accordance with IFRS 9, Financial Instruments [“IFRS 9”]. CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS The Company classifes its fnancial 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 – commercial segment Mortgage and loan investments – residential segment other than one specifc portfolio of residential mortgages A portfolio of residential mortgages in Mortgage and loan investment Deferred placement fees receivable Amortized cost Amortized cost FVTPL Amortized cost FVTPL FVTPL Amortized cost Amortized cost CLASSIFICATION AND MEASUREMENT OF FINANCIAL LIABILITIES The Company classifes its fnancial 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 First National Financial Corporation 2022 ANNUAL REPORT CASH FLOW HEDGES The Company applies cash fow 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 fows on the anticipated future debt to be arranged through securitization of these mortgages obtained through CMB, disclosed as debt 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 efective portion of the change in the fair value of the designated hedging instrument qualifying as a cash fow 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 inefective is recognized immediately in the consolidated statements of income. Impairment The expected credit loss [“ECL”] impairment model applies to all fnancial assets classifed as amortized cost or FVOCI, as well as certain of-balance sheet loan commitments. The IFRS 9 ECL approach has three stages: Stage 1 – the credit risk has not increased signifcantly 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 signifcantly since initial recognition, and the allowance for credit loss is increased to cover full lifetime expected credit loss; and Stage 3 – a fnancial 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 fnancial assets. The Company assesses the credit risk of the mortgages based on the expected repayments of principal and interest. All mortgages with arrears that are less than 31 days past due are included in Stage 1 whereas mortgages with principal in arrears between 31 to 90 days are included in Stage 2. While mortgages in these two stages are not considered to be impaired, the Company recognizes a 12-month ECL for Stage 1 mortgages and 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 specifc expectation of a detrimental impact on the estimated cash fows 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 refect 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 signifcant 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 efectiveness of the hedges at both the hedge inception and on an ongoing basis. Any inefectiveness of any hedging relationship is recognized immediately in the consolidated statements of income. 56 First National Financial Corporation 2022 ANNUAL REPORT FAIR VALUE HEDGES Revenue recognition The Company enters into interest rate swaps to protect against changes in the fair value of fxed rate mortgages funded by ABCP debt. The Company also shorts 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 Government of Canada bonds to manage the mortgages it originates, providing the Company with servicing fees. 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 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 fnancial position, unless: length investor. The Company does not [i] substantially all of the risks and rewards associated with the fnancial 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 fnancial 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 efective, are ofset 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 change in the value of the hedged risk is adjusted to the carrying 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 inefective hedge are immediately recorded in the consolidated statements of income. instruments have been transferred, in which case the assets are derecognized in full; or [ii] a signifcant 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 fnancial 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 specifcally identifed cash fows, 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 fnance these mortgages, net of the amortization of debt discounts and premiums. Capitalized origination fees and debt discounts or premiums are amortized on an efective yield basis over the term of the related mortgages or debt. 57 First National Financial Corporation 2022 ANNUAL REPORT Derecognition A fnancial asset is derecognized when: • The right to receive cash fows from the asset has expired; or • The Company has transferred its rights to receive cash fows from the assets or has assumed an obligation to pay the cash fows, 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 fows 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 immediately collected or collectible in excess of the mortgage principal are recognized as placement fees. When placement fees and associated servicing fees are earned over the term of the related mortgages, the Company determines the present value of the future stream of placement fees and records a gain on deferred placement fees and a deferred placement fees receivable. Since quoted prices are generally not available for retained interests, the Company estimates values recognized in income over the life of based on the net present value of future expected cash fows, calculated the servicing obligation as payments are received from mortgagors. Interest using management’s best estimates of income earned by the Company from key assumptions related to expected holding cash in trust related to servicing prepayment rates and discount rates activities is classifed as mortgage commensurate with the risks involved. servicing income. The amortization of MORTGAGE SERVICING INCOME The Company services substantially all of the mortgages that it originates whether the mortgage is placed with an institutional investor or transferred to a securitization vehicle. In addition, mortgages are serviced on behalf of third-party institutional investors and securitization structures. For all mortgages administered for investors or third parties, the Company recognizes any servicing liabilities is also recorded as mortgage servicing income. The Company provides underwriting and fulfllment processing services for mortgages originated by two large Canadian banks through the mortgage broker distribution channel. The Company recognizes servicing income when the services are rendered and the underwritten mortgages have been funded. servicing income when services are MORTGAGE INVESTMENT INCOME 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 fows over market servicing fee rates and is reported as deferred placement revenue at the time of placement. Servicing income related to mortgages placed with institutional investors is The Company earns interest income from its interest-bearing assets including deferred placement fees receivable, mortgage and loan investments and mortgages accumulated for sale or securitization. Mortgage investment income is recognized on an accrual basis. 