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Annual Report 2023

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20 23 Annual Report Corporate Profile First National is a leading mortgage finance company that provides loan solutions – both insured and conventional – to owners of single-family, multi-unit and commercial properties across Canada. Founded in 1988, we are one of Canada’s largest non-bank originators and underwriters of mortgages. Our business advantages include our service-driven culture, long- standing market share leadership position in the mortgage broker channel, innovative use of securitization and private placements to fund mortgages, purpose-built technology, and expertise in mortgage origination, underwriting and loan administration. You can learn more in this report and in our Sustainability Report at www.firstnational.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 published by S&P Dow Jones Indices LLC. 1 First National Financial Corporation 2023 Annual Report2023 by the Numbers 318,000 $24.4B $143.5B Single family residential customers served. New and renewed mortgage Mortgages Under Administration loans made to multi-unit (MUA) – the source of most of our residential and single-family earnings – reached this milestone, residential mortgages. a 10% increase from 2022. 2 First National Financial Corporation 2023 Annual Report$2B $252.8M $2.1B Revenue increased 29% Net income reached a new record The total value of dividends and over 2022. ($4.15 per share). distributions paid to First National shareholders between our IPO in 2006 and 2023 (or $34.83 per share). 1,518% Total Shareholder Return from our IPO in 2006 to December 31, 2023. 38% After-tax Pre-Fair Market Value1 return on shareholders’ equity demonstrates the efficiency of our business model and ability to adapt and thrive in a rapidly changing world. 1,624 Members of our empowered workforce expertly serve all of Canada’s major real estate markets. 7 35 Consecutive years First Years of service as a National has been named a non-bank lender. Great Place to Work® in Canada based on an independent survey of our workforce. (1) Non-IFRS measure. See MD&A for more details. First National Financial Corporation | 2022 Annual Report 3 3 First National Financial Corporation 2023 Annual ReportOur Leadership Team Stephen Smith Co-founder, Executive Chairman of the Board Moray Tawse Co-founder and Senior Executive Vice President Jason Ellis President and Chief Executive Officer Robert Inglis Chief Financial Officer Hilda Wong Executive Vice President and General Counsel Scott McKenzie Executive Vice President, Residential Mortgages Jeremy Wedgbury Executive Vice President, Commercial Mortgages Thomas Kim Executive Vice President and Managing Director, Capital Markets 4 First National Financial Corporation 2023 Annual ReportMessage to Fellow Shareholders First National adapted well to volatile market conditions in 2023. While rising interest rates resulted in a reset for Canada’s housing markets, the stabilizing effects of our business model and hard work by our team in responding to the needs of customers allowed our company to thrive. Mortgages Under Administration (MUA), an important driver of corporate earnings, increased to a record $143.5 billion, 10% above 2022. A combination of MUA growth and wider net interest margins resulted in a 54% increase in Pre-FMV Income, our operating profitability metric. Net income, which unlike Pre-FMV Income includes the impact of gains and losses on financial instruments, grew 28% to $252.8 million ($4.15 per common share). Adaptation is the lifeblood of our company Since First National was founded in 1988, we have experienced many dramatic changes in our market environment. Throughout, our company has shown a remarkable propensity to adapt without altering our business model as a non-bank lender. We believe adaptability is a core strength and it was on display and exemplified in many parts of our organization. For our residential team, the market changed course twice during the year. In the first quarter, mortgage fundings decreased 25% as housing market activity levels moderated after the Bank of Canada policy interest rate increased to 4.5% in January. In the spring, borrowing activity reignited on speculation that the Bank would hold the line on rates, which it did between January and May. The increased activity led to a 26% increase in our fundings in the third quarter. In the fourth quarter, fundings reversed course again, falling 21% from the prior year in reaction to policy interest rate increases in June and July that pushed the Bank’s policy rate to 5.0%. For the 16th time since our initial public offering in 2006, solid Our team adapted well to these realities, maintaining First profitability enabled our Board to increase the common share National’s position as a market share leader in the mortgage dividend, which now sits at an annualized rate of $2.45 per broker channel throughout the year, and helping thousands of share. By generating excess capital beyond what we need to customers renew their First National mortgages. As a result fund near-term growth, our Board also authorized the payment of this performance, single-family MUA reached $94.5 billion, of a special dividend of $0.75 per common share in December. 7% above 2022. Our MD&A provides a detailed explanation of these results As further indicators of the team’s ability to adapt for the and the contributing factors, which include diversified benefit of partners and customers, First National was chosen mortgage lending, servicing and securitization activities. Lender of the Year (Mortgage Finance category) in the 2023 In the context of market volatility, this performance is satisfying Mortgage Awards of Excellence, an industry-wide competition but not surprising. judged by independent experts, and took home gold medals in the CMP Broker on Lenders Survey in the key categories of top turnaround time and satisfaction with credit policy and interest rates. 5 First National Financial Corporation 2023 Annual Report“ The position First National occupies in the marketplace as an independent, customer-focused financial services provider sets us apart and makes us an ideal partner for mortgage brokers and other financial institutions.” 6 First National Financial Corporation 2023 Annual ReportFor our commercial mortgage team, April 2023 brought news that CMHC was increasing mortgage loan insurance premium rates for all multi-unit property types, effective June 19. That decision prompted a sudden flurry of activity as clients asked First National to expedite our lending process and submit applications to CMHC in advance of the premium rate change. Without deviating from our standard-setting underwriting rigour, the team worked diligently to successfully meet the challenge and submit to CMHC before the deadline. As a result, First National’s commercial originations – which are predominantly for multi-unit properties – increased 11% year over year, bringing commercial MUA to $49.0 billion, 16% above 2022. The collaboration between our borrowers, CMHC and First National means many more rental units will be built and preserved in the coming years, a great outcome for a country in urgent need of housing and a sign that all players in our market are working to adapt and thrive in a challenging economic environment. One of the most impressive examples of our adaptability is the transition our workforce made from remote work at the outset of the pandemic to a high-performance hybrid approach where teams are now, again, spending time together in the office. Both ends of this transition required adjustments by every member of our team. Now that we have a solid hybrid model in place, we look forward to recouping the benefits of in-person knowledge transfer and what that means for the preservation of our culture. I spoke at some length in my message last year about First National’s cultural beliefs: striving for better, earning trust, encouraging autonomy and emphasizing accountability. Our ability to adapt and thrive owes much to these core principles and all were on display throughout our organization in 2023. 7 First National Financial Corporation 2023 Annual ReportA great place to work First National’s ability to adapt and thrive is directly related to the character of the people who work here. They are talented, engaged, and motivated to serve. As an employer, we strive to create and sustain an environment that encourages teamwork, learning and advancement. We also regularly validate our approach by seeking feedback from our team, both informally through townhall meetings across the country, and formally through extensive workforce surveys. Our 2023 engagement survey, conducted independently by Talent Map, provided us with a wealth of information and insightful feedback across 17 categories that we are using to enhance our employer value proposition. Despite workflow disruptions associated with Covid, the results showed that our team continues to be engaged and motivated. I was particularly pleased to see 90% of respondents agreeing with statements such as “people on my team take ownership of problems or issues until resolved.” This is a great result and consistent with what I see daily. I am also pleased to note that in 2023, and for the 7th straight year, First National was named a Great Place to Work® in Canada. This designation is based on an independent survey of our workforce with the results benchmarked by the Great Place to Work Institute against other companies our size. Camaraderie got particularly high marks in the 2023 survey as did inclusion and our support of employee mental health. We use these survey results in a culturally appropriate manner: to look for ways we can strive to be better as an employer. 8 First National Financial Corporation 2023 Annual Report Better lending for a better future First National entered 2024 in a position of strength. As noted, MUA is at record levels for both our residential and commercial businesses, our mortgage renewal opportunities are sizable, and in January we started delivering on an additional third-party underwriting and fulfillment mandate with a major Canadian bank. We created this line of business in 2015 by adapting our capabilities to serve Canadian financial institutions who choose to be active in the mortgage broker channel. Since then, it has helped our customers and the broker channel thrive while diversifying First National’s sources of revenue. As far as the housing market outlook is concerned, the jury is still out. Future sentiment depends on interest rate decisions to come this year from the Bank of Canada, which will hinge on gauges of inflation. At the time of writing, the impact of interest rate increases continues to be felt in the housing market and across the broader economy. Counterbalancing these challenges is population growth – which creates demand for all forms of housing – and various government incentives designed to stimulate housing creation. The recent announcement of a $20 billion increase in the Canada Mortgage Bond program to fund mortgage loans on multi-unit rental projects insured by CMHC is one of the federal government’s key incentives. As a CMHC-approved issuer of NHA-MBS and seller into the CMB program for many years, First National intends to leverage this sizeable increase in 2024 in support of our customers. We describe our short-term expectations in the outlook section of our MD&A. To these I would add a key observation: First National must be willing and able to continue to adapt to whatever comes our way. I believe we are. As First National has proven for decades, a better lending approach is always possible if we set our minds to it. Our 2024 financial planning addresses this goal. It includes ongoing investments in automation, our products and our people. This agenda is entirely consistent with our long-time strategies: providing a full range of mortgage solutions for Canadian single-family and commercial customers; growing assets under administration; employing technology to enhance business processes and service to mortgage brokers and borrowers; and maintaining a conservative risk profile. Ultimately, better lending comes from a desire to be better and that is a cultural mainstay of our organization. 9 First National Financial Corporation 2023 Annual Report Looking back with thanks 2023 marked the 35th anniversary of First National’s founding by Stephen Smith and Moray Tawse who remain actively involved as Directors, owners, advisors and inspiring leaders within our business. Their ongoing contributions are much appreciated, as are those of our independent Board members whose expertise and perspectives are relevant and valued. Our institutional ability to adapt quickly is supported by a responsive and experienced group of senior leaders. They deserve and receive my thanks as do all 1,600+ members of the First National team for their dedication and commitment to better lending. On behalf of all of us, I offer my utmost thanks to our customers, business partners and shareholders for your support. Yours sincerely, Jason Ellis President and Chief Executive Officer March 5, 2024 10 First National Financial Corporation 2023 Annual ReportMortgages Under Administration ($ Billions) 2023 MUA by Asset Type 180 150 120 90 60 30 0 143.5 69% Insured 27% Uninsured single- family residential 4% Uninsured multi-residential and commercial 2019 2020 2021 2022 2023 Revenue ($ Billions) 2023 Funding Sources 2.5 2.0 1.5 1.0 0.5 0.0 2.02 66% Institutional investors 31% Securization 3% Internal 2019 2020 2021 2022 2023 Pre-Fair Market Value Income1 2023 Revenue Sources Prior to Fair Value ($ Millions) 350 300 250 200 150 100 50 0 2019 2020 2021 2022 2023 (1) Non-IFRS measure. See MD&A for more details. 322.1 Gains/Losses 31% Institutional placements 24% Net interest- securitized mortgages 29% Mortgage servicing 16% Investment income 11 First National Financial Corporation 2023 Annual ReportManagement’s Discussion and Analysis The following management’s discussion and analysis (“MD&A”) of financial condition and results of operations is prepared as of March 5, 2024. This discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes of First National Financial Corporation (the “Company” or “Corporation” or “First National”) as at and for the year ended December 31, 2023. The audited consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”). 12 First National Financial Corporation 2023 Annual Report13 First National Financial Corporation 2023 Annual ReportThis MD&A contains forward-looking information. Please see “Forward-Looking Information” for a discussion of the risks, uncertainties and assumptions relating to these statements. The selected financial information and discussion below also refer to certain measures to assist in assessing financial performance. These other measures, such as “Pre-FMV Income” and “After-tax Pre-FMV Dividend Payout Ratio”, should not be construed as alternatives to net income or loss or other comparable measures determined in accordance with IFRS as an indicator of performance or as a measure of liquidity and cash flow. These measures do not have standard meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. General Description of the Company First National Financial Corporation is the parent company of First National Financial LP (“FNFLP”), a Canadian-based originator, underwriter and servicer of predominantly prime residential (single-family and multi-unit) and commercial mortgages. With more than $143 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. 2023 Results Summary First National’s performance in 2023 exceeded management’s expectations. Despite housing market headwinds caused by the cumulative effect of higher interest rates, mortgage originations, inclusive of renewals, were just 2% lower than the prior year. Core operating profitability, measured by Pre-FMV Income(1), increased to a near record $322.2 million as the Company’s long term securitization strategy provided financial results that augmented current year placement activity. Solid growth in Mortgages Under Administration (MUA) in the year together with strong relationships with institutional investors will continue to benefit First National. Unless otherwise noted, tabular amounts The following summarizes performance of the Company’s significant metrics: • MUA grew to $143.5 billion at December 31, 2023 from $131.0 billion at December 31, 2022, an increase of 10%; the growth from September 30, 2023, when MUA was $141.9 billion, was 5% on an annualized basis. are in thousands of Canadian dollars. Additional information relating to the Company is available in First National Financial Corporation’s profile on the System for Electronic Data Analysis and Retrieval (“SEDAR”) website at www.sedar.com. 14 First National Financial Corporation 2023 Annual Report• Total single-family mortgage origination, including • Income before income taxes was $343.9 million in 2023 renewals, was $24.4 billion in 2023 compared to $26.3 compared to $269.1 million in 2022. The increase included billion in 2022, a decrease of 7%. The Company attributes the effect of changing capital market conditions in both this to slower home buying activity throughout the year years. Excluding gains and losses related to financial partially offset by a surge in activity during the second quarter. Generally home affordability decreased as 2023 featured higher mortgage rates reflecting Bank of Canada instruments, earnings before income taxes and gains and losses on financial instruments (“Pre-FMV Income”(1)) for 2023 increased by 54% to $322.2 million from $208.8 interest rate hikes. Commercial segment origination, million in 2022. This change was largely the result of the including renewals, of $13.0 billion was 11% higher than Company’s success in growing MUA over the past several the $11.8 billion originated in 2022. Growth in commercial years. Higher MUA creates higher servicing revenues, and mortgage origination continued to be fueled by demand the larger portfolio of securitized mortgages provides for high-quality insured multi-family mortgage products. five- and ten-year streams of income which are reflected in Total consolidated origination decreased by 2% in 2023 higher net interest income. The commercial segment also compared to 2022. benefited from increased deferred placement fees. • Revenue for 2023 increased by 29% to $2.0 billion from $1.6 billion in 2022. This change was largely the result of higher interest rates. In the past 12 months, mortgage rates increased in tandem with the interest rate environment as monetary policy tightened to counteract inflation risks. These changes led to comparatively higher interest revenue earned on securitized mortgages, higher interest revenue earned on mortgages accumulated for securitization and higher interest earned on mortgage investments. (1) This non-IFRS measure adjusts income before income taxes by eliminating the impact of changes in fair value by adding back losses on the valuation of financial instruments (except those on mortgage investments) and deducting gains on the valuation of financial instruments (except those on mortgage investments). See Key Performance Indicators section in this MD&A. 15 First National Financial Corporation 2023 Annual ReportIn the fourth quarter of 2023, the Company’s Board of Directors announced an increase to First National’s regular monthly common share dividend to an annualized rate of $2.45 per share from $2.40 per share effective with the dividend paid on December 15, 2023. The Board also declared a special common share dividend in the amount of $0.75 per share which was paid on December 15, 2023. This special payment reflected the Board’s determination that the excess capital generated in the past year was not needed to support near-term growth. 