58 First National Financial Corporation 2022 ANNUAL REPORT Brokerage fees Securities sold short and securities purchased under resale agreements Brokerage fees are primarily fees paid to external mortgage brokers. Brokerage fees relating to mortgages placed with institutional investors are expensed as incurred, and Securities sold short consist typically of those relating to mortgages recorded at amortized cost are capitalized to the carrying the short sale of Government of Canada cost of the related mortgages and amortized over the term of the mortgages. bonds. Bonds purchased under resale 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 classifed at amortized cost. The Company has a continuous involvement in these mortgages, including the right to receive future cash fows 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 efective yield basis. Debt related to securitized mortgages Debt related to securitized mortgages represents obligations related to the fnancing of mortgages pledged under securitization. This debt is measured at its amortized cost using the efective 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 agreements consist of the purchase of a bond with the commitment from the Company to resell the bond to the original seller at a specifed 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 classifed as FVTPL and are recorded at fair value. The efective 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 diference between the cost of the purchase and the predetermined Mortgages accumulated for sale are mortgages funded pending subsequent settlement proceeds to be received on a resale with institutional investors and are classifed as FVTPL and recorded at fair value. These agreement is recorded over the term 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. of the hedged mortgages as an ofset to hedge expense. Transactions are recorded on a settlement date basis. 59 First National Financial Corporation 2022 ANNUAL REPORT Mortgage and loan investments Mortgage and loan investments Property, Plant and Equipment Goodwill Goodwill represents the price paid for consists of two portfolios: a portfolio Property, plant and equipment is the Company’s business in excess of the of commercial segment bridge and recorded at cost and depreciated over fair value of the net tangible assets and mezzanine loans and a portfolio of the estimated useful life of the assets on identifable intangible assets acquired residential segment mortgages. Both a straight-line basis. commercial segment and residential segment mortgages are non- derivative fnancial assets with fxed or determinable payments. The Company classifes the mortgages as FVTPL or at amortized costs depending on the Company’s intention. The mortgages held at fair value are measured using management’s best estimate of the fair value. Changes in fair value are recognized immediately in the consolidated statements of income. Generally, commercial investments are measured at FVTPL, and residential segment investments are measured at amortized cost. Leases Computer equipment Ofce equipment Leasehold improvements Computer software in connection with the IPO. Goodwill is reviewed annually for impairment or more frequently when an event or change in circumstances indicates that the asset might be impaired. 3 years 5 years 1 – 10 years Restricted cash 5 – 10 years Restricted cash represents principal and interest collected on mortgages pledged under securitization that is held in trust until the repayment of debt The Company used the declining balance related to these mortgages is made in a method to depreciate all property, plant subsequent period. and equipment other than leasehold improvements in the years prior to 2022. During the year, the Company re-assessed this depreciation method, and concluded that a straight-line basis depreciation over the useful life of the 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. The Company measures right-of-use assets is more appropriate. This change assets at cost. The right-of-use assets has been accounted for prospectively. are subsequently amortized using the The depreciation of property, plant and straight-line method. The right-of-use equipment would have been $6,892 assets are also subject to impairment. in 2021 had it been calculated on the Lease liabilities are calculated using straight-line basis now used by the the present value of future lease Company. 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. payments, discounted at the Company’s incremental borrowing rate. After the commencement date, the amount of lease liabilities is increased to refect the accretion of interest and reduced for the lease payments made. The Company’s major leases are for premises at its Toronto head ofce and four regional ofces. The Company has elected not to recognize right-of- use assets and a lease liability for its various ofce equipment leases, which are insignifcant for application of the standard. 60 First National Financial Corporation 2022 ANNUAL REPORT Deferred income taxes arise on temporary diferences between the carrying amounts of assets and liabilities on the consolidated statements of fnancial position and their tax bases. Deferred tax liabilities are generally recognized for all taxable temporary diferences and deferred tax assets are recognized to the extent that future realization of the tax beneft 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 ofset 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 ofset exists in the entity. Earnings per common share The Company presents earnings per share [“EPS”] amounts for its common shares. EPS is calculated by dividing the net earnings attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the year. 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 fxed and foating 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 by the rating agencies. Credit exposure to securitized mortgages is generally limited to this cash collateral. The principal and interest payments on the securitized mortgages are paid by the Company to the structured entities monthly over the term of the mortgages. The full amount of the cash collateral is recorded as an asset and the Company anticipates full recovery of these amounts. NHA MBS securitizations may also require cash collateral in some circumstances. As at December 31, 2022, the cash held as collateral for securitization was $160,712 [2021 – $105,108]. Servicing liability The Company places mortgages with third-party institutional clients and retains the rights and obligations to service these mortgages. When the service-related fees are paid upfront by a third party, the Company records a servicing liability. 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 fows, calculated using management’s best estimates of key assumptions related to expected prepayment rates and discount rates commensurate with the risks involved. The Company earns the related servicing fees over the term of the mortgages on an efective yield basis. Income taxes The Company accounts for income taxes in accordance with the liability method of tax allocation. Under this method, the provision for income taxes is calculated based on income tax laws and income tax rates substantively enacted as at the dates of the consolidated statements of fnancial 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. 61 First National Financial Corporation 2022 ANNUAL REPORT The following table compares the carrying amount of mortgages pledged for securitization and the associated debt: 2022 Securitized mortgages Capitalized amounts related to hedge accounting Capitalized origination costs Debt discounts Add Principal portion of payments recorded in restricted cash 2021 Securitized mortgages Capitalized amounts related to hedge accounting Capitalized origination costs Debt discounts Add Principal portion of payments recorded in restricted cash Carrying amount of securitized mortgages ($) 37,127,747 (46,173) 204,248 — 37,285,822 541,618 37,827,440 Carrying amount of associated liabilities ($) (37,281,919) — — 393,524 (36,888,395) — (36,888,395 Carrying amount of securitized mortgages ($) Carrying amount of associated liabilities ($) 35,186,217 50,880 198,358 — 35,435,455 — 766,118 36,201,573 (35,659,675) (46,933) — 130,255 (35,576,353) — — (35,576,353) The principal portion of payments held in restricted cash represents payments on account of mortgages pledged under securitization which has been received at year- end but has not yet been applied to reduce the associated debt. This cash is applied to pay down the debt in the month subsequent to collection. In order to compare the components of mortgages pledged under securitization to securitization debt, this amount is added to the carrying value of mortgages pledged under securitization in the above table. Mortgages pledged under securitization have been classifed as amortized cost and are carried at par plus adjustment for unamortized origination costs and amounts related to hedge accounting. 