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 Total Assets $503,441 $562,861 $525,897 $432,086 $414,785 $392,413 $416,774 $350,321 $44,245 $83,630 $89,194 $35,738 $42,669 $40,145 $61,281 $53,637 $77,125 $95,456 $89,854 $59,748 $59,492 $48,219 $55,864 $45,187 $0.72 $1.38 $1.47 $0.58 $0.70 $0.66 $1.01 $0.88 $45,957,399 $45,176,543 $46,417,841 $44,268,705 $43,763,672 $42,392,225 $42,927,449 $42,386,708 2023 Fourth quarter Third quarter Second quarter First quarter 2022 Fourth quarter Third quarter Second quarter First quarter 16 First National Financial Corporation 2023 Annual ReportReconciliation of Quarterly Determination of Pre-FMV Income(1) ($000s, except per share amounts) 2023 Fourth quarter Third quarter Second quarter First quarter 2022 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 investments Pre-FMV Income for the Period(1) $59,895 $113,830 $121,544 $48,638 $58,269 $54,645 $83,081 $73,087 $16,894 ($18,435) ($31,690) $11,110 $1,353 ($5,846) ($27,217) ($27,900) $336 $61 $— $— ($130) ($580) $— $— $77,125 $95,456 $89,854 $59,748 $59,492 $48,219 $55,864 $45,187 (1) This non-IFRS measure adjusts income before income taxes by eliminating the impact of changes in fair value by adding back losses on the valuation of financial instruments (except those on mortgage investments) and deducting gains on the valuation of financial instruments (except those on mortgage investments). See Key Performance Indicators section in this MD&A. With First National’s large portfolio of mortgages under in an attempt to stem inflation. Short-term interest rates administration, quarterly revenue is driven primarily by servicing rose by 425 basis points between March 2022 and January income and the gross interest earned on mortgages pledged 2023 to their highest level since 2011. While spreads on new under securitization. The gross interest on the mortgage mortgage originations widened somewhat, the Company portfolio is dependent both on the size of the portfolio of faced the headwinds of a slowing housing market, and strong mortgages pledged under securitization, as well as mortgage rates. Recently MUA has increased, and revenue followed. Net income is partially dependent on conditions in bond competition for customers such that it earned comparatively lower Pre-FMV Income(1). 2023 featured a return to a more stable housing environment: mortgage rates stabilized, and markets, which affect the value of gains and losses on financial consumer confidence returned. In general, despite two more instruments arising from the Company’s interest rate hedging increases from the Bank of Canada, there was a sequential program. Accordingly, the movement of this measurement improvement in mortgage origination volumes between the between quarters is related to factors external to the Company’s first and third quarters of 2023. The fourth quarter was softer core business. By removing this volatility and analyzing Pre- FMV Income(1), management believes a more appropriate measurement of the Company’s performance can be assessed. In the past eight quarters, the Company experienced a relatively volatile economic environment. 2022 began with a positive economic outlook: there was a surplus of liquidity for investment in financial assets and origination volumes remained strong. However, late in the 2022 first quarter, risks associated with inflation became evident as wages and prices increased and companies competed for employees. The Bank of Canada moved quickly and continuously beginning on March 2, 2022, as economic indicators turned more negative. Throughout 2023 lower prepayment rates also added to performance. The resulting operational efficiency from solid origination levels and the increased amounts of record MUA and the portfolio of mortgages pledged under securitization, translated to higher Pre-FMV Income(1) than recorded in the same periods in 2022. 17 First National Financial Corporation 2023 Annual ReportOutstanding Securities of the Corporation At December 31, 2023, and March 5, 2024, the Corporation had outstanding: 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; 200,000 November 2025 senior unsecured notes; and 200,000 September 2026 unsecured notes. Selected Annual Financial Information and Reconciliation to Pre-FMV Income(1) ($000s, except per share amounts) For the Year Ended December 31, Income Statement Highlights Revenue Interest expense – securitized mortgages Brokerage fees Salaries, interest and other operating expenses Add (deduct): realized and unrealized losses (gains) on financial instruments Add (deduct): unrealized gains (losses) regarding mortgage investments Pre-FMV Income(1) Add (deduct): realized and unrealized gains (losses) on financial instruments excluding those on mortgage investments Provision for income taxes Net income Common share dividends declared Per Share Highlights Net income per common share Dividends per common share At Year End Balance Sheet Highlights Total assets 2023 2022 2021 2,024,285 (1,119,475) (139,199) (421,704) 1,574,293 (739,295) (173,290) (392,626) 1,394,606 (630,279) (201,786) (298,720) (22,121) (59,610) (5,815) 397 322,183 21,785 (91,100) 252,807 189,397 4.15 3.16 (710) 208,762 60,320 (71,350) 197,732 141,423 3.25 2.36 (730) 257,276 6,545 (69,260) 194,561 210,885 3.20 3.52 45,957,399 43,763,672 42,274,158 Total long-term financial liabilities 598,745 399,222 398,888 Note: (1) Pre-FMV Income is not a recognized earnings measure under IFRS and does not have a standardized meaning prescribed by IFRS. Therefore, Pre-FMV Income may not be comparable to similar measures presented by other issuers. Investors are cautioned that Pre-FMV Income should not be construed as an alternative to net income or loss determined in accordance with IFRS as an indicator of the Company’s performance or as an alternative to cash flows from operating, investing and financing activities as a measure of liquidity and cash flows. 18 First National Financial Corporation 2023 Annual ReportVision and Strategy The Company provides mortgage financing solutions to the residential and commercial mortgage markets in Canada. By offering a full range of mortgage products, with a focus on customer service and superior technology, the Company believes that it is a leading non-bank mortgage lender. The Company intends to continue leveraging these strengths to lead the non-bank mortgage lending industry in Canada, while appropriately managing risk. The Company’s strategy is built on four cornerstones: providing a full range of mortgage solutions for Canadian single-family and commercial customers; growing assets under administration; employing technology to enhance business processes and service to mortgage brokers and borrowers; and maintaining a conservative risk profile. An important element of the Company’s strategy is its direct relationship with mortgage borrowers. The Company is considered by most of its borrowers as the mortgage lender. This is a critical distinction. It allows the Company to communicate with each borrower directly throughout the term of the related mortgage. Through this relationship, the Company can negotiate new transactions and pursue marketing initiatives. Management believes this strategy will provide long-term profitability and sustainable brand recognition for the Company. Key Performance Drivers The Company’s success is driven by the following factors: • Growth in the portfolio of mortgages under administration; • Growth in the origination of mortgages; • Raising capital for operations; and • Employing innovative securitization transactions to minimize funding costs. Growth in Portfolio of Mortgages under Administration 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, 2023, MUA totalled $143.5 billion, up from $131.0 billion at December 31, 2022, an increase of almost 10%. The growth of MUA in the fourth quarter of 2023 was 5% on an annualized basis. 19 First National Financial Corporation 2023 Annual ReportGrowth in Origination of Mortgages Direct Origination by the Company The origination of mortgages not only drives the growth of MUA as described above, but leverages the Company’s origination platform, which has a large fixed-cost component. As more mortgages are originated, the marginal costs of underwriting decrease. Increased origination satisfies demand from institutional customers and produces volume for the Company’s own securitization programs. In 2023, the Company’s single-family origination decreased by 7% compared to 2022. The Company believes this is the result of a relatively uncertain interest rate environment in the year which curtailed housing purchases. Comparatively, higher housing prices, resulting from the low mortgage rates during the pandemic, also had an impact as buyers and sellers struggled to determine the fair values for properties. The commercial segment continued to perform well despite changing market conditions. Total commercial volumes were $13.0 billion in the year compared to $11.8 billion in 2022, an increase of 11%. On a combined basis, overall origination in 2023 decreased 2% year over year. Third-Party Mortgage Underwriting and Fulfilment Processing Services In 2015, the Company launched its third-party underwriting and fulfilment processing services business with a large Canadian Schedule I bank (“Bank”). This business is designed to adjudicate mortgages originated by the Bank through the single-family residential mortgage broker channel. First National employs a customized software solution based on its industry-leading 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 offerings. In late 2019 and 2023, the Company entered into similar agreements with two other Canadian banks. Excalibur Mortgage Products The Company originates alternative single-family (“Excalibur”) mortgage products. Alternative lending describes single-family residential mortgages that are originated using broader underwriting criteria than those applied in originating prime mortgages. These mortgages generally have higher interest rates than prime mortgages. First National’s relationships with mortgage brokers and its underwriting systems allow for cost effective origination of significant volumes. The product is originated primarily for placement with institutional investors, but beginning in April 2019, the Company finalized an agreement with a bank-sponsored securitization conduit to fund a portion 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 growing volumes in Western Canada. 20 First National Financial Corporation 2023 Annual ReportRaising Capital for Operations Bank Credit Facility The Company has a $1.5 billion revolving line of credit with a syndicate of banks. This facility enables the Company to fund the large amounts of mortgages accumulated for securitization. In the second quarter of 2023, the Company extended the term of the facility by another year to March 2028. The facility bears interest at floating rates. The Company has elected to undertake this debt for a number of reasons: (1) the facility provides the amount of debt required to fund mortgages originated for securitization purposes; (2) the debt is revolving and can be used and repaid as the Company requires, providing more flexibility than senior unsecured notes, which are fully drawn during their term; (3) the five-year remaining term gives the Company a committed facility for the medium term; and (4) the cost of borrowing reflects the Company’s BBB issuer rating. Note Issuance In September 2023, the Company issued 200,000 7.293% Series 4 notes for a three- year term pursuant to a private placement under an offering memorandum. These notes add to the Company’s 2020 issuance of 200,000 2.961% Series 3 senior unsecured notes and 2019’s issuance of 200,000 3.582% Series 2 senior unsecured notes. The net proceeds of these issuances, 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 $600 million. Preferred Share Issuance Effective April 1, 2021, pursuant to the original prospectus, the Company reset the annual dividend rate on the outstanding Class A Series 1 preference shares to 2.895% for a five-year term to March 31, 2026. After the exercise of shareholder conversion rights in March 2021, there were 2,984,835 Class A Series 1 shares outstanding and 1,015,165 Class A Series 2 outstanding. The Series 2 shares bear a floating rate dividend calculated quarterly based on the 90-day T-Bill rate. Both the Series 1 and Series 2 shares pay quarterly dividends, subject to Board of Directors approval, and are redeemable at the discretion of the Company such that after each five-year term ending on March 31, the Company can choose to extend the shares for another five- year term at a fixed spread (2.07%) over the relevant index (five-year Government of Canada bond yield for any Series 1 shares or the 90-day T-Bill rate for any Series 2 shares). While investors in these shares have an option on each five-year anniversary to convert their Series 1 preference shares into Series 2 preference shares (and vice versa), there is no provision of redemption rights to these shareholders. As such, the Company considers these shares to represent a permanent source of capital. 21 First National Financial Corporation 2023 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 fees observed in Housing Corporation (“CMHC”) as an mortgage securitization markets also affect profitability. In early 2020, fears of a global issuer of NHA-MBS and as a seller into pandemic led to a dramatic and sudden decrease in bond yields as central banks cut the Canada Mortgage Bonds (“CMB”) overnight rates significantly. Credit spreads, including those on mortgages, widened. program. Issuer status provides the Later in 2020, as financial systems began to normalize, mortgage coupons remained Company with direct and independent elevated as other credit spreads, including those on NHA-MBS, narrowed. The resulting access to reliable and low-cost funding. spreads had positive impacts on 2020 results and increased the profitability inherent in Insured mortgage spreads can be the Company’s ongoing securitization portfolio. In 2021, mortgage spreads narrowed, to illustrated by comparing insured posted levels not seen since before the 2008 financial crisis as competition increased. In 2022 five-year fixed single-family mortgage and through 2023, spreads widened in response to the Bank of Canada’s interest rate rates to a similar term five-year policy announcements and an increase in general economic uncertainty. In 2023, the Government of Canada bond as listed Company originated and renewed approximately $11.8 billion of single-family and multi- in the table below. unit residential mortgages for securitization purposes. Period end Five-Year Insured Mortgage Spread by Quarter 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 1.38% 1.98% 1.51% 1.48% 1.62% 1.65% 1.59% 2.07% 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 2024. In July 2022, CMHC issued new rules related to the allocation of NHA-MBS guarantee fees between “lenders” and “aggregators”. These rules commenced in the latter part of 2023 through a transition period. CMHC has indicated recently that these rules may be subject to further clarification. While these rules have not yet impacted the Company’s ability to place mortgages with its existing institutional customers, the rules will have an ongoing impact on the amount of NHA MBS that issuers can create. Canada Mortgage Bonds Program The CMB program is an initiative where Canada Housing Trust (“CHT”) issues securities to investors in the form of semi-annual interest-yielding 5 and 10-year bonds. As a seller into the CMB, the Company is able to make direct sales of NHA MBS into the program. The ability to sell into the CMB has given the Company access to lower costs of funds on both single-family and multi-family mortgage securitizations. Because of the effectiveness of the CMB, many institutions have indicated their desire to participate. As a result, CHT has created guidelines through CMHC that limit the amount that can be sold by each seller into the CMB each quarter. The Company is subject to these limitations. CMHC has indicated there may be modifications as early as 2024 which may reduce the amounts which the Company’s can sell into 10-year CMB. The 2023 federal budget suggested that there could be changes to this program. Subsequently, the