62 First National Financial Corporation 2022 ANNUAL REPORT The changes in capitalized origination costs for the years ended December 31 are summarized as follows: Opening balance, January 1 Add new origination costs capitalized in the year Less amortization in the year Ending balance, December 31 2022 ($) 198,358 101,302 (95,412) 204,248 2021 ($) 184,818 114,789 (101,249) 198,358 During the year ended December The following table summarizes the mortgages pledged under securitization that are 31, 2022, the Company invested in 31 days or more past due as at December 31: mortgages that were transferred into the securitization vehicles with principal balances as at December 31, 2022 of $8,628,395 [2021 – $8,940,445]. The contractual maturity profle of the Arrears days 31 to 60 mortgages pledged under securitization 61 to 90 programs is summarized as follows: Greater than 90 2022 ($) 2021 ($) 4,712 3,343 905 8,960 1,086 447 752 2,285 ($) 5,509,598 4,998,610 6,646,988 2023 2024 2025 2026 All the mortgages listed above are insured, except for 14 mortgages which are uninsured and have a principal balance of $7,555 as at December 31, 2022 [2021 – six mortgages, $1,505]. The Company’s exposure to credit loss is limited to uninsured 7,081,116 mortgages with principal balances totaling $4,433,482 [2021 – $3,094,301], before 2027 and thereafter 12,891,435 consideration of the value of underlying collateral. Approximately one half of the uninsured mortgages are conventional prime single-family mortgages, with loan to 37,127,747 value ratios of 80% or less. The Company has provided an allowance for expected credit losses of $3,485 as of December 31, 2022 [2021 – $766] related to mortgages pledged under securitization. 63 First National Financial Corporation 2022 ANNUAL REPORT 4. DEFERRED PLACEMENT FEES RECEIVABLE The Company enters into transactions with institutional investors to sell primarily fxed- rate mortgages in which placement fees are received over time as well as at the time of the mortgage placement. These mortgages are derecognized when substantially all of the risks and rewards of ownership are transferred and the Company has minimal exposure to the variability of future cash fows from these mortgages. The investors have no recourse to the Company’s other assets for failure of mortgagors to make payments when due. Deferred placement fees receivable are classifed as amortized cost and are initially determined based on the present value of the anticipated future stream of cash fows. This determination assumes there will be no credit losses, commensurate with the credit quality of the investors. It is also assumed that there will be no prepayment for the commercial segment as borrowers cannot refnance for fnancial advantage without paying the Company a fee commensurate with the value of its investment in the mortgage. The efect of variations, if any, between actual experience and assumptions will be recorded in future consolidated statements of income but is expected to be minimal. 2022 Mortgages placed with institutional investors Gains on deferred placement fees created Cash receipts on deferred placement fees received 2021 Residential ($) Commercial ($) — — 419 3,218,988 15,043 16,500 Mortgages placed with institutional investors 1,018,328 2,421,410 Gains on deferred placement fees created Cash receipts on deferred placement fees received 1,442 97 14,684 16,775 Residential ($) Commercial ($) Total ($) 3,218,988 15,043 16,919 Total ($) 3,439,738 16,126 16,872 64 First National Financial Corporation 2022 ANNUAL REPORT The Company estimates that the expected undiscounted cash fows to be received on the deferred placement fees receivable will be as follows: 2023 2024 2025 2026 2027 and thereafter Residential ($) Commercial ($) Total ($) 365 307 259 127 — 1,058 16,395 14,449 12,213 9,126 20,267 72,450 16,760 14,756 12,472 9,253 20,267 73,508 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 classifed 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 classifed 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 classifcation: Mortgages accumulated for securitization Mortgages accumulated for sale 2022 ($) 2021 ($) 2,226,825 24,369 2,251,194 2,726,697 30,943 2,757,640 The Company’s exposure to credit loss is limited to $491,786 [2021 – $299,446] of principal balances of uninsured mortgages within mortgages accumulated for securitization, before consideration of the value of underlying collateral. As at December 31, 2022, three of these mortgages are in arrears past 31 days, with a total principal balance of $1,330 [2021 – NIL]. 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 insignifcant. 65 First National Financial Corporation 2022 ANNUAL REPORT 6. MORTGAGE AND LOAN INVESTMENTS Mortgage and loan investments consist of two portfolios: commercial frst and second mortgages held for various terms, the majority of which mature within one year; and residential frst mortgages which are held to maturity. Except for a portion of the residential loan portfolio that is classifed as amortized cost, mortgage and loans are measured at FVTPL with any change in fair value being immediately recognized in income. The portion of the residential loan portfolio that is classifed at amortized cost has a total balance of $10,171 as at December 31, 2022 which is subject to expected credit loss. The Company recorded losses of fair value related to the commercial segment investments of $710 [2021 – $730] for the year ended December 31, 2022. The following table discloses the composition of the Company’s portfolio of mortgage and loan investments by geographic region as at December 31, 2022: Province/Territory Alberta British Columbia Manitoba New Brunswick Newfoundland and Labrador Nova Scotia Nunavut Ontario Prince Edward Island Quebec Saskatchewan Yukon Portfolio balance ($) Percentage of portfolio (%) 5,183 36,903 3,479 186 166 9,850 5 111,013 54 22,628 534 121 190,122 2.73 19.41 1.83 0.10 0.09 5.18 0.00 58.39 0.03 11.90 0.28 0.06 100.00 The following table discloses the mortgages that are past due as at December 31: 2022 ($) 2021 ($) 54 — 952 1,006 884 397 14,015 15,296 Arrears days 31 to 60 61 to 90 Greater than 90 66 First National Financial Corporation 2022 ANNUAL REPORTThe portfolio contains $11,577 [2021 – $12,723] of insured mortgages and $178,545 [2021 – $179,617] of uninsured mortgage and loan investments as at December 31, 2022. Of the uninsured mortgages, approximately $1,006 [2021 – $10,712] have principal balances in arrears of more than 30 days. The maturity profle of the principal amount of the loans in the table below is based on the earlier of contractual renewal or maturity dates: Residential Commercial 2023 ($) 16,468 2024 ($) 2,328 2025 ($) 2026 ($) 2027 and thereafter ($) Total ($) 6,232 12,567 19,114 56,709 102,786 30,777 505 — — 134,068 119,254 33,105 6,737 12,567 19,114 190,777 Total ($) 68,682 137,270 205,952 2022 2021 Interest income earned for the year was $17,311 [2021 – $14,292] and is included in mortgage investment income on the consolidated statements of income. 7. OTHER ASSETS The components of other assets are as follows as at December 31: Property, plant and equipment, net Right-of-use assets Goodwill 2022 ($) 2021 ($) 39,993 49,374 29,776 119,143 36,968 52,385 29,776 119,129 The right-of-use assets pertain to fve premises leases for the Company’s ofce space. The leases have remaining terms of one to fourteen years. The related lease liability of $51,171 as at December 31, 2022 [2021 – $52,871] is grouped with accounts payable and accrued liabilities on the consolidated statements of fnancial 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 proftability. These factors indicate that the Company’s recoverable amount exceeds the carrying value of its net assets and, accordingly, goodwill is not impaired. 67 First National Financial Corporation 2022 ANNUAL REPORT 8. MORTGAGES UNDER ADMINISTRATION As at December 31, 2022, the Company managed mortgages under administration of $131,000,635 [2021 – $123,907,627], including mortgages held on the Company’s consolidated statements of fnancial position. Mortgages under administration are serviced for fnancial institutions such as banks, insurance companies, pension funds, mutual funds, trust companies, credit unions and securitization vehicles. As at December 31, 2022, the Company administered 321,470 mortgages [2021 – 325,399] for 113 institutional investors [2021 – 119] with an average remaining term to maturity of 43 months [2021 – 43 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 benefcial interest in these funds they are not presented on the consolidated statements of fnancial position. The aggregate of these accounts as at December 31, 2022 was $759,676 [2021 – $806,268]. As at December 31, 2022, the Company has included in accounts receivable and sundry $339 [2021 – $702] of uninsured non-performing mortgages. 2022 ($) 2021 ($) 90,249,205 84,184,863 2,450,613 37,127,747 1,173,070 2,969,617 35,186,217 1,566,930 131,000,635 123,907,627 68 First National Financial Corporation 2022 ANNUAL REPORT9. BANK INDEBTEDNESS 10. DEBT RELATED TO SECURITIZED MORTGAGES 11. SWAP CONTRACTS Bank indebtedness includes a revolving Swaps are over-the-counter contracts credit facility of $1,500,000 [2021 – Debt related to securitized mortgages in which two counterparties exchange $1,500,000] maturing in March 2027. represents the funding for mortgages a series of cash fows based on agreed- At December 31, 2022, $1,065,868 pledged under the NHA-MBS, CMB and upon rates to a notional amount. The [2021 – $965,420] was drawn, of which ABCP programs. As at December 31, Company uses interest rate swaps to the following have been pledged as 2022, debt related to securitized manage interest rate exposure relating collateral: mortgages was $36,888,395 [2021 – to variability of interest earned on [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. $35,576,353], net of unamortized mortgages pledged under securitization. discounts of $393,524 [2021 – $130,255]. The swap agreements that the Company A comparison of the carrying amounts of enters into are interest rate swaps the pledged mortgages and the related wherve two counterparties exchange a debt is summarized in note 3. series of payments based on diferent Debt related to securitized mortgages is reduced on a monthly basis when the interest rates applied to a notional amount in a single currency. principal payments received from the The following tables present, by mortgages are applied. Debt discounts remaining term to maturity, the notional and premiums are amortized over the amounts and fair values of the swap term of each debt on an efective yield contracts outstanding as at December 31, basis. Debt related to securitization 2022 and 2021: mortgages had a similar contractual maturity profle as the associated mortgages in mortgages pledged under securitization. 2022 Interest rate swap contracts 2021 Interest rate swap contracts Less than 3 years ($) 3 to 5 years ($) 6 to 10 years ($) Total notional amount ($) Fair value ($) 3,135,786 801,573 — 3,937,360 106,563 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 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 fnancial position. 69 First National Financial Corporation 2022 ANNUAL REPORT 12. SENIOR UNSECURED NOTES The Company has two note issuances outstanding. $200 million of fve-year term Series 2 senior unsecured notes bearing interest at 3.582% payable in equal semi- 14. SECURITIES TRANSACTIONS UNDER REPURCHASE AND RESALE AGREEMENTS annual payments maturing in November 2024. $200 million of fve-year Series 3 senior The Company’s outstanding securities unsecured notes bearing interest at 2.961% payable in equal semi-annual payments purchased under resale agreements maturing in November 2025. 13. COMMITMENTS, GUARANTEES AND CONTINGENCIES As at December 31, 2022, the Company has the following operating lease commitments for its ofce premises: 2023 2024 2025 2026 and thereafter ($) 10,268 9,400 9,307 93,887 122,862 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 specifc mortgages included in mortgages accumulated for sale or securitization. The current contracts are with fnancial institutions, based on bankers’ acceptance rates and mature on or before January 31, 2023. The Company’s commitments for premises listed above have remaining terms of one to fourteen years, and have been accounted in right-of-use assets and recorded as other assets on the consolidated statements of fnancial position. Outstanding commitments for future advances on mortgages with terms of one to 10 years amounted to $1,795,019 as at December 31, 2022 [2021 – $1,939,420]. The commitments generally remain open for a period of up to 90 days. These commitments have credit and interest rate risk profles similar to those mortgages that are currently under administration. Certain of these commitments have been sold to institutional investors while others will expire before being drawn down. Accordingly, these amounts do not necessarily represent future cash requirements of the Company. In the normal course of business, the Company enters into a variety of guarantees. Guarantees include contracts where the Company may be required to make payments to a third party, based on changes in the value of an asset or liability that the third party holds. In addition, contracts under which the Company may be required to make payments if a third party fails to perform under the terms of the contract [such as mortgage servicing contracts] are considered guarantees. The Company has determined that the estimated potential loss from these guarantees is insignifcant. 70 First National Financial Corporation 2022 ANNUAL REPORT16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The major components of accounts payable and accrued liabilities are as follows as at December 31: Accrued liabilities Accrued dividends payable Accrued interest on securitization debt Servicing liability Lease liability 17. SHAREHOLDERS’ EQUITY [a] Authorized Unlimited number of common shares 2022 ($) 74,465 12,878 68,258 39,714 51,171 246,486 2021 ($) 72,508 12,427 46,763 37,800 52,871 222,369 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, 2022 and 2021 Common shares Preferred shares # $ 59,967,429 4,000,000 122,671 97,394 71 First National Financial Corporation 2022 ANNUAL REPORT [c] Preferred shares On January 25, 2011, the Company issued 4 million Class A Series 1 Preferred Shares at a price of $25.00 per share for gross proceeds of $100,000 before issue expenses. 