government consulted with industry participants including First National. At the end of September 2023, the federal government through the Ministry of Finance, announced that the annual limit for Canada Mortgage Bonds was increased to $60 billion from $40 billion. The additional CMB capacity will be allocated exclusively for the funding of CMHC insured Multi-Family NHA MBS. In October 2023, CMHC announced that in support of the additional CMB funding capacity, up to $5 billion of additional NHA MBS guarantees would be made available in the fourth quarter of the year to support the higher CMB amounts. At the same time, CMHC increased available NHA MBS guarantee from $150 billion to $170 billion for 2024 such that the $20 billion increase is dedicated to multi-family pools. Period Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 22 First National Financial Corporation 2023 Annual ReportKey Performance Indicators The principal indicators used to measure the Company’s performance are: • Earnings before income taxes and losses and gains on financial instruments, with the exception of any losses or gains related to mortgage investments (“Pre-FMV Income”(1)); and • Dividend payout ratio. Beginning in 2020, the Company presented Pre-FMV Income(1) as a key performance indicator. This non-IFRS measure adjusts the Company’s earnings by excluding gains and losses related to the fair value of financial instruments. Pre-FMV Income(1) is not recognized under IFRS. However, management believes that Pre-FMV Income(1) is a useful measure that provides investors with an indication of income normalized for capital-market fluctuations. Pre-FMV Income(1) should not be construed as an alternative to net income determined in accordance with IFRS or to cash flows from operating, investing and financing activities. The Company’s method of calculating Pre-FMV Income(1) may differ from other issuers and, accordingly, Pre-FMV Income(1) may not be comparable to measures used by other issuers. ($000s) For the Period Revenue Income before income taxes Pre-FMV Income(1) At Period End Total assets Quarter Ended Year Ended December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 503,441 59,895 77,125 414,785 58,269 59,492 2,024,285 343,907 322,183 1,574,293 269,082 208,762 45,957,399 43,763,672 45,957,399 43,763,672 Mortgages under administration 143,546,966 131,000,635 143,546,966 131,000,635 (1) This non-IFRS measure adjusts income before income taxes by eliminating the impact of changes in fair value by adding back losses on the valuation of financial instruments (except those on mortgage investments) and deducting gains on the valuation of financial instruments (except those on mortgage investments). Since going public in 2006, First National has been considered a high-yielding, dividend-paying company. With a large MUA that generates continuing income and cash flow and a business model that is designed to make efficient use of capital, the Company has been able to pay distributions to its shareholders that represent a relatively large ratio of its earnings. The Company calculates the dividend payout ratio as dividends declared on common shares over net income attributable to common shareholders. This measure is useful to shareholders, as it indicates the percentage of earnings paid out as dividends. Similar to the performance measurement for earnings, the Company also calculates the dividend payout ratio on a basis using after-tax Pre- FMV Income(1). 23 First National Financial Corporation 2023 Annual ReportDetermination of Common Share Dividend Payout Ratio ($000s) For the Period Net income attributable to common shareholders Total dividends paid or declared on common shares Dividends paid or declared on common shares, excluding special dividends Total common share dividend payout ratio Regular common share dividend payout ratio(1) After-tax Pre-FMV dividend payout ratio(2) Quarter Ended Year Ended December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 43,242 41,785 248,952 194,693 81,456 35,730 189,397 141,423 36,480 35,730 144,421 141,423 188% 84% 64% 86% 86% 84% 76% 58% 62% 73% 73% 94% 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 financial instruments (except those on mortgage investments) and deducting gains on the valuation of financial instruments (except those on mortgage investments). The Company uses its aggregate effective tax rate to tax affect the impact of the valuation of financial instruments on this ratio. For the year ended December 31, 2023, the total common share payout ratio excluding special dividends was 76% compared to 73% for the year ended December 31, 2022. However, in both years, the Company recorded gains and losses on changes in fair value of financial instruments. Gains and losses are recorded in the period in which the prices on Government of Canada bonds change; however, the offsetting economic impact is generally reflected in narrower or wider spreads in the future once the mortgages have been pledged for securitization. Accordingly, management does not consider such gains and losses to affect its dividend payment policy in the short term. If the gains and losses on financial instruments in the two years are excluded from the above calculations, the regular dividend payout ratio for 2023 (which excludes the payment of the special dividend) would have been 62% compared to 94% in 2022. The Company also paid $3.9 million of dividends on its preferred shares in 2023 compared to $3.0 million in 2022. 24 First National Financial Corporation 2023 Annual ReportRevenues and Funding Sources Mortgage Origination The Company derives a significant amount of its revenue from mortgage origination activities. Most mortgages originated are funded either by placement with institutional investors or through securitization conduits, in each case with retained servicing. In general, originations are allocated from one funding source to another depending on different criteria, including type of mortgage and securitization limits, with an overall consideration related to maintaining diversified funding sources. The Company retains servicing rights on virtually all the mortgages it originates. This provides the Company with servicing fees to complement revenue earned through originations. For the year ended December 31, 2023, origination volume decreased to $37.4 billion from $38.1 billion, or about 2% compared to 2022. Securitization The Company securitizes a portion of its origination through various vehicles, including NHA-MBS, CMB and asset-backed commercial paper (“ABCP”). Although legally these transactions represent sales of mortgages, for accounting purposes they do not meet the requirements for sale recognition and instead are accounted for as secured financings. These mortgages remain as mortgage assets of the Company for the full term and are funded with securitization-related debt. Of the Company’s $37.4 billion of originations in 2023, $11.8 billion was originated for its own securitization programs. Placement Fees and Gain on Deferred Placement Fees The Company recognizes revenue at the time that a mortgage is placed with an institutional investor. Cash amounts received in excess of the mortgage principal at the time of placement are recognized in revenue as “placement fees”. The present value of additional amounts expected to be received over the remaining life of the mortgage sold (excluding normal market-based servicing fees) is recorded as a “deferred placement fee”. A deferred placement fee arises when mortgages with spreads in excess of a base spread are placed. Normally the Company would earn an upfront cash placement fee, but investors prefer paying the Company over time, as they earn net interest margin on such transactions. Upon the recognition of a deferred placement fee, the Company establishes a “deferred placement fee receivable” that is amortized as the fees are received by the Company. Of the Company’s $37.4 billion of originations in 2023, $24.6 billion was placed with institutional investors. For all institutional placements, the Company earns placement fees. Revenues based on these originations are equal to either (1) the present value of the excess spread, or (2) an origination fee based on the outstanding principal amount of the mortgage. This revenue is received in cash at the time of placement. In addition, under certain circumstances, additional revenue from institutional placements may be recognized as “gain on deferred placement fees” as described above. 25 First National Financial Corporation 2023 Annual ReportMortgage Servicing and Administration The Company services virtually all mortgages generated through its mortgage origination activities on behalf of a wide range of institutional investors. Mortgage servicing and administration is a key component of the Company’s overall business strategy and a significant source of continuing income and cash flow. In addition to pure servicing revenues, fees related to mortgage administration are earned by the Company throughout the mortgage term. Another aspect of servicing is the administration of funds held in trust, including borrowers’ property tax escrows, reserve escrows and mortgage payments. As acknowledged in the Company’s agreements, any interest earned on these funds accrues to the Company as partial compensation for administration services provided. The Company has negotiated favourable interest rates on these funds with the chartered banks that maintain the deposit accounts, which has resulted in significant additional servicing revenue. In addition to the interest income earned on securitized mortgages and deferred placement fees receivable, the Company also earns interest income on mortgage- related assets, including mortgages accumulated for sale or securitization, mortgage and loan investments and purchased mortgage servicing rights. The Company provides underwriting and fulfilment processing services to two mortgage originators using the mortgage broker distribution channel. The Company earns a fee based on the dollar value of funded mortgages. These fees are recognized at the time a mortgage funds and are included in “Mortgage servicing income” in the consolidated statement of income. 26 First National Financial Corporation 2023 Annual ReportResults of Operations The following table shows the volume of mortgages originated by First National and mortgages under administration for the periods indicated: ($ millions) Mortgage Originations by Segment Single-family residential Multi-unit and commercial 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 Quarter Ended Year Ended December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 4,360 3,840 8,200 5,667 2,259 274 8,200 94,546 49,001 143,547 5,502 2,966 8,468 5,028 3,231 209 8,468 88,590 42,411 131,001 24,408 13,042 37,450 24,616 11,830 1,004 37,450 94,546 49,001 143,547 26,319 11,797 38,116 24,343 12,570 1,203 38,116 88,590 42,411 131,001 Total mortgage origination volumes decreased in 2023 compared to the 2022 by 2%. This reflected a 7% decrease in single-family volumes, partly offset by an 11% increase in commercial segment volumes year over year. Management believes the decrease in the single-family segment was due to rapidly changing mortgage rates which reflected the Bank of Canada’s (“BoC) interest rate policies. To begin 2023, mortgage interest rates rose as the BoC had increased its overnight rates by 400 basis points between March and December 2022. Accordingly, single-family origination was slow to start the year. As 2023 moved forward, the fear of rising interest rates diminished, and origination volumes increased throughout the next two quarters but slowed again in the fourth quarter. The Company believes this reflected a slower housing market across most of the country as the economic indicators were unfavorable as a consequence of the BoC’s rate hiking policies. The Company’s MERLIN technology continued to support its mortgage origination platform allowing First National to underwrite efficiently across the country. In the commercial segment, where the Company’s expertise in underwriting multi-unit mortgages is a fundamental competency, 2023 volumes reflected continuing demand for insured mortgages. This was partially offset by significantly lower conventional mortgage activity as higher interest rates affected real estate valuations. Origination for direct securitization into NHA-MBS, CMB and ABCP programs remained a large part of the Company’s strategy, with more than $11.8 billion of volume 2023. 27 First National Financial Corporation 2023 Annual ReportNet Interest – Securitized Mortgages Comparing the year ended December 31, 2023, to the year of the Company electing to securitize renewed mortgages as opposed to placement with institutional customers. It is also ended December 31, 2022, “net interest – securitized mortgages” the consequence of borrowers taking shorter renewal terms as (“NIM”) increased by about 28% to $216.6 million from $169.3 they determine how to react to higher interest rates on maturity. million. The portfolio of mortgages pledged under securitization For new residential volume, per-unit pricing was lower by 1% grew 6% from about $37.2 billion at December 31, 2022 to than in the prior year as more borrowers chose shorter terms, $39.4 billion at December 31, 2023. This reflected growth in particularly 3-year terms. Shorter terms are placed at lower per- the multi-residential program portfolio of 9% and 4% in single- unit fees than longer term placements. family programs. Commercial segment earnings were up by $9.8 million and grew with the larger portfolio and an increase in margin largely related to the success of the Company’s insured construction mortgage program. Residential segment NIM was higher by $37.5 million year over year. The significant factors which contributed to this increase other than the growth in the portfolio were: (1) slower rates of prepayment; (2) the success of the Company’s Excalibur securitization program; and (3) the reduced impact of short-term interest rate volatility on the Company’s floating rate securitization programs. Slower prepayment speeds had a favorable influence on several aspects of NIM. To start 2022, prepayment speeds were higher than expected as borrowers took advantage of historically low mortgage rates to refinance mid term. While this diminished as mortgage rates increased later in 2022, with comparatively higher mortgage interest rates throughout 2023, prepayment speeds slowed to rates lower than even traditional levels. This change had several favorable outcomes for the Company: higher MUA balances in the portfolios; lower amortization expenses for capitalized origination and other issuance costs; and the Gains on Deferred Placement Fees Gains on deferred placement fees revenue increased 69% to $25.3 million from $15.0 million. These gains related primarily to the growth of multi-unit residential mortgages originated and sold to institutional investors where volumes increased by 70% from those in 2022. Mortgage Servicing Income Mortgage servicing income increased 17% to $252.6 million from $216.8 million. This increase in revenue was attributable to three factors: growing MUA, higher interest earned on escrow deposits and higher revenues on the Company’s third-party underwriting business. The largest contributor was the interest component. With overnight interest rates increasing by more than 300 basis points from mid-year 2022 to mid-year 2023, the Company earned a significantly higher return on these balances. Second, the Company’s customers in its third-party underwriting business generated higher year-over-year origination volumes preservation of lower funding costs. The residential segment was which increased fees earned by the Company. Mortgage Investment Income Mortgage investment income increased 32% to $139.9 million from $105.7 million. The increase was due primarily to the interest rate environment. Interest rates rose steadily through 2022 as the market reacted to a cycle of rate hikes by the Bank of Canada to address inflation risks. The impact was such that 5-year bond yields increased by about 250 basis points between December 31, 2022, and the high point in 2023. This directly affected mortgage rates offered by the Company such that it earned comparatively more interest income on its mortgage and loan investment portfolio and mortgages accumulated for securitization. also favorably affected by the Excalibur securitization program as MUA grew by about 14% in securitized assets over the past 12 months. Excalibur also continued to perform with almost no loan-loss experience. The comparative year was negatively affected by the rapid rise of short-term interest rates. As rates rise, there is a temporary compression between the Company’s prime lending rate, which affects its floating rate mortgages, and its short-term CDOR-based funding costs. This was lower in 2023 as there were just two rate hikes by the BoC in the year such that comparative NIM was higher by approximately $4.7 million in 2023. Placement Fees Placement fee revenue decreased by 8% to $248.3 million from $268.6 million in the comparative year. The decrease was mainly the result of a shift in placement activity between segments. Although overall volumes for institutional customers increased by 1% from 2022, placement volume for the residential segment decreased by 10% and volume for commercial segment mortgages increased by 27%. Generally, per-unit fees for commercial placement are much lower than those on residential products. Placement fees for renewed residential mortgages were lower by about $3.7 million. This is the result 28 First National Financial Corporation 2023 Annual ReportRealized and Unrealized Gains (Losses) on Financial Instruments This financial statement line item consists of three primary components: (1) gains and losses related to the Company’s economic hedging of single-family commitments, (2) gains and losses related to holding a portfolio of mortgage and loan investments at fair value, and (3) gains and losses on interest rate swaps used to mitigate interest rate risk on its CMB activity. With the adoption of IFRS 9, a significant portion of the Company’s interest rate management program qualifies as “hedging” for accounting purposes. The Company has elected to document hedging relationships for virtually all of the multi-residential commitments and mortgages it originates for its own securitization programs. It has also done the same for funded single-family mortgages and the swaps used in its ABCP programs. This decision has reduced the volatility of gains and losses on financial instruments otherwise recorded in the Company’s regular earnings, as gains and losses on hedged items are generally deferred and amortized into income over the term of the related mortgages. The Company has not documented a hedging relationship for accounting purposes related to its interest mitigation program for its single-family mortgage commitments. The Company believes, given the optional nature of these commitments, it is difficult to establish a valid hedging relationship. For financial reporting purposes, this means that there will still be gains and losses on financial instruments, but these should be limited to those on the bonds sold short used to mitigate such risk. The following table summarizes these gains and losses by category in the periods indicated: Summary of Realized and Unrealized Gains (Losses) on Financial Instruments ($000s) Gains (losses) on short bonds used for the economic hedging program Gains (losses) on mortgages held at fair value Gains (losses) on interest rate swaps Net gains (losses) on financial instruments (16,894) Quarter Ended Year Ended December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 (20,881) 336 3,651 (844) (130) (379) (1,353) 23,620 397 (1,896) 22,121 74,442 (710) (14,122) 59,610 2022 featured an inflationary environment in which bond yields rose significantly as central banks tightened monetary policies. This resulted in increases in both short and long-term interest rates. Accordingly, the Company recorded large gains on its short bonds used to economically hedge single-family mortgage commitments. Although interest rates were more volatile in 2023, overall, bond yields rose and created significant gains on the short bonds used for the Company’s hedging program. In the fourth quarter of 2023 this trend reversed as bond yields decreased with softer economic indicators. 