18. INCOME TAXES The major components of deferred provision for (recovery of) income taxes for the years ended December 31 consist Holders of Class A Series 1 Preferred Shares have the right, at their option, to convert of the following: Related to origination and reversal of temporary diferences 2022 ($) 2021 ($) 36,850 11,610 The major components of the current income tax expense for the years ended December 31 consists of the following: 2022 ($) 2021 ($) Income taxes relating to the current year 34,500 57,650 their shares into cumulative, foating rate Class A Preferred Shares, Series 2 [“Series 2 Preferred Shares”], subject to certain conditions, on March 31, 2021 and on March 31 every fve 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, 2022 and 2021, there were 2,984,835 Series 1 Preferred Shares and 1,015,165 Series 2 Preferred Shares outstanding with an aggregate carrying value of $97,394. Holders of the Class A Series 1 Preferred Shares receive a cumulative quarterly fxed dividend at a rate equal to the fve year Government of Canada yield plus 2.07%. The dividend rate may be reset every fve 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 fve-year term ending March 31, 2026.Holders of the Class A Series 2 Preferred Shares will be entitled to receive cumulative quarterly foating 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 classifed as equity. The par value per preferred share is $25. [d] Earnings per Share Net income attributable to shareholders Less: dividends declared on preferred shares Net income attributable to common shareholders 2022 ($) 197,732 2021 ($) 194,561 (3,039) (2,695) 194,693 191,866 Number of common shares outstanding 59,967,429 59,967,429 Basic earnings per common share 3.25 3.20 72 First National Financial Corporation 2022 ANNUAL REPORT The efective income tax rate reported in the consolidated statements of income varies from the Canadian statutory tax rate of 26.42% for the year ended December 31, 2022 [2021 – 26.42%] for the following reasons: COMPANY’S STATUTORY TAX RATE Income before income taxes Income tax at statutory tax rate Increase (decrease) resulting from Permanent diferences Prior year adjustment Other Income tax expense 2022 ($) 26.42% 269,082 71,091 292 (42) 9 71,350 2021 ($) 26.42% 263,821 69,702 193 (457) (178) 69,260 The movement in signifcant components of the Company’s deferred income tax liabilities and assets for the years ended December 31, 2022 and 2021 are as follows: As at January 1, 2022 ($) Recognized in income and OCI ($) As at December 31, 2022 ($) 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 17,007 84,886 184 3,522 13,840 (13,968) (1,882) (3,399) (9,987) (2,203) 88,000 80 70,551 (184) 1,729 (790) 445 (11,239) 236 (509) 1,081 61,400 17,087 155,437 — 5,251 13,050 (13,523) (13,121) (3,163) (10,496) (1,122) 149,400 73 First National Financial Corporation 2022 ANNUAL REPORT 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 20,900 17,007 84,886 184 3,522 13,840 (13,968) (1,882) (3,399) (9,987) (2,203) 88,000 The amount of deferred tax expense recorded in income and OCI consists of an expense of $36,850 [2021 –$11,610] recorded in net income and an expense of $24,550 [2021 – $9,290] recorded in OCI related to unrealized gains on cash fow 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 diferent 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 signifcant. 74 First National Financial Corporation 2022 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 securitization vehicle and the underlying For single-family mortgages, only a cost of funding is set. As interest rates portion of the commitments issued change, the values of these interest by the Company eventually fund. The rate dependent fnancial instruments Company must assign a probability of vary inversely with the values of the funding to each mortgage in the pipeline mortgage contracts. As interest rates and estimate how that probability increase, a gain will be recorded on changes as mortgages move through the economic hedge which will be the various stages of the pipeline. The ofset by the reduced future spread on amount that is actually economically Interest rate risk is the risk that the fair mortgages pledged under securitization hedged is the expected value of the value or future cash fows of a fnancial as the mortgage rate committed to mortgages funding within the future instrument will fuctuate because of the borrower is fxed at the point of commitment period. changes in market interest rates. The commitment. Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s mortgages accumulated for securitization. The Company uses various strategies to The table below provides the fnancial impact that an immediate and sustained 100 reduce interest rate risk. The Company’s basis point and 200 basis point increase and decrease in short-term interest rates risk management objective is to maintain would have had on the net income of the Company in 2022 and 2021. 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 mortgage rate is committed to the borrower and the time the mortgage is sold to a Decrease in interest rate(1) Increase in interest rate 2022 ($) 2021 ($) 2022 ($) 2021 ($) 100 BASIS POINT SHIFT Impact on net income 21,804 13,180 (21,804) (7,959) 200 BASIS POINT SHIFT Impact on net income 43,608 29,760 (43,608) (15,919) (1) Interest rate is not decreased below 0%. 75 First National Financial Corporation 2022 ANNUAL REPORT Credit risk Liquidity risk and capital resources Market risk Credit risk is the risk of loss associated Market risk is the risk of loss that may with a counterparty’s inability or Liquidity risk is the risk that the arise from changes in market factors unwillingness to fulfll its payment Company will be unable to meet its such as interest rates and credit spreads. obligations. The Company’s credit risk fnancial obligations as they come due. The level of market risk to which the is mainly lending related in the form of mortgage default. The Company uses stringent underwriting criteria and experienced adjudicators to mitigate this risk. The Company’s approach to managing credit risk is based on the consistent application of a detailed set of credit policies and prudent arrears management. As at December 31, 2022, 88% [2021 – 91%] of the pledged mortgages were insured mortgages. See details in note 3. The Company’s exposure is further mitigated by the relatively short period over which a mortgage is held by the Company prior to securitization. The Company’s liquidity strategy has been to use bank credit to fund working capital requirements and to use cash fow 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] Company is exposed varies depending on market conditions, expectations of future interest rates and credit spreads. Customer concentration risk Placement fees and mortgage servicing income from one Canadian fnancial institution represent approximately 12.7% [2021 – 19.6%] of the Company’s total revenue. accounts receivable and sundry, and [vi] Fair value measurement mortgage and loan investments. The Company has a credit facility with a syndicate of fnancial institutions, The Company uses the following hierarchy for determining and disclosing the fair value of fnancial instruments recorded at fair value in the consolidated statements of fnancial 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 signifcant inputs are based on observable market data; and Level 3 – valuation techniques in which one or more signifcant inputs are unobservable. The maximum credit exposures of which provides for a total of $1,500,000 the fnancial assets are their carrying in fnancing. values as refected on the consolidated statements of fnancial position. The Company does not have signifcant concentration of credit risk within any particular geographic region or group of customers.  The Company fnances 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 The Company is at risk that the principal on the mortgages are used to underlying mortgages default and the pay down the related debt within a 30 servicing cash fows cease. The large day period. Accordingly, these sources portfolio of individual mortgages that of fnancing amortize at the same rate underlies these assets is diverse in terms as the mortgages pledged thereunder, of geographical location, borrower providing an almost perfectly matched exposure and the underlying type of asset and liability relationship. 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. 76 First National Financial Corporation 2022 ANNUAL REPORT Carrying value and fair value of selected fnancial instruments The fair value of the fnancial assets and fnancial liabilities of the Company approximates its carrying value, except for mortgages pledged under securitization, which has a carrying value of $37,285,823 [2021 – $35,435,455] and a fair value of $35,990,243 [2021 – $36,515,923]; debt related to securitized mortgages, which has a carrying value of $36,888,395 [2021 – $35,576,353] and a fair value of $34,968,655 [2021 – $35,864,253]; and senior unsecured notes, which have a carrying value of $399,222 [2021 – $398,888] and a fair value of $374,120 [2021 – $409,056]. These fair values are estimated using valuation techniques in which one or more signifcant inputs are unobservable [Level 3]. Valuation methods and assumptions The Company uses valuation techniques to estimate fair values, including reference to third party valuation service providers using proprietary pricing models and internal valuation models such as discounted cash fow analysis. The valuation methods and key assumptions used in determining fair values for the fnancial assets and fnancial liabilities are as follows: [a] Mortgages and loan investments Commercial segment 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 fair value. [b] Deferred placement fees receivable The fair value of deferred placement fees receivable at inception is determined by internal valuation models using market data inputs, where possible. The value is determined by discounting the expected future cash fows related to the placed mortgages at market interest rates. The expected future cash fows are estimated based on certain assumptions which are not supported by observable market data. [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 at inception is determined by internal valuation models using market data inputs, where possible. The value is determined by discounting the expected future cost related to the servicing of explicit mortgages at market interest rates. The expected future cash fows are estimated based on certain assumptions which are not supported by observable market data. [e] Other fnancial assets and fnancial 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 profles. [f] Fair value of fnancial instruments not carried at fair value The fair value of these fnancial instruments is determined by discounting projected cash fows 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 refect 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 signifcant inputs are unobservable [Level 3] and are calculated for disclosure purposes only. 77 First National Financial Corporation 2022 ANNUAL REPORT The following tables represent the Company’s fnancial instruments measured at fair value on a recurring basis as at December 31: 2022 FINANCIAL ASSETS Mortgages accumulated for sale Mortgage and loan investments Total fnancial assets FINANCIAL LIABILITIES Securities sold short Interest rate swaps Total fnancial liabilities 2021 FINANCIAL ASSETS Mortgages accumulated for sale Mortgage and loan investments Interest rate swaps Total fnancial assets FINANCIAL LIABILITIES Securities sold short Total fnancial liabilities Level 1 ($) Level 2 ($) Level 3 ($) Total ($) — — — — — — 24,369 — 24,369 2,954,374 13,434 2,967,808 — 164,919 164,919 — — — 24,369 164,919 189,288 2,954,374 13,434 2,967,808 Level 1 ($) Level 2 ($) Level 3 ($) Total ($) — — — — — — 30,943 — 688 31,631 2,677,689 2,677,689 — 192,340 — 192,340 30,943 192,340 688 223,971 — — 2,677,689 2,677,689 In estimating the fair value of fnancial assets and fnancial liabilities using valuation techniques or pricing models, certain assumptions are used, including those that are not fully supported by observable market prices or rates [Level 3]. The amount of the change in fair value recognized by the Company in net income for the year ended December 31, 2022 that was estimated using a valuation technique based on assumptions that are not fully supported by observable market prices or rates was approximately a loss of $710 [2021 – $730]. Although the Company’s management believes that the estimated fair values are appropriate as at the date of the consolidated statements of fnancial position, those fair values may difer if other reasonably possible alternative assumptions are used. Transfers between levels in the fair value hierarchy are deemed to have occurred at the beginning of the period in which the transfer occurred. Transfers between levels can occur as a result of additional or new information regarding valuation inputs and changes in their observability. During 2022 and 2021, the Company did not have any transfers between levels. 78 First National Financial Corporation 2022 ANNUAL REPORT The following table presents changes in the fair values, including realized gains of $192,983 [2021 – $10,666] of the Company’s fnancial assets and fnancial liabilities for the years ended December 31, 2022 and 2021, all of which have been classifed as FVTPL: FVTPL mortgages Securities sold short Interest rate swaps 2022 ($) 2021 ($) (710) 74,441 (14,121) 59,610 (730) 15,397 (8,852) 5,815 The Company does not have any assets or liabilities that are measured at fair value on a non recurring basis. Movement in Level 3 fnancial instruments measured at fair value The following tables show the movement in Level 3 fnancial instruments in the fair value hierarchy for the years ended December 31, 2022 and 2021. The Company classifes fnancial instruments to Level 3 when there is reliance on at least one signifcant unobservable input in the valuation models. Fair value as at January 1, 2022 ($) Investments ($) Losses recorded in income ($) Payment and amortization ($) Fair value as at December 31, 2022 ($) FINANCIAL ASSETS Mortgage and loan investments FINANCIAL ASSETS Mortgage and loan investments 192,340 400,483 (710) (427,194) 164,919 Fair value as at January 1, 2021 ($) Investments ($) Losses recorded in income ($) Payment and amortization ($) Fair value as at December 31, 2021 ($) 138,021 608,109 (730) (628,340) 192,340 79 First National Financial Corporation 2022 ANNUAL REPORT 20. CAPITAL MANAGEMENT The Company’s objective is to maintain a capital base so as to maintain investor, creditor and market confdence and sustain future development of the business. Management defnes 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, 2022, the ratio was 1.88:1 [2021 – 2.21:1]. The Company was in compliance with the bank covenant throughout the year. On May 16, 2022, Refnitiv Benchmark Service (UK) Limited (RBSL), the administrator of CDOR, announced that the calculation and publication of all tenors of CDOR will permanently cease following a fnal publication on June 28, 2024. The Canadian Alternative Reference Rate Working Group [“CARR”] was created to identify and seek to develop a new risk-free Canadian dollar interest rate benchmark. An enhanced Canadian Oversight Repo Rate Average [“CORRA”] has been designed to comply with recommendations