29 First National Financial Corporation 2023 Annual ReportBrokerage Fees Expense Brokerage fees expense decreased 20% to $139.2 million from Income before Income Taxes and Pre-FMV Income Income before income taxes increased 28% to $343.9 million $173.3 million. This reflected a 16% year-over-year decrease in from $269.1 million in 2022. This increase was partially the origination volumes of single-family mortgages for institutional result of changing capital markets. The Company’s results investors and lower per-unit broker fees. 2022 was a very include gains and losses on financial instruments used to competitive period for broker product and per unit broker fees economically hedge residential mortgage commitments. As were historically high. In 2023, per-unit fees returned to more described previously in this MD&A, the Company recorded traditional levels and accounted for a 6% decrease in $21.7 million of gains on financial instruments (excluding gains fees overall. Salaries and Benefits Expense Salaries and benefits expense increased 4% to $200.5 million from $193.0 million. Average salaries were higher, reflecting standard annual merit increases and in addition, incentive- driven commercial underwriting compensation was higher year over year by $3.1 million. Overall headcount decreased 4% (1,624 employees at December 31, 2023, compared to 1,686 at December 31, 2022). Management salaries were paid to the two senior executives (co-founders) who together control about 71% of the Company’s common shares. The current period expense is a result of the compensation arrangement executed on the closing of the initial public offering (“IPO”) in 2006. Interest Expense Interest expense increased 13% to $153.4 million from $136.0 million. As discussed in the “Liquidity and Capital Resources” section of this analysis, the Company warehouses a portion of the mortgages it originates prior to settlement with the investor related to mortgage investments) in 2023. Comparatively, in 2022, the Company recorded $60.3 million of gains on financial instruments (excluding losses related to mortgage investments). The change in these values accounted for a $38.6 million increase in comparative income before income taxes. Pre-FMV Income, which excludes these changes, increased by 54% to $322.2 million from $208.8 million. This change was largely the result of the Company’s success in growing MUA over the past several years. Higher MUA for institutional customers creates higher mortgage administration revenues, including interest on escrow deposits, and the larger portfolio of securitized mortgages provides 5 and 10 year streams of income which are reflected in higher securitization income. The commercial segment benefited from higher deferred placement fees. Income Tax Expense The provision for taxes increased by 28% to $91.1 million from $71.4 million. The provision increased proportionately with net income before income taxes. or funding with a securitization vehicle. The Company used its $1.5 billion syndicated bank line together with repurchase Other Comprehensive Income For the commercial segment, the Company hedges the agreements to fund mortgages during this period. The overall interest rate risk associated with insured multi-residential interest expense increased from 2022 because of higher mortgages. This hedging begins on commitment and ends prevailing interest rates on the Company’s floating rate debt. when the Company either securitizes the mortgage or places Interest expense also includes the cost of carry related to the the mortgage with an institutional investor. As the Company Company’s economic hedging program. determined that these cash flow hedges were effective, the Other Operating Expenses Other operating expenses increased by 7% to $67.8 million from $63.6 million, primarily due to higher information technology costs and expenses related to the growing securitization business. Company recorded $6.5 million of pre-tax net losses on such hedges in OCI in 2023. In the year, the Company amortized a portion of the gains and losses in accumulated OCI into regular earnings in the amount of $21.7 million. The remaining OCI amount will be amortized into net income in future periods. 30 First National Financial Corporation 2023 Annual ReportOperating Segment Review The Company aggregates its business from two segments for financial reporting purposes: (i) Residential (which includes single-family residential mortgages), and (ii) Commercial (which includes multi-unit residential and commercial mortgages), as summarized below: Operating Business Segments For The Year Ended Residential Commercial ($000s, except percent amounts) December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Originations and renewals 24,416,844 26,319,422 13,042,685 11,796,939 Percentage change Revenue Percentage change Income before income taxes Percentage change As at Identifiable assets Mortgages Under Administration (7%) 1,454,434 30% 207,192 20% 1,115,222 172,541 11% 569,851 24% 136,715 42% 459,071 96,541 December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 30,362,969 94,545,641 28,923,269 88,589,805 15,564,654 49,001,325 14,810,627 42,410,830 Residential Segment Commercial Segment Overall residential origination volumes including renewals 2023 commercial revenues were higher compared to those decreased by 7% between 2022 and 2023 while residential in 2022 and segment income before income taxes increased revenues increased by 30%. Revenue was higher partly due by 42% year over year. The increase in revenue is largely to the impact of gains on financial instruments. Excluding the attributable to higher securitization NIM from the growing impact of these revenues, adjusted revenue increased by 36%. portfolio of securitized mortgages, increased deferred Revenue growth is largely the result of higher interest revenue placement fees and higher interest earned on escrow deposits. on its securitized portfolio which resulted from the higher Together with stable spreads on originated mortgages, revenues interest rate environment over the past two years. Net income flowed through to net income. Identifiable assets increased before tax was also affected by fair value-related revenues. from those at December 31, 2022, as the Company increased Without the impact of these revenues, net income before tax its portfolio of securitized mortgages by about $1.2 billion and increased to $185.5 million in 2023 from $112.2 million in 2022, decreased its commercial hedging assets by $0.5 billion. or by 65%. This is partially the outcome of higher net interest on securitized mortgages which increased $37.2 million year over year as a result of lower prepayment and wider securitization spreads. Income was also favourably affected by higher mortgage servicing income and lower costs of carrying hedges against the Company’s single family commitment obligations. Identifiable assets increased from December 31, 2022 as the Company’s mortgages pledged under securitization increased by about $1.0 billion, mortgages accumulated for securitization increased by $0.3 billion and hedging assets increased by $0.2 billion. 31 First National Financial Corporation 2023 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 effective during the turmoil experienced in 2007 through 2009, and once again at the onset of the Covid-19 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 profitable margins. Originating prime mortgages also allows the Company to securitize in the capital markets; however, this activity requires significant cash resources to purchase and hold mortgages prior to arranging for term debt through the securitization markets. For this purpose, the Company uses the combination of 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 financial institutions for total credit of $1.5 billion. This facility was extended for a year in May 2023 and now matures in March 2028. As at December 31, 2023, the Company had entered into repurchase transactions with financial institutions to borrow $1.5 billion related to $1.6 billion of mortgages held in “mortgages accumulated for sale or securitization” on the balance sheet. At December 31, 2023, outstanding bank indebtedness was $1,083.0 million (December 31, 2022 – $1,065.9 million). This debt was used to fund $1,026.9 million (December 31, 2022 – $833.2 million) of mortgages accumulated for sale or securitization. At December 31, 2023, the Company’s other interest-yielding assets included: (1) deferred placement fees receivable of $73.9 million (December 31, 2022 – $64.6 million) and (2) mortgage and loan investments of $270.9 million (December 31, 2022 – $190.1 million). The Company considers the portion of bank indebtedness and the senior unsecured notes that fund assets other than mortgages accumulated for sale or securitization a proxy for true leverage. This leverage increased between December 31, 2022, and December 31, 2023, and now stands at $654.8 million (December 31, 2022 – $631.9 million). This represents a debt-to-equity ratio of approximately 0.89:1. This ratio decreased from the ratio of 0.90:1 as at December 31, 2022. In general, the Company has maintained a comparable ratio between the two years, increasing both retained earnings and debt in similar proportions. The Company believes the ratio is appropriate given the nature of the assets which the debt is funding. The Company funds a portion of its mortgage originations for institutional placement on the same day as the advance of the related mortgage. The remaining originations are funded by the Company on behalf of institutional investors or pending securitization by the Company. On specified days, the Company aggregates all mortgages warehoused to date for an institutional investor and transacts a settlement with that institutional investor. A similar process occurs prior to arranging for funding through securitization. The Company uses a portion of the committed credit facility with the banking syndicate to fund the mortgages during this warehouse period. The credit facility is designed to be able to fund the highest balance of warehoused mortgages in a month and is normally only partially drawn. 32 First National Financial Corporation 2023 Annual ReportThe Company also invests in short-term mortgages, usually for 6 to 18-month terms, to bridge existing borrowers in the interim period before traditional term financing can be provided. The banking syndicate has provided credit facilities to partially fund these investments. The Company’s mortgage and loan investments also includes a portfolio of single-family mortgages not eligible for securitization. These arise when minor imperfections are discovered on mortgages otherwise originated for securitization. The portfolio comprises largely prime insured mortgages. To the extent these mortgages are financed by bank borrowings, as they repay, the cash will be used to pay down this bank indebtedness. The syndicate has also provided credit to finance a portion of the Company’s deferred placement fees receivable and the origination costs associated with securitization, as well as other longer-term assets. A portion of the Company’s capital has been employed to support its ABCP and NHA-MBS programs, primarily to provide credit enhancements as required by rating agencies. The most significant portion of cash collateral is the investment made on behalf of the Company’s ABCP programs. As at December 31, 2023, the investment in cash collateral was $151.6 million (December 31, 2022 – $160.7 million). The Company’s Board of Directors has elected to pay dividends, when declared, on a monthly basis on the outstanding common shares and on a quarterly basis on the outstanding preference shares. For purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends (and deemed dividends) paid by the Company to Canadian residents on both common and preference shares after June 30, 2010, are designated as “eligible dividends”. Unless stated otherwise, all dividends (and deemed dividends) paid by the Company hereafter are designated as “eligible dividends” for the purposes of such rules. 33 First National Financial Corporation 2023 Annual ReportFinancial Instruments and Risk Management The Company records mortgages accumulated for sale and a portion of mortgage and loan investments as financial assets measured at “fair value through profit or loss” such that changes in market value are recorded in the consolidated statement of income. The mortgages accumulated for sale are held for very short periods, and any change in value due to changing interest rates is the obligation of the ultimate institutional investor. Accordingly, the Company believes there will be little, if any, effect on its income related to the change in fair value of these mortgages. The majority of mortgages in mortgage and loan investments are uninsured commercial segment bridge loans. These are primarily floating rate loans that have mortgage terms of 18 months or less. As the mortgages do not conform to conventional mortgage lending, there are few active quoted markets available to determine the fair value of these assets. The Company estimates fair value based upon: benchmark interest rates, credit spreads for similar products, creditworthiness and status of the borrower, valuation of the underlying real property, payment history, and other conditions specific to the rationale for the loan. Any favourable or unfavourable amounts will be recorded in the statement of income each quarter. The Company believes its hedging policies are suitably designed As described above, the Company employs various strategies such that the interest rate risk of holding mortgages prior to to reduce interest rate risk. In the normal course of business, securitization is mitigated. The Company designates hedging the Company also takes on credit spread risk. This is the relationships such that the results of any effective hedging does risk that the credit spread at which a mortgage is originated not affect the Company’s statement of income. See previous changes between the date of commitment of that mortgage discussion in this MD&A under “Realized and Unrealized and the ultimate date of placement or securitization. If credit Gains (Losses) on Financial Instruments”. As at December 31, spreads widen during this holding period, this is unfavourable 2023, the Company had $1.55 billion of notional forward bond for the Company. It means that the Company cannot fund the positions related to its single-family programs. For multi-unit mortgages originated with a funding source as effectively as residential and commercial mortgages, the Company assumes originally intended. Despite entering into effective interest rate all mortgages committed will fund, and hedges each mortgage hedges, the Company’s exposure to credit spreads will remain. individually. This includes mortgages committed for the CMB This risk is inherent in the Company’s business model and the program as well as mortgages to be sold to the Company’s Company believes it cannot be economically hedged. As at other securitization vehicles. As at December 31, 2023, the December 31, 2023, the Company had various exposures to Company had entered into $0.7 billion of notional value forward changing credit spreads. In particular, in mortgages accumulated bond sales for this segment. The Company is also a party to for sale or securitization, there were approximately $2.5 billion two interest rate swaps that economically hedge the interest of mortgages that were susceptible to some degree of changing rate exposure related to certain CMB transactions in which credit spreads. the Company has replacement obligations. As at December 31, 2023, the aggregate value of these swaps which mature in September 2025 and September 2026, was a $7.6 million liability. During 2023, the fair value of these swaps decreased by $1.9 million. 