of the Financial Stability Board as part of a global efort to reform benchmark interest rates. There is some uncertainty about how the Canadian dollar benchmark rates will evolve and the speed at which CORRA will become a dominant benchmark for Canadian dollar borrowings. Starting in 2022, CMHC has introduced foating rate NHA MBS pool type which coupon is referenced to CORRA. The Company has many swaps and other derivatives that are referenced to CDOR. All of these instruments are with large Canadian fnancial institutions and the Company will rely on those institutions to amend the agreements as required to incorporate the new reference rate. The Company believes this transition will have a minimal impact, if any, on the Company’s operations. The following table discloses the Company’s exposure to signifcant interest rate benchmark subject to CDOR reform as of December 31: Non-derivative fnancial liabilities Derivative notional amounts 2022 ($) 946,792 3,937,360 2021 ($) 1,044,188 3,394,626 80 First National Financial Corporation 2022 ANNUAL REPORT 21. EARNINGS BY BUSINESS SEGMENT The Company operates principally in two business segments, Residential and Commercial. These segments are organized by mortgage type and contain revenue and expenses related to origination, underwriting, securitization and servicing activities. Identifable assets are those used in the operations of the segments. 2022 REVENUE Interest revenue – securitized mortgages Interest expense – securitized mortgages Net interest – securitized mortgages Placement and servicing Mortgage investment income [note 6] Realized and unrealized gains (losses) on fnancial instruments EXPENSES Amortization Interest Other operating INCOME BEFORE INCOME TAXES Identifable assets Goodwill Total assets Residential ($) Commercial ($) Total ($) 595,573 (482,721) 112,852 390,497 68,832 60,320 632,501 11,822 100,029 348,109 459,960 172,541 312,996 (256,574) 56,422 109,962 36,823 (710) 202,497 1,800 35,980 68,176 105,956 96,541 908,569 (739,295) 169,274 500,459 105,655 59,610 834,998 13,622 136,009 416,285 565,916 269,082 28,923,269 14,810,627 43,733,896 — — 29,776 28,923,269 14,810,627 43,763,672 CAPITAL EXPENDITURES 8,667 3,713 12,380 81 First National Financial Corporation 2022 ANNUAL REPORT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 fnancial instruments EXPENSES Amortization Interest Other operating INCOME BEFORE INCOME TAXES Identifable assets Goodwill Total assets CAPITAL EXPENDITURES Residential ($) Commercial ($) Total ($) 538,317 (422,707) 115,610 444,658 41,050 6,525 607,843 8,065 47,760 352,652 408,477 199,366 255,190 (207,572) 47,618 86,751 22,825 (710) 156,484 1,117 21,974 68,938 92,029 64,455 793,507 (630,279) 163,228 531,409 63,875 5,815 764,327 9,182 69,734 421,590 500,506 263,821 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 22. RELATED PARTY AND OTHER TRANSACTIONS The Company has servicing contracts insurance company provides insurance in connection with commercial bridge policies to the Company’s borrowers at and mezzanine mortgages originated market rates. In addition, the insurance by the Company and subsequently company has also provided the Company sold to various entities controlled by a with portfolio insurance at market senior executive and shareholder of the premiums. The total bulk insurance Company. The Company services these premium paid by the Company in 2022 mortgages during their terms at market was $1,899 [2021 – $1,966], net of third- commercial servicing rates. During the party investor reimbursement. year, the Company originated $286,763 of new mortgages for the related parties. The related parties also funded several progress draws totaling $17,328 on existing mortgages originated by the Company. All such mortgages, which are administered by the Company, have a balance of $259,673 as at December 31, 2022 [2021 – $213,648 A senior executive and shareholder of the Company has a signifcant investment in a Canadian bank. The Company has an agreement to originate and adjudicate applications for secured credit cards for the bank. These applications are originated through the Company’s mortgage broker relationships. The Company receives an immaterial fee A senior executive and shareholder of the for successfully adjudicating such Company has a signifcant investment in applications. a mortgage default insurance company. In the ordinary course of business, the 82 First National Financial Corporation 2022 ANNUAL REPORTCORPORATE GOVERNANCE First National’s Board of Directors and management team fully acknowledge the importance of their duty to serve the long-term interests of shareholders. Sound corporate governance is fundamental to maintaining the confdence of investors and increasing shareholder value. As such, First National is committed to the highest standards of integrity, transparency, compliance and discipline. These standards defne the relationships among all of our stakeholders – Board, management and shareholders – and are the basis for building these values and nurturing a culture of accountability and responsibility across the organization. 83 First National Financial Corporation 2022 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 efcient 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 refect 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 fnancial statements; • Oversight and supervision of the quality and integrity of the Company’s fnancial statements, and the corporate governance guidelines of • Oversight and supervision of the adequacy of the Company’s internal accounting the Canadian Securities Administrators. As a public company, First National’s Board continues to update, develop and implement appropriate governance policies and practices as it sees ft. controls and procedures, as well as its fnancial reporting practices. The Audit Committee consists of three independent directors, all of whom are considered fnancially literate for the purposes of the Canadian Securities Administrators’ Multilateral Instrument 52-110 – Audit Committees. COMMITTEE MEMBERS Robert Mitchell (Chair), Robert Pearce and Diane Sinhuber 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 conficts of interest and transactions involving related parties of the Company; and • Periodically reviewing the composition and efectiveness of the Board of Directors. The Governance Committee consists of four 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, Robert Pearce and Martine Irman 84 First National Financial Corporation 2022 ANNUAL REPORT BOARD OF DIRECTORS STEPHEN SMITH Stephen Smith, one of Canada’s leading fnancial services entrepreneurs, is the Chairman and CEO of Smith Financial Corporation. During his career, he has been an innovator in the development and utilization of various securitization techniques to fnance mortgage assets as well as a leader in the development and application of information technology (MERLIN) in the mortgage industry. Mr. Smith co-founded First National Financial Corporation in 1988, served as CEO until 2022, and remains as Executive Chair. Mr. Smith is Chair of Canada Guaranty Mortgage Insurance Company, which he owns in partnership with Ontario Teachers’ Pension Plan. He is Chair and co-owner of Peloton Capital Management, a mid-market North American private equity frm. He is Chair and co-owner of Glass, Lewis & Co., a leading global proxy advisory Mr. Smith holds a B.Sc (Hons.) in and interest rate derivatives. Mr. Ellis Electrical Engineering from Queen’s holds a BA degree from the University University and a M.Sc. in Economics from of Western Ontario, a MBA degree the London School of Economics. In 2017, from McMaster University and is a CFA Queen’s University awarded him charterholder. an Honourary LL.D. MORAY TAWSE DUNCAN JACKMAN Duncan N. R. Jackman has been Moray Tawse is Executive Vice President and Secretary of the Corporation, and Chairman, President and Chief Executive Ofcer of E-L Financial Corporation, Executive Vice President and Co- an investment and insurance holding founder of First National. Mr. Tawse company, since 2003. In 2003, he was directs the operations of all of First also elected Chairman of the board of National’s commercial mortgage directors of The Empire Life Insurance origination activities. With over 30 years Company. Mr. Jackman is also Chairman of experience in the real estate fnance of Algoma Central Corporation, the industry, Mr. Tawse is one of Canada’s largest Great Lakes bulk shipper, as leading experts on commercial real well as Chairman and President of estate and is often called upon to deliver Economic Investment Trust Limited keynote addresses at national real estate and United Corporations Limited, two symposiums. JASON ELLIS frm. Also, he is Chair and co-owner of Jason Ellis is the President and Chief Fairstone Bank of Canada and the largest Executive Ofcer for First National shareholder in Equitable Bank. and is responsible for the design and He is Chair of Historica Canada, creator of the Heritage Minutes and publisher of The Canadian Encyclopedia. He is the member of the Boards of the Rideau Hall Foundation, Canada Infrastructure Bank and the C.D. Howe Institute and is a Honourary Governor of the Royal Ontario Museum. 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. In 2019, Mr. Smith was inducted into the Canadian Business Hall of Fame. In 2012, he was awarded the Queen’s Diamond Jubilee Medal. 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 Ofcer in 2018 and President in 2019. On January 12, 2022, Mr. Ellis was appointed Chief Executive Ofcer. 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 fxed income 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. 85 First National Financial Corporation 2022 ANNUAL REPORT ROBERT MITCHELL ROBERT PEARCE Robert Mitchell was appointed Executive Robert Pearce serves on the board of Chair and Chair of the Investment directors of Canada Guaranty Mortgage Committee of Dixon Mitchell Investment Insurance Company, CPI Card Group Counsel Inc., a Vancouver-based and Fairstone Bank of Canada. Mr. investment management company, on Pearce spent 26 years with BMO Bank January 1, 2021. From 2000 to 2020, of Montreal from 1980 to 2006, most he was President of Dixon Mitchell recently holding the position of President Investment Counsel Inc. Prior to that, and Chief Executive Ofcer, Personal and he was Vice President, Investments at Commercial Client Group. He also served Seaboard Life Insurance Company. Mr. on the board of directors of MasterCard Mitchell has an MBA from the University International from 1998 to 2006 and of Western Ontario and a Bachelor of as Chairman of the Canadian Bankers’ Commerce (Finance) from the University Association from 2004 to 2006. Mr. of Calgary, and is a CFA charterholder. Mr. Mitchell sits on the board of Pearce holds a BA from the University of Victoria and an MBA from the University Equestrian Canada. BARBARA PALK Barbara Palk retired as President of TD Asset Management Inc. in 2010, following a 30-year career in institutional investment and investment management. of British Columbia. Mr. Pearce brings over 40 years of operational and leadership experience in the fnancial services industry to the Board of Directors. DIANE SINHUBER She currently serves on the board Diane Sinhuber serves on the board of directors of Crombie Real Estate of directors of First National Financial Investment Trust, where she chairs the Corporation and Scarborough Health Governance and Nominating Committee. Network and is an independent and Her experience on boards of directors objective fnancial expert, as well include the Ontario Teachers’ Pension as a risk, governance and controls Plan, where she chaired the Investment professional with over 35 years’ Committee; TD Asset Management experience providing accounting and USA Funds Inc.; Canadian Coalition for auditing services, including reporting Good Governance, where she chaired to and chairing Audit Committees. Ms. the Governance Committee; Greenwood Sinhuber is knowledgeable in IFRS, Ms. Sinhuber has a Bachelor of Business Administration, is a Fellow of Chartered Professional Accountants of Ontario (FCPA) and holds the ICD.D certifcation. MARTINE IRMAN Martine Irman serves on the board of directors of First National Financial Corporation, the TMX Group of Companies and Plan International Canada. She also sits on the Board of St. Michael’s Hospital Foundation and the Campaign Committee of MAP Centre For Urban Health Solutions, and is the Immediate Past Chair of the Board for Export Development Canada. Ms. Irman is a senior fnancial executive and brings over 30 years’ experience in international banking, treasury, securities and trade and has spent 20 years sitting on both corporate and not-for-proft boards along with Executive Advisory Councils. She held several senior level positions over a 30 year period with TD including as Vice-Chair, TD Securities and Senior Vice President, TD Bank Group. She is also a Past Chair of the Board of the YMCA of Greater Toronto. Ms. Irman holds a Bachelor of Arts in Economics and Financial Studies and has completed The Wharton Business School Advanced Management Executive Program. She is a graduate of the Rotman School of Management Institute of Corporate Directors and holds the ICD.D College School; the Investment Canadian accounting standards for certifcation. Counselling Association of Canada; the private enterprises and not-for-proft Perimeter Institute; the Shaw Festival; organizations, US GAAP, and PCAOB UNICEF Canada; and Queen’s University, requirements and has provided services where she was the Chair of the Board to all types of fnancial institutions and of Trustees. Ms. Palk is a member of the within a global bank. She is a retired Institute of Corporate Directors, a Fellow Deputy Chief Auditor of TD Bank Group of the Canadian Securities Institute and a and held several positions with Ernst CFA charterholder. She holds a Bachelor & Young LLP over a 29 year period, of Arts (Honours) in Economics from including as leader of EY Canada’s Queen’s University, and has been named one of Canada’s Top 100 Most Powerful Financial Services Organization for all service lines. She previously served on Women (2004). a number of Boards including as Chair of the YMCA of Greater Toronto and the Kidney Foundation of Canada in Toronto. 86 First National Financial Corporation 2022 ANNUAL REPORT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.frstnational.ca ANNUAL MEETING OF SHAREHOLDERS May 16, 2023, 10:00 a.m. EDT TMX Market Centre Pearce Bunting Room 120 Adelaide St W Toronto, ON REGISTRAR AND TRANSFER AGENT Computershare Investor Services Inc. Toronto, Ontario 1.800.564.6253 EXCHANGE LISTING AND SYMBOLS Common shares: (TSX) FN Class A Series 1 Preference Shares: (TSX) FN.PR.A Class A Series 2 Preference Shares: (TSX) FN.PR.B INVESTOR RELATIONS CONTACTS Robert Inglis Chief Financial Ofcer rob.inglis@frstnational.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 and Executive Chairman Moray Tawse Co-founder and Executive Vice President Jason Ellis President and Chief Executive Ofcer Robert Inglis Chief Financial Ofcer Thomas Kim 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 Vancouver Calgary Toronto Montréal Halifax FIRSTNATIONAL.CA Printed on 100% sustainably-sourced paper 

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