34 First National Financial Corporation 2023 Annual ReportCapital Expenditures A significant portion of First National’s business model is the origination and placement or securitization of financial assets. Generally, placement activities do not require any capital investment. Securitization transactions may require the investment of significant amounts of the Company’s own capital. This capital is provided in the form of cash collateral, credit enhancements, and the upfront funding of broker fees and other origination costs. These are described more fully in the “Liquidity and Capital Resources” section above. The business requires capital expenditures on technology (both software and hardware), leasehold improvements, and office furniture. During 2023, the Company purchased new computer equipment and software and made leasehold improvements. In the long term, the Company expects capital expenditures on fixed assets will be approximately $10 million annually. Summary of Contractual Obligations The Company’s long-term obligations include leases of premises with terms up to 15 years for its offices across Canada, and its obligations for the ongoing servicing of mortgages sold to securitization conduits and mortgages related to purchased servicing rights. The Company sells its mortgages to securitization conduits on a fully serviced basis and is responsible for the collection of the principal and interest payments on behalf of the conduits, including the management and collection of mortgages in arrears. Payments Due By Period ($000s) Total 0–1  years 1–3  years 4–5  years After 5 years Lease obligations 120,747 10,652 20,672 20,074 69,349 35 First National Financial Corporation 2023 Annual ReportCritical Accounting Policies and Estimates The Company prepares its financial statements in accordance The Company elects to treat certain of its financial assets and with IFRS, which requires management to make estimates, liabilities, including mortgages accumulated for sale, a portion judgments and assumptions that management believes are of mortgage and loan investments and bonds sold short, at reasonable based upon the information available. These fair value through profit or loss. Essentially, this policy requires estimates, judgments and assumptions affect the reported the Company to record changes in the fair value of these amounts of assets and liabilities and disclosure of contingent instruments in the current period’s earnings. A portion of the assets and liabilities at the date of the financial statements, bonds sold short are designated as an effective hedge, and and the reported amounts of revenue and expenses during accordingly, a portion of the change in the short bonds’ fair the reporting period. Management bases its estimates on value may be recorded in Other Comprehensive Income or historical experience and other assumptions that it believes deferred against hedge assets. This accounting has reduced to be reasonable under the circumstances. Management also the volatility in earnings as changes in the value on short evaluates its estimates on an ongoing basis. The significant bonds have been matched to the recognition of the change accounting policies of First National are described in Note 2 to in value of the hedged mortgages. The Company’s assets the Company’s annual consolidated financial statements as at and liabilities are such that the Company must use valuation December 31, 2023. The policies that First National believes are techniques based on assumptions that are not fully supported the most critical to aid in fully understanding and evaluating its reported financial results include the determination of the by observable market prices or rates in most cases. Much like the valuation of deferred placement fees receivable described gains on deferred placement fees and the impact of fair value above, the Company’s method of determining the fair value of accounting on financial instruments. The Company uses estimates in valuing its gain or loss on the sale of its mortgages placed with institutions earning a deferred placement fee. Under IFRS, valuing a gain on deferred placement fees requires the use of estimates to determine the fair value of the retained interest in the mortgages. These retained interests are reflected on the Company’s balance sheet as deferred placement fees receivable. The key assumptions the assets listed above are subject to Company estimates. The most significant would be implicit in the valuation of mortgage and loan investments that are recorded at FVTPL. These are generally non-homogeneous mortgages where it is difficult to find independent valuation comparatives. The Company uses information in its underwriting files, regional real estate information and other internal measures to determine the fair value of these assets. used in the valuation of gains on deferred placement fees are As a mortgage lender, the Company invests in uninsured prepayment rates and the discount rate used to present value mortgages. When it funds these mortgages through future expected cash flows. The annual rate of unscheduled securitization debt, it continues to be liable for any credit losses. principal payments is determined by reviewing portfolio The key inputs in the measurement of any expected credit prepayment experience on a monthly basis. The Company loss (“ECL”) include probability of default, loss given default assumes there is virtually no prepayment on multi-unit and forecast of future economic conditions, which involves residential fixed-rate mortgages. On a quarterly basis, the Company reviews the estimates used to ensure their appropriateness and monitors the performance statistics of the relevant mortgage portfolios to adjust and improve these estimates. The estimates used reflect the expected performance of the mortgage portfolio over the lives of the mortgages. The method of determining the assumptions underlying the estimates used for the year ended December 31, 2023, are consistent with those used for the year ended December 31, 2022, and the quarters ended March 31, June 30, and September 30, 2023. significant 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, credit losses are typically low compared to its securitization portfolio. In 2023, the Company recorded a provision for credit loss provision of $2.3 million. 36 First National Financial Corporation 2023 Annual ReportDisclosure Controls and Internal Control over Financial Reporting ESG The Company issued its initial Public Accountability Statement The Company’s disclosure controls and procedures are designed in the fall of 2021. In November 2023, it issued an updated to provide reasonable assurance that information required to be disclosed by the Company in reports filed under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified under those laws, and include controls and procedures that are designed to ensure that information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, report which explores First National’s approach to sustainability and provides environmental, social and governance disclosure that has been reviewed and approved by the Board of Directors. It complements the Management Information Circular, Annual Information Form, Management Discussion and Analysis and Annual Report, all of which offer information about the financial position, priorities, responsibilities and commitments of the to allow timely decisions regarding required disclosure. consolidated operations of First National. As of December 31, 2023, management evaluated, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, management concluded that the Company’s disclosure controls and procedures, as defined by National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, were effective as of December 31, 2023. Risks and Uncertainties Affecting the Business The business, financial condition and results of operations of the Company are subject to a number of risks and uncertainties and are affected by a number of factors outside the control of management of the Company. In addition to the risks addressed elsewhere in this discussion and the financial statements, Management is responsible for establishing and maintaining these risks include: ability to sustain performance and growth, adequate internal control over financial reporting. Internal reliance on sources of funding, concentration of institutional control over financial reporting is designed to provide investors including third-party servicing customers, reliance reasonable assurance regarding the reliability of financial on independent mortgage brokers, changes in interest rates, reporting and the preparation of financial statements for repurchase obligations and breach of representations and external purposes in accordance with reporting standards; warranties on mortgage sales, risk of servicer termination however, because of its inherent limitations, internal control including the impact of trigger events on cash collateral over financial reporting may not prevent or detect and retained interests, reliance on multi-unit residential and misstatements on a timely basis. commercial mortgages, general economic conditions, legislation Management evaluated, under the supervision of and with the participation by the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and, based on that evaluation, concluded that the Company’s internal control over financial reporting was effective as of December 31, 2023, and that no material weaknesses have been identified in the Company’s internal control over financial reporting as of December 31, 2023. No changes were made in the Company’s internal control over financial reporting during the year ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. and government regulation (including regulations imposed by the Department of Finance and CMHC and the policies set by and for mortgage default insurance companies), potential for losses on uninsured mortgages, competition, reliance on mortgage insurers, reliance on key personnel and the ability to attract and retain employees and executives, conduct and compensation of independent mortgage brokers, failure or unavailability of computer and data processing systems and software, insufficient insurance coverage, change in or loss of ratings, impact of natural disasters and other events, unfavourable litigation, and environmental liability. In addition, there are risks associated with the structure of the Company, including: those related to the dependence on FNFLP, leverage and restrictive covenants, dividends that are not guaranteed and could fluctuate with the Company’s performance, restrictions on potential growth, the market price of the Company’s shares, statutory remedies, control of the Company, and contractual restrictions. The Company is subject to Canadian federal and provincial income and commodity tax laws and pays such taxes as it determines are compliant with such legislation. Among the risks of all potential tax matters, there is a risk that tax legislation changes are detrimental to the Company or that Canadian tax authorities interpret tax legislation differently 37 First National Financial Corporation 2023 Annual Reportthan the Company’s filing positions. Risk and risk exposure are managed through a combination of insurance, a system of internal controls and sound operating practices. The Company’s key business model is to originate primarily prime mortgages and find funding through various channels to earn ongoing servicing or spread income. For the single-family residential segment, the Company relies on 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 8.5% of the Company’s total revenues. Rate hikes by the Bank of Canada in 2022 and 2023 have raised short-term interest rates by 475 basis points. 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 475 basis points with the latest change occurring in early July 2023. These were significant changes that have taken place over a short period of time. Higher borrowing rates will directly affect consumers across the country. Management believes these changes may impact the Company negatively in future periods. Losses related to these risks could be material. For a more complete discussion of the risks affecting the Company, reference should be made to the Company’s Annual Information Form. Forward-Looking Information Forward-looking information is included in this MD&A. In some and will not necessarily be an accurate indication of whether or cases, forward-looking information can be identified by the not, or the times by which, those results will be achieved. While use of terms such as “may”, “will”, ‘“should”, “expect”, “plan”, management considers these assumptions to be reasonable “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, based on information currently available to it, they may prove “continue” or other similar expressions concerning matters to be incorrect. Forward-looking information is subject to that are not historical facts. Forward-looking information certain factors, including risks and uncertainties, which could may relate to management’s future outlook and anticipated cause actual results to differ materially from what management events or results, and may include statements or information currently expects. These factors include reliance on sources regarding the future financial position, business strategy and of funding, concentration of institutional investors, reliance strategic goals, product development activities, projected costs on independent mortgage brokers, and changes in interest and capital expenditures, financial results, risk management rates as outlined in the “Risk and Uncertainties Affecting the strategies, hedging activities, geographic expansion, licensing Business” section. In evaluating this information, the reader plans, taxes and other plans and objectives of or involving the should specifically consider various factors, including the risks Company. Particularly, information regarding growth objectives, outlined in the “Risk and Uncertainties Affecting the Business” any increase in mortgages under administration, future use of section, that may cause actual events or results to differ securitization vehicles, industry trends and future revenues is materially from any forward-looking information. The forward- forward-looking information. Forward-looking information is looking information contained in this discussion represents based on certain factors and assumptions regarding, among management’s expectations as of March 5, 2024, and is subject other things, interest rate changes and responses to such to change after such date. However, management and the changes, the demand for institutionally placed and securitized Company disclaim any intention or obligation to update or mortgages, the status of the applicable regulatory regime, and the use of mortgage brokers for single-family residential revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required mortgages. This forward-looking information should not be under applicable securities regulations. read as providing guarantees of future performance or results, 38 First National Financial Corporation 2023 Annual ReportOutlook 2023 was a very successful year for the Company. Despite two midyear rate hikes by the Bank of Canada (“BoC”) and some economic uncertainty, the Company almost equalled the origination volumes recorded in 2022 and grew MUA to over $143 billion, the highest value in First National’s history. 2023 was a year defined by changing housing markets. The year began with a slow market, partially the consequence of the BoC’s monetary policy decisions which raised overnight interest rates. Mortgage rates rose in tandem and negatively affected housing activity. Toward the second quarter of 2023, there was a pause in the BoC’s interest rate hikes. At the same time, news of regional bank failures in the United States resulted in a significant, albeit temporary, decrease in benchmark interest rates. Against this backdrop, borrowers entered the market and the Company’s mortgage commitments increased significantly. These commitments transformed into mortgage closings in the second and third quarter of 2023. However, at the end of the second quarter the BoC began increasing overnight lending rates again. In its June and July meetings, the BoC raised rates by another 50 basis points in aggregate and reiterated its commitment to lowering inflation. This led to increased mortgage rates and more uncertainly about future interest rates. The Company believes these increases contributed to a much slower housing market during the summer months and accordingly lower volumes were funded in the fourth quarter. While the fourth quarter of 2023 was a slower period for single-family segment origination, the commercial segment posted a record for quarterly originations. Throughout the year, the Company continued to build its portfolio of mortgages pledged under securitization. It will benefit from both MUA and the securitized portfolio in the future: earning income from mortgage administration, net securitization margin and improving its position to capture increased renewal opportunities. In the short term, the Company expects significantly lower single-family origination to start 2024 than in the 2023 comparative quarters due to persistent housing affordability challenges and an increasingly competitive marketplace. Although economic indicators have shown decreasing rates of inflation, it is still above the BoC’s target rate of 2% and accordingly, the BoC has yet to reverse any of its recent rate hikes. Prevailing market conditions have affected prospective buyers such that like the last quarter of 2023, the start of 2024 will show reduced activity. In the longer term, higher immigration levels are expected to support demand in the housing market. For its commercial segment, the Company anticipates a strong start for origination as recent government announcements have supported the creation of multi-unit housing. These initiatives, including the increase of the CMB program from $40 to $60 billion, provide a stable market for the Company’s borrowers to use CMHC insured mortgages for funding. In both business segments, management is confident that First National will remain a competitive leader in the marketplace. 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 investors and solid securitization markets, the Company has access to consistent and reliable sources of funding. The Company is confident that its strong relationships with mortgage brokers and diverse funding sources will continue to set First National apart from its competition. The Company will continue to generate income and cash flow from its $39 billion portfolio of mortgages pledged under securitization and $101 billion servicing portfolio and focus on the value inherent in its significant single-family renewal book. 39 First National Financial Corporation 2023 Annual ReportManagement’s Responsibility for Financial Reporting The management of First National Financial Corporation end and the Company has disclosed in its annual MD&A our (the “Company”) is responsible for the integrity, consistency conclusion about the effectiveness of internal control over and reliability of the consolidated financial statements financial reporting at the financial year-end based on that and Management’s Discussion and Analysis (“MD&A”). The evaluation. We have also disclosed in the MD&A any change in consolidated financial statements have been prepared by our internal control over financial reporting that occurred during Management in accordance with International Financial the year that has materially affected, or is reasonably likely to Reporting Standards. materially affect, our internal control over financial reporting. We certify that we have reviewed the financial statements and information contained in the MD&A, and, based on our knowledge, they do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the statements and the annual report. Based on our knowledge, the financial statements together with MD&A and other financial information included in the annual report fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of the dates and for the periods presented. The preparation of financial statements involves transactions affecting the current period which cannot be finalized with certainty until future periods. Estimates and assumptions are based on historical experience and current conditions, and are believed to be reasonable. We are responsible for establishing and maintaining internal control over financial reporting for the Company. We have designed such internal control over financial reporting, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for The Board of Directors oversees that management fulfils its responsibility for financial reporting and internal control. The financial statements have been reviewed by the Audit Committee and approved by the Board of Directors. Ernst & Young LLP, the independent auditors appointed by the shareholders, has performed an independent audit of the Company’s consolidated financial statements and provide their report which follows. The auditors have full and free access to, and meet at least quarterly with, the Audit Committee to discuss their audit and related matters. Jason Ellis President and Chief Executive Officer Robert Inglis Chief Financial Officer external purposes. We evaluated, or caused to be evaluated March 5, 2024 under our supervision, the effectiveness of the Company’s internal control over financial reporting at the financial year 40 First National Financial Corporation 2023 Annual Report Independent auditor’s report To the Shareholders of First National Financial Corporation Report on the audit of the consolidated financial statements Opinion We have audited the consolidated financial statements of First National Financial Corporation and its subsidiaries [collectively, Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial the “Company”], which comprise the consolidated statements statements of the current period. These matters were addressed of financial position as at December 31, 2023 and December 31, in the context of the audit of the financial statements as a 2022, and the consolidated statements of income, comprehensive whole, and in forming the auditor’s opinion thereon, and we income, changes in equity and cash flows for the years then do not provide a separate opinion on these matters. For each ended, and notes to the consolidated financial statements, matter below, our description of how our audit addressed the including a summary of material accounting policy information. matter is provided in that context. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2023 and December 31, 2022, and its consolidated financial We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of performance and its consolidated cash flows for the years then procedures designed to respond to our assessment of the ended in accordance with International Financial Reporting risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. Standards [“IFRSs”]. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 41 First National Financial Corporation 2023 Annual ReportMeasurement of estimated credit losses As more fully described in note 2 and note 3 to the financial statements, the Company is exposed to credit risk on its mortgage assets. In 2023 the Company has recorded an allowance for credit losses of $5,808 thousand. The Company manages credit risk by employing underwriting policies and procedures designed to minimize exposure to credit losses, and by acquiring insurance against borrower default on substantially all its mortgages. The Company’s expected credit loss [“ECL”] impairment analysis considers a range of possible outcomes supported by past loss events, current conditions and an expectation of future possible outcomes. The allowance for credit losses was identified 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 effectiveness of their credit management strategies in minimizing future credit losses as well as make a forecast of possible future economic conditions and consider the impact of each on their critical assumptions. Variations in the key assumptions and key data inputs described can have a material effect on the measurement of ECL for each loan underwritten by the Company. We obtained an understanding of management’s controls over exposure to credit risk, including mortgage underwriting policies and processes used to assess borrower capacity, income verification, creditworthiness and collateral. We tested the operating effectiveness of these controls by assessing for a sample of mortgages originated and funded, compliance with management’s underwriting policy and processes and eligibility, when arranged, for insurance against borrower default based on criteria of the mortgage default insurer. For the purpose of auditing the allowance for credit losses, among other procedures, • We tested the accuracy of the Company’s historic default and write-off data and evaluated management’s ECL impairment analysis, by obtaining the Company’s historical data. • We tested management’s data and model by obtaining contrary data from independent sources, to develop a range for the estimated ECL on the uninsured portfolio of mortgages held at amortized cost. • With the assistance of our credit risk specialists, we also evaluated management’s methodology and governance over the application of expert credit judgment by evaluating that the amounts recorded were reflective of underlying credit quality and macroeconomic trends. • We compared our range to management’s estimate of allowance for credit losses. • We also assessed the adequacy of the Company’s disclosures on the management of credit risk. 42 First National Financial Corporation 2023 Annual ReportOther information Management is responsible for the other information. The other information comprises: • Management’s Discussion and Analysis • The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. 43 First National Financial Corporation 2023 Annual ReportAuditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about • Evaluate the overall presentation, structure, and content whether the consolidated financial statements as a whole of the consolidated financial statements, including the are free from material misstatement, whether due to fraud or disclosures, and whether the consolidated financial error, and to issue an auditor’s report that includes our opinion. statements represent the underlying transactions and Reasonable assurance is a high level of assurance, but is not a events in a manner that achieves fair presentation. guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Company’s audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. appropriate in the circumstances, but not for the purpose We describe these matters in our auditor’s report unless law or of expressing an opinion on the effectiveness of the Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. • Conclude on the appropriateness of management’s use of The engagement partner on the audit resulting in this the going concern basis of accounting and, based on the independent auditor’s report is Humayun Jafrani. audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Toronto, Canada March 5, 2024 44 First National Financial Corporation 2023 Annual Report Consolidated statements of financial position As at December 31 (in thousands of Canadian dollars) Notes 2023 2022 Assets Restricted cash Cash held as collateral for securitization Accounts receivable and sundry Mortgages accumulated for sale or securitization Mortgages pledged under securitization Deferred placement fees receivable Mortgage and loan investments Income taxes recoverable Securities purchased under resale agreements Other assets Total assets Liabilities and equity Liabilities Bank indebtedness Obligations related to securities and mortgages sold under repurchase agreements Accounts payable and accrued liabilities Securities sold short Debt related to securitized mortgages Senior unsecured notes Income taxes payable Deferred income tax liabilities Total liabilities Common shares Preferred shares Retained earnings Accumulated other comprehensive 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 18 17 17 550,842 151,557 133,264 2,583,634 39,427,192 73,904 270,921 — 2,653,376 112,709 605,708 160,712 114,675 2,251,194 37,285,822 64,648 190,122 18,460 2,953,188 119,143 45,957,399 43,763,672 1,083,000 1,065,868 1,524,192 285,344 2,649,249 1,360,947 246,486 2,954,374 38,880,798 36,888,395 598,745 47,408 150,900 399,222 — 149,400 45,219,636 43,064,692 122,671 97,394 477,799 39,899 737,763 122,671 97,394 418,244 60,671 698,980 45,957,399 43,763,672 45 First National Financial Corporation 2023 Annual Report Consolidated statements of income Years ended December 31 (in thousands of Canadian dollars, except earnings per share) Notes 2023 2022 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 financial instruments Expenses Brokerage fees Salaries and benefits Interest Other operating Income before income taxes Income tax expense Net income for the year Earnings per share Basic See accompanying notes 1,336,063 (1,119,475) 216,588 248,313 25,307 139,929 252,552 22,121 904,810 139,199 200,489 153,407 67,808 560,903 343,907 91,100 252,807 908,569 (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 4.15 3.25 3 4 6 19 18 17 46 First National Financial Corporation 2023 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 (losses) from change in fair value of cash flow hedges Reclassification of net losses (gains) to income Income tax recovery (expense) Total other comprehensive income (losses) Total comprehensive income See accompanying notes Notes 18 2023 252,807 (6,548) (21,724) (28,272) 7,500 (20,772) 232,035 2022 197,732 123,327 (30,477) 92,850 (24,550) 68,300 266,032 Consolidated statements of changes in equity Years ended December 31 (in thousands of Canadian dollars) Common shares Preferred shares Retained earnings Accumulated other comprehensive income Total equity Balance as at January 1, 2023 122,671 97,394 418,244 60,671 698,980 Net income for the year Other comprehensive income Dividends paid or declared — — — — — — 252,807 — 252,807 — (20,772) (20,772) (193,252) — (193,252) Balance as at December 31, 2023 122,671 97,394 477,799 39,899 737,763 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 — (144,462) — 197,732 68,300 68,300 — (144,462) Balance as at December 31, 2022 122,671 97,394 418,244 60,671 698,980 See accompanying notes 47 First National Financial Corporation 2023 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 Provision for deferred income taxes Non-cash portion of gains on deferred placement fees Decrease in restricted cash 2023 2022 252,807 197,732 9,000 (24,551) 54,866 36,850 (14,490) 210,099 Net investment in mortgages pledged under securitization (2,067,552) (1,953,607) Net increase in debt related to securitized mortgages Securities purchased under resale agreements, net Securities sold short, net Amortization of deferred placement fees receivable Amortization of property, plant and equipment Unrealized losses (gains) on financial instruments Net change in non-cash working capital balances related to operations Cash provided by (used in) operating activities Investing activities Additions to property, plant and equipment Repayment (investment) in 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 Issuance of senior unsecured notes Cash provided by (used in) financing 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 See accompanying notes 48 1,918,585 299,812 (409,690) 15,295 14,160 70,078 132,810 (236,316) (103,506) (6,200) 9,155 (929,146) 848,744 (77,447) 1,415,282 (275,216) 420,370 14,212 13,622 (49,607) 15,247 493,910 509,157 (12,380) (55,604) (1,306,771) 1,321,883 (52,872) (192,884) (144,012) 163,245 (5,628) 199,088 163,821 (17,132) (1,065,868) (1,083,000) (407,082) (5,639) — (556,733) (100,448) (965,420) (1,065,868) 1,526,201 1,139,276 16,230 1,073,914 773,905 44,225 First National Financial Corporation 2023 Annual ReportNotes to Consolidated Financial Statements [in thousands of Canadian dollars, unless otherwise indicated] December 31, 2023 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 $143 billion in mortgages under administration as at December 31, 2023, FNFLP is a significant participant in the mortgage broker distribution channel. The Corporation is incorporated under the laws of the Province of Ontario, Canada and has its registered office and principal place of business located at 16 York Street, Toronto, Ontario. The Corporation’s common and preferred shares are listed on the Toronto Stock Exchange under the symbols FN, FN.PR.A and FN.PR.B, respectively. 2. Material accounting policy information [a] Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards [“IFRS”]. The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and certain financial assets and financial liabilities that are recorded at fair value through profit or loss [“FVTPL”] and measured at fair value. The carrying values of recognized assets and liabilities that are designated as hedged items in fair value hedges, and that would otherwise be carried at amortized cost, are adjusted to record changes in fair value attributable to the risks that are being mitigated in effective hedge relationships. The consolidated financial statements are presented in Canadian dollars and all values are rounded to the nearest thousand except when otherwise indicated. The consolidated financial statements were authorized for issue by the Board of Directors on March 5, 2024. 49 First National Financial Corporation 2023 Annual Report[b] Basis of consolidation The consolidated financial statements comprise the financial [c] Use of estimates The preparation of consolidated financial statements in statements of the Company and its subsidiaries, including conformity with IFRS requires management to make estimates FNFLP, First National Financial GP Corporation [“GP”, the and assumptions that affect the reported amounts of assets general partner of FNFLP], FNFC Trust, a special purpose and liabilities, including contingencies, at the date of the entity [“SPE”] which is used to manage undivided co ownership consolidated financial statements and the reported amounts interests in mortgage assets funded with Asset-Backed of revenue and expenses during the reporting period. Actual Commercial Paper [“ABCP”], First National Asset Management results may differ from those estimates. Major areas requiring Inc. [“FNAM”], and First National Mortgage Corporation. use of estimates by management are those that require reporting of financial assets and financial liabilities at fair value. FNAM is a wholly owned subsidiary of the GP, and an indirect subsidiary of the Company. FNAM is a NHA approved lender and NHA-MBS issuer in the capacity of an “aggregator”. Its business model is to purchase mortgages from mortgage originators in order to create NHA-MBS pools, and subsequently [d] Material accounting policy information Financial instruments The Company accounts for its financial assets and liabilities sell these into the Canada Mortgage Bonds programs [“CMB”]. in accordance with IFRS 9, Financial Instruments [“IFRS 9”]. The Company earns interest income from the retained interest related to mortgages transferred to four special purpose entities which the Company does not control. The SPEs are sponsored by third-party financial institutions which acquire assets from various sellers including mortgages from the Company. As at December 31, 2023, the Company recorded, on its consolidated statements of financial position, its portion of the assets of the SPEs amounting to $3,438 million [2022 – $3,119 million]. The Company also recorded, in its consolidated statements of income, interest revenue – securitized mortgages of $163,477 [2022 – $87,258] and interest expense – securitized mortgages of $128,836 [2022 – $62,816] related to its interest in the SPEs.  The consolidated financial statements have been prepared using consistent accounting policies for like transactions and other events in similar circumstances. All intercompany assets and liabilities, equity, income, expenses and cash flows relating to transactions between these companies are eliminated in full on consolidation. Classification and measurement of financial assets The Company classifies its financial assets as either amortized cost or at FVTPL as summarized below: Securities purchased under resale agreements Amortized cost Mortgages accumulated for securitization Amortized cost Mortgages accumulated for sale FVTPL Mortgages pledged under securitization Amortized cost Mortgage and loan investments – commercial segment FVTPL Mortgage and loan investments – residential segment other than one specific portfolio of residential mortgages A portfolio of residential mortgages in Mortgage and loan investment Amortized cost FVTPL Deferred placement fees receivable Amortized cost Classification and measurement of financial liabilities The Company classifies its financial liabilities as either amortized cost or at FVTPL as summarized below: Obligations related to securities and mortgages sold under repurchase agreements Securities sold short Amortized cost FVTPL Debt related to securitized mortgages Amortized cost Servicing liabilities Senior unsecured notes Amortized cost Amortized cost 50 First National Financial Corporation 2023 Annual ReportImpairment The expected credit loss [“ECL”] impairment model applies Cash flow hedges The Company applies cash flow hedge accounting for the to all financial assets classified as amortized cost or FVOCI, anticipated funding of its multi-unit residential commercial as well as certain off-balance sheet loan commitments. The segment mortgages. At the time of mortgage commitment, the IFRS 9 ECL approach has three stages: Stage 1 – the credit risk Company shorts Government of Canada bonds as the hedging has not increased significantly since initial recognition such instrument to hedge the cash flows on the anticipated future that an allowance for credit loss is recognized and maintained debt to be arranged through securitization of these mortgages equal to 12 months of expected credit loss; Stage 2 – the obtained through CMB, disclosed as debt related to securitized credit risk has increased significantly since initial recognition, mortgages. The Company also uses the same hedging strategy and the allowance for credit loss is increased to cover full when placing mortgages with institutional investors who plan lifetime expected credit loss; and Stage 3 – a financial asset to use CMB funding. The effective portion of the change in the is considered credit impaired and the allowance for credit fair value of the designated hedging instrument qualifying as a loss continues to be the full lifetime expected credit loss, with cash flow hedge is recognized in other comprehensive income interest revenue calculated on the carrying amount [net of the [“OCI”] in the consolidated statements of comprehensive allowance for credit loss], rather than the gross carrying value income. When the hedge relationship is terminated, the of the financial assets. The Company assesses the credit risk of the mortgages based on the expected repayments of principal and interest. All mortgages with arrears that are less than 31 days past due are included in Stage 1 whereas mortgages with principal in arrears between 31 to 90 days are included in Stage 2. While mortgages in these two stages are not considered to be impaired, the Company recognizes a 12-month ECL for Stage 1 mortgages and a lifetime ECL for Stage 2 mortgages. When a mortgage is in arrears for over 90 days or the Company has issued a legal demand for repayment, there is a specific expectation of a detrimental impact on the estimated cash flows and, therefore, the Company considers the mortgages as impaired and includes them in Stage 3. The key inputs in the measurement of ECL include Probability of Default, Loss Given Default and forecast of future economic conditions, which involve significant judgement. Hedge accounting The Company applies IFRS 9 hedge accounting for certain mortgage commitments and funded mortgages. The Company uses a combination of short Government of Canada bonds and bond repo arrangements to manage exposure to interest rate risk associated with mortgage commitments and funded mortgages held prior to securitization. In addition, the Company uses interest rate swaps to manage exposure to interest rate risk for mortgages in SPEs. The Company documents a hedging relationship between the hedging instrument and the hedged item at inception when the relationship is established. The Company also assesses the effectiveness of the hedges at both the hedge inception and on an ongoing basis. Any ineffectiveness of any hedging relationship is recognized immediately in the consolidated statements of income. cumulative amounts recognized in OCI are amortized into interest expense – securitized mortgages over the term of the securitized debt, or amortized against placement fees from institutional investors. Any change in fair value of the hedge determined as ineffective is recognized immediately in the consolidated statements of income. Fair value hedges The Company enters into interest rate swaps to protect against changes in the fair value of fixed rate mortgages funded by ABCP debt. The Company also shorts Government of Canada bonds to manage interest rate exposure for a portion of single-family mortgage commitments and funded residential mortgages accumulated for securitization. The Company applies hedge accounting for the swaps. For the short bond hedges, the Company documents a hedging relationship during the period when the mortgages are funded until the date they are securitized or placed with an arm’s length investor. The Company does not apply hedge accounting to the short bonds used to mitigate interest risk on single-family mortgage commitments. The Company’s policy is not to utilize derivative financial instruments for trading or speculative purposes. In the case of the swaps and short bonds used to hedge funded mortgages, changes in fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by changes in the fair value of the hedging instrument, both of which are recognized in the consolidated statements of income. At hedge unwind, the realized 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 ineffective hedge are immediately recorded in the consolidated statements of income. 51 First National Financial Corporation 2023 Annual ReportRevenue recognition The Company earns revenue from placement, securitization and servicing activities related to its mortgage business. The majority of originated mortgages are sold to institutional investors through the placement of mortgages or funded through securitization conduits. The Company retains servicing rights on substantially all of the mortgages it originates, providing the Company with servicing fees. Interest revenue and expense from mortgages pledged under securitization The Company enters into securitization transactions to fund a portion of the mortgages it has originated. Upon transfer of these mortgages to securitization vehicles, the Company receives cash proceeds from the transaction. These proceeds are accounted for as debt related to securitized mortgages and the Company continues to hold the mortgages on its consolidated statements of financial position, unless: [i] substantially all of the risks and rewards associated with the financial instruments have been transferred, in which case the assets are derecognized in full; or [ii] a significant portion, but not all, of the risks and rewards have been transferred. The asset is derecognized entirely if the transferee has the ability to sell the financial asset; otherwise the asset continues to be recognized to the extent of the Company’s continuing involvement. Where [i] or [ii] above applies to a fully proportionate share of all or specifically identified cash flows, the relevant accounting treatment is applied to that proportion of the mortgage. For securitized mortgages that do not meet the criteria for derecognition, no gain or loss is recognized at the time of the transaction. Instead, net interest income is recognized over the term of the mortgages. Interest revenue – securitized mortgages represents the interest portion of mortgage payments received and accrued by borrowers and is net of the amortization of capitalized origination costs. Interest expense – securitized mortgages represents the costs to finance these mortgages, net of the amortization of debt discounts and premiums. Capitalized origination fees and debt discounts or premiums are amortized on an effective yield basis over the term of the related mortgages or debt. 52 First National Financial Corporation 2023 Annual ReportDerecognition A financial asset is derecognized when: • The right to receive cash flows from the asset has expired; or • The Company has transferred its rights to receive cash flows from the assets or has assumed an obligation to pay the cash flows, received in full without material delay to a third party under a “pass-through” arrangement; and either [a] the Company has transferred substantially all the risks and rewards of the asset; or [b] the Company has neither transferred nor retained substantially all of the risks and rewards of the asset, but has transferred control of the asset. Placement fees and deferred placement fees receivable The Company enters into placement agreements with institutional investors to purchase the mortgages it originates. When mortgages are placed with institutional investors, the Company transfers the contractual right to receive mortgage cash flows to the investors. Because it has transferred substantially all the risks and rewards of these mortgages, it derecognizes these assets. The Company retains a residual interest representing the rights and obligations associated with servicing the mortgages. Placement fees are earned by the Company for its origination and underwriting activities on a completed transaction basis when the mortgage is funded. Amounts 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 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 servicing income when services are rendered. For mortgages placed under deferred placement arrangements, the Company retains the rights and obligations to service the mortgages. The deferred placement fees receivable is the present value of the excess retained cash flows over market servicing fee rates and is reported as deferred placement revenue at the time of placement. Servicing income related to mortgages placed with institutional investors is recognized in income over the life of the servicing obligation as payments are received from mortgagors. Interest income earned by the Company from holding cash in trust related to servicing activities is classified as mortgage servicing income. The amortization of any servicing liabilities is also recorded as mortgage servicing income. The Company provides underwriting and fulfillment processing services for mortgages originated by two large Canadian banks through the mortgage broker distribution channel. The Company recognizes servicing income when the services are rendered and the underwritten mortgages have been funded. Mortgage investment income The Company earns interest income from its interest-bearing assets including deferred placement fees receivable, mortgage and loan investments and mortgages accumulated for sale or securitization. Mortgage investment income is recognized on fees receivable. Since quoted prices are generally not available an accrual basis. for retained interests, the Company estimates values based on the net present value of future expected cash flows, calculated using management’s best estimates of key assumptions related to expected prepayment rates and discount rates commensurate with the risks involved. 53 First National Financial Corporation 2023 Annual ReportBrokerage fees Brokerage fees are primarily fees paid to external mortgage Securities sold short and securities purchased under resale agreements brokers. Brokerage fees relating to mortgages placed with institutional investors are expensed as incurred, and those relating to mortgages recorded at amortized cost are capitalized to the carrying cost of the related mortgages and amortized over the term of the mortgages. Mortgages pledged under securitization Mortgages pledged under securitization are mortgages that the Company has originated and funded with debt raised through the securitization markets and have been classified at amortized Securities sold short consist typically of the short sale of Government of Canada bonds. Bonds purchased under resale agreements consist of the purchase of a bond with the commitment from the Company to resell the bond to the original seller at a specified price. The Company uses the combination of bonds sold short and bonds purchased under resale agreements to economically hedge its mortgage commitments and the portion of funded mortgages that it intends to securitize in subsequent periods. cost. The Company has a continuous involvement in these Bonds sold short are classified as FVTPL and are recorded at fair mortgages, including the right to receive future cash flows arising value. The effective yield payable on bonds sold short is recorded from these mortgages. Origination costs, such as brokerage fees as hedge expense in other operating expenses. Bonds purchased and bulk insurance premiums that are directly attributable to the under resale agreements are carried at cost plus accrued interest, acquisition of such assets, are deferred and amortized over the which approximates their market value. The difference between term of the mortgages on an effective yield basis. the cost of the purchase and the predetermined proceeds to be Debt related to securitized mortgages Debt related to securitized mortgages represents obligations related to the financing of mortgages pledged under securitization. This debt is measured at its amortized cost using received on a resale agreement is recorded over the term of the hedged mortgages as an offset to hedge expense. Transactions are recorded on a settlement date basis. Mortgage and loan investments the effective yield method. Any discount/premium and issuance Mortgage and loan investments consists of two portfolios: costs on raising these debts that is directly attributable to a portfolio of commercial segment bridge and mezzanine obtaining such liabilities is deferred and amortized over the loans and a portfolio of residential segment mortgages. Both term of the debt obligations. Mortgages accumulated for sale or securitization Mortgages accumulated for sale are mortgages funded pending subsequent settlement with institutional investors and are classified as FVTPL and recorded at fair value. These mortgages are held for terms usually not exceeding 90 days. commercial segment and residential segment mortgages are non-derivative financial assets with fixed or determinable payments. The Company classifies the mortgages as FVTPL or at amortized cost 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 Mortgages accumulated for securitization are mortgages at amortized cost. funded pending the arrangement of term debt through the Company’s various securitization programs and are measured at amortized cost. Leases The Company measures right-of-use assets at cost. The right- of-use assets are subsequently amortized using the straight-line method. The right-of-use assets are also subject to impairment. Lease liabilities are calculated using the present value of future lease payments, discounted at the Company’s incremental borrowing rate. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. The Company’s major leases are for premises at its Toronto head office and four regional offices. The Company has elected not to recognize right-of-use assets and a lease liability for its various office equipment leases, which are insignificant for application of the standard. 54 First National Financial Corporation 2023 Annual ReportProperty, plant and equipment Property, plant and equipment is recorded at cost and depreciated over the estimated useful life of the assets on a straight-line basis. Computer equipment Office equipment Leasehold improvements Computer software 3 years 5 years 1 – 10 years 5 – 10 years Property, plant and equipment are subject to an impairment review if there are events or changes in circumstances that indicate the carrying amount may not be recoverable. Goodwill Goodwill represents the price paid for the Company’s business in excess of the fair value of the net tangible assets and identifiable intangible assets acquired in connection with the IPO. Goodwill is reviewed annually for impairment or more frequently when an event or change in circumstances indicates that the asset might be impaired. Restricted cash Restricted cash represents principal and interest collected on mortgages pledged under securitization that is held in trust until the repayment of debt related to these mortgages is made in a subsequent period. Bank indebtedness Bank indebtedness consists of bank loans net of cash balances or deposit with banks. Cash held as collateral for securitization Cash held as collateral for securitization represents cash-based credit enhancements held by various securitization vehicles, including FNFC Trust and a Canadian Trust Company acting as the title custodian for the Company’s NHA-MBS program. 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 flows, calculated using management’s best estimates of key assumptions related to expected prepayment rates and discount rates commensurate with the risks involved. The Company earns the related servicing fees over the term of the mortgages on an effective yield basis. 55 First National Financial Corporation 2023 Annual ReportIncome taxes 3. Mortgages pledged under securitization 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 The Company securitizes residential and commercial mortgages in order to raise debt to fund these mortgages. Most of these securitizations consist of the transfer of fixed and floating laws and income tax rates substantively enacted as at the dates rate mortgages into securitization programs, such as ABCP, of the consolidated statements of financial position. The income 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, 2023, the cash held as collateral for securitization was $151,557 [2022 – $160,712]. tax provision consists of current income taxes and deferred income taxes. Current and deferred taxes relating to items in the Company’s equity are recorded directly against equity. Current income taxes are amounts expected to be payable or recoverable as the result of operations in the current year and any adjustment to tax payable or tax recoverable amounts recorded in previous years. Deferred income taxes arise on temporary differences between the carrying amounts of assets and liabilities on the consolidated statements of financial position and their tax bases. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that future realization of the tax benefit is probable. Deferred taxes are calculated using the tax rates expected to apply in the periods in which the assets will be realized or the liabilities settled. Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income taxes levied by the same taxation authority, and when a legal right to offset exists in the entity. Earnings per common share 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. 56 First National Financial Corporation 2023 Annual ReportThe following table compares the carrying amount of mortgages pledged for securitization and the associated debt: 2023 Securitized mortgages Capitalized amounts related to hedge accounting Capitalized origination costs Debt discounts Add Principal portion of payments recorded in restricted cash 2022 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 ($) 39,264,199 (41,212) 204,205 — 39,427,192 473,080 39,900,272 Carrying amount of securitized mortgages ($) 37,127,747 (46,173) 204,248 — 37,285,822 541,618 37,827,440 The principal portion of payments held in restricted cash represents payments on account of mortgages pledged under securitization which has been received at year- end but has not yet been applied to reduce the associated debt. This cash is applied to pay down the debt in the month subsequent to collection. In order to compare the components of mortgages pledged under securitization to securitization debt, this amount is added to the carrying value of mortgages pledged under securitization in the above table. Mortgages pledged under securitization have been classified as amortized cost and are carried at par plus adjustment for unamortized origination costs and amounts related to hedge accounting. Carrying amount of associated liabilities ($) (39,300,233) (19,103) — 438,538 (38,880,798) — (38,880,798) Carrying amount of associated liabilities ($) (37,281,919) — — 393,524 (36,888,395) — (36,888,395) 57 First National Financial Corporation 2023 Annual ReportThe changes in capitalized origination costs for the years ended December 31 are summarized as follows: Opening balance, January 1 Add new origination costs capitalized in the year Less amortization in the year Ending balance, December 31 2023 ($) 204,248 91,120 (91,163) 204,205 2022 ($) 198,358 101,302 (95,412) 204,248 During the year ended December 31, 2023, the Company invested in mortgages that were transferred into the securitization vehicles with principal balances as at December 31, 2023 of $9,321,681 [2022 – $8,628,395]. The contractual maturity profile of the mortgages pledged under securitization programs is summarized as follows: 2024 2025 2026 2027 2028 and thereafter ($) 6,021,009 6,688,736 7,982,548 6,329,548 12,242,358 39,264,199 The following table summarizes the mortgages pledged under securitization that are 31 days or more past due as at December 31: Arrears days 31 to 60 61 to 90 Greater than 90 All the mortgages listed above are insured, except for 29 mortgages which are uninsured and have a principal balance of $16,985 as at December 31, 2023 [2022 – 14 mortgages, $7,555]. The Company’s exposure to credit loss is limited to uninsured mortgages with principal balances totaling $4,851,746 [2022 – $4,433,482], before consideration of the value of underlying collateral. Approximately one half of the uninsured mortgages are conventional prime single-family mortgages, with loan to value ratios of 80% or less. The Company has provided an allowance for expected credit losses of $5,808 as of December 31, 2023 [2022 – $3,485] related to mortgages pledged under securitization. 58 2023 ($) 2022 ($) 4,683 3,692 9,868 18,243 4,712 3,343 905 8,960 First National Financial Corporation 2023 Annual Report4. Deferred placement fees receivable The Company enters into transactions with institutional investors to sell primarily fixed- rate mortgages in which placement fees are received over time as well as at the time of the mortgage placement. These mortgages are derecognized when substantially all of the risks and rewards of ownership are transferred and the Company has minimal exposure to the variability of future cash flows from these mortgages. The investors have no recourse to the Company’s other assets for failure of mortgagors to make payments when due. Deferred placement fees receivable are classified as amortized cost and are initially determined based on the present value of the anticipated future stream of cash flows. This determination assumes there will be no credit losses, commensurate with the credit quality of the investors. It is also assumed that there will be no prepayment for the commercial segment as borrowers cannot refinance for financial advantage without paying the Company a fee commensurate with the value of its investment in the mortgage. The effect of variations, if any, between actual experience and assumptions will be recorded in future consolidated statements of income but is expected to be minimal. 2023 Mortgages placed with institutional investors Gains on deferred placement fees created Cash receipts on deferred placement fees received 2022 Mortgages placed with institutional investors Gains on deferred placement fees created Cash receipts on deferred placement fees received Residential ($) Commercial ($) Total ($) — — 346 5,460,050 5,460,050 25,307 18,246 25,307 18,592 Residential ($) Commercial ($) — — 419 3,218,988 15,043 16,500 Total ($) 3,218,988 15,043 16,919 The Company estimates that the expected undiscounted cash flows to be received on the deferred placement fees receivable will be as follows: Residential ($) Commercial ($) Total ($) 2024 2025 2026 2027 2028 and thereafter 316 266 130 –– –– 712 19,390 16,968 13,748 11,523 23,314 84,943 19,706 17,234 13,878 11,523 23,314 85,655 59 First National Financial Corporation 2023 Annual Report5. Mortgages accumulated for sale or securitization Mortgages accumulated for sale or securitization consist of mortgages the Company has originated for its own securitization programs, together with mortgages funded in advance of settlement with institutional investors. Mortgages originated for the Company’s own securitization programs are classified as amortized cost and are recorded at par plus adjustment for unamortized origination costs. Mortgages funded for placement with institutional investors are designated as FVTPL and are recorded at fair value. The fair values of mortgages classified as FVTPL approximate their carrying values as the time period between origination and sale is short. The following table summarizes the components of mortgages according to their classification: Mortgages accumulated for securitization Mortgages accumulated for sale 2023 ($) 2022 ($) 2,556,521 27,113 2,583,634 2,226,825 24,369 2,251,194 The Company’s exposure to credit loss is limited to $396,402 [2022 – $491,786] of principal balances of uninsured mortgages within mortgages accumulated for securitization, before consideration of the value of underlying collateral. As at December 31, 2023, 14 of these mortgages are in arrears past 31 days, with a total principal balance of $6,524 [2022 – three mortgages with a balance of $1,330]. These are primarily conventional prime single-family mortgages similar to the mortgages described in note 3. Accordingly, the expected credit loss related to these mortgages is insignificant. 60 First National Financial Corporation 2023 Annual Report6. Mortgage and loan investments Mortgage and loan investments consist of two portfolios: commercial first and second mortgages held for various terms, the majority of which mature within one year; and residential first mortgages which are held to maturity. Except for a portion of the residential loan portfolio that is classified 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 classified at amortized cost has a total balance of $45,327 as at December 31, 2023 which is subject to expected credit loss. The Company recorded fair value gains related to the commercial segment investments of $397 [2022 – losses of $710] for the year ended December 31, 2023. The following table discloses the composition of the Company’s portfolio of mortgage and loan investments by geographic region as at December 31, 2023: Province/Territory Alberta British Columbia Manitoba New Brunswick Newfoundland and Labrador Nova Scotia Ontario Quebec Saskatchewan Yukon Portfolio balance ($) Percentage of portfolio (%) 54,228 41,562 469 157 119 6,854 148,986 17,710 749 87 270,921 20.02 15.34 0.17 0.06 0.04 2.53 54.99 6.54 0.28 0.03 100.00 The following table discloses the mortgages that are past due as at December 31: 2023 ($) 2022 ($) Arrears days 31 to 60 61 to 90 Greater than 90 1,822 456 161 2,439 The portfolio contains $21,837 [2022 — $11,577] of insured mortgages and $249,084 [2022 — $178,545] of uninsured mortgage and loan investments as at December 31, 2023. Of the uninsured mortgages, approximately $2,439 [2022 — $1,006] have principal balances in arrears of more than 30 days. 54 — 952 1,006 61 First National Financial Corporation 2023 Annual ReportThe maturity profile of the principal amount of the loans in the table below is based on the earlier of contractual renewal or maturity dates: Residential Commercial 2024 ($) 37,808 166,119 203,927 2025 ($) 10,146 8,705 18,851 2023 2022 2026 ($) 2027 ($) 2028 and thereafter ($) Total ($) 15,890 23,313 8,940 96,097 — — — 174,824 15,890 23,313 8,940 270,921 Total ($) 56,709 134,068 190,777 Interest income earned for the year was $15,645 [2022 – $17,311] and is included in mortgage investment income on the consolidated statements of income. 7. Other assets The components of other assets are as follows as at December 31: Property, plant and equipment, net Right-of-use assets Goodwill 2023 ($) 2022 ($) 36,285 46,648 29,776 112,709 39,993 49,374 29,776 119,143 The right-of-use assets pertain to five premises leases for the Company’s office space. The leases have remaining terms of one to fourteen years. The related lease liability of $49,686 as at December 31, 2023 [2022 – $51,171] is grouped with accounts payable and accrued liabilities on the consolidated statements of financial position. The recoverable amount of the Company’s goodwill is calculated by reference to the Company’s market capitalization, mortgages under administration, origination volume, and profitability. These factors indicate that the Company’s recoverable amount exceeds the carrying value of its net assets and, accordingly, goodwill is not impaired. 62 First National Financial Corporation 2023 Annual Report8. Mortgages under administration As at December 31, 2023, the Company managed mortgages under administration of $143,546,966 [2022 – $131,000,635], including mortgages held on the Company’s consolidated statements of financial position. Mortgages under administration are serviced for financial institutions such as banks, insurance companies, pension funds, mutual funds, trust companies, credit unions and securitization vehicles. As at December 31, 2023, the Company administered 333,488 mortgages [2022 – 321,470] for 101 institutional investors [2022 – 113] with an average remaining term to maturity of 40 months [2022 – 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 beneficial interest in these funds they are not presented on the consolidated statements of financial position. The aggregate of these accounts as at December 31, 2023 was $742,373 [2022 – $759,676]. 9. Bank indebtedness Bank indebtedness includes a revolving credit facility of $1,500,000 [2022 – $1,500,000]. In May 2023, the term of the facility was extended for 12 months to a new maturity date in March 2028. At December 31, 2023, $1,083,000 [2022 – $1,065,868] was drawn, of which the following have been pledged as collateral: [a] a general security agreement over all assets, other than real property, of the Company; and [b] a general assignment of all mortgages owned by the Company. The credit facility bears a variable rate of interest based on prime and bankers’ acceptance rates. 2023 ($) 2022 ($) 100,340,846 90,249,205 2,819,648 39,264,199 1,122,273 2,450,613 37,127,747 1,173,070 143,546,966 131,000,635 63 First National Financial Corporation 2023 Annual Report10. Debt related to securitized mortgages Debt related to securitized mortgages represents the funding for mortgages pledged under the NHA-MBS, CMB and ABCP programs. As at December 31, 2023, debt related to securitized mortgages was $38,880,798 [2022 – $36,888,395], net of unamortized discounts of $438,538 [2022 – $393,524]. A comparison of the carrying amounts of the pledged mortgages and the related debt is summarized in note 3. Debt related to securitized mortgages is reduced on a monthly basis when the principal payments received from the mortgages are applied. Debt discounts and premiums are amortized over the term of each debt on an effective yield basis. Debt related to securitization mortgages had a similar contractual maturity profile as the associated mortgages in mortgages pledged under securitization. 11. Swap contracts Swaps are over-the-counter contracts in which two counterparties exchange a series of cash flows based on agreed-upon rates to a notional amount. The Company uses interest rate swaps to manage interest rate exposure relating to variability of interest earned on mortgages pledged under securitization. The swap agreements that the Company enters into are interest rate swaps where two counterparties exchange a series of payments based on different interest rates applied to a notional amount in a single currency. The following tables present, by remaining term to maturity, the notional amounts and fair values of the swap contracts outstanding as at December 31, 2023 and 2022: 2023 Interest rate swap contracts 2022 Interest rate swap contracts Less than 3 years ($) 3 to 5 years ($) 6 to 10 years ($) Total notional amount ($) Fair value ($) 3,622,867 707,363 — 4,330,230 36,971 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 Favourable fair values of the interest rate swap contracts are included in accounts receivable and sundry and unfavourable fair values are included in accounts payable and accrued liabilities on the consolidated statements of financial position. 64 First National Financial Corporation 2023 Annual Report12. Senior unsecured notes The Company has three unsecured notes outstanding. $200 million of five-year term Series 2 senior unsecured notes bearing interest at 3.582% payable in equal semi- annual payments maturing in November 2024; $200 million of five-year Series 3 senior unsecured notes bearing interest at 2.961% payable in equal semi-annual payments maturing in November 2025; and $200 million of three-year term Series 4 senior unsecured notes bearing interest at 7.293% payable in equal semi-annual payments maturing in September 2026. The three-year note was issued in September 2023. The net proceeds of the offering [$199.1 million, net of financing fees], were used to repay indebtedness under the bank credit facility. 13. Commitments, guarantees and contingencies As at December 31, 2023, the Company has the following operating lease commitments for its office premises: 2024 2025 2026 2027 and thereafter The Company’s commitments for premises listed above have remaining terms of one to thirteen years, and have been accounted in right-of-use assets and recorded as other assets on the consolidated statements of financial position. Outstanding commitments for future advances on mortgages with terms of one to 10 years amounted to $1,920,620 as at December 31, 2023 [2022 – $1,795,019]. The commitments generally remain open for a period of up to 90 days. These commitments have credit and interest rate risk profiles similar to those mortgages that are currently under administration. Certain of these commitments have been sold to institutional investors while others will expire before being drawn down. Accordingly, these amounts do not necessarily represent future cash requirements of the Company. In the normal course of business, the Company enters into a variety of guarantees. Guarantees include contracts where the Company may be required to make payments to a third party, based on changes in the value of an asset or liability that the third party holds. In addition, contracts under which the Company may be required to make payments if a third party fails to perform under the terms of the contract [such as mortgage servicing contracts] are considered guarantees. The Company has determined that the estimated potential loss from these guarantees is insignificant. ($) 10,652 10,559 10,113 89,423 120,747 65 First National Financial Corporation 2023 Annual Report14. Securities transactions under repurchase and resale agreements The Company’s outstanding securities purchased under resale agreements and securities sold under repurchase agreements have a remaining term to maturity of less than three months. 15. Obligations related to securities and mortgages sold under repurchase agreements The Company uses repurchase agreements to fund specific mortgages included in mortgages accumulated for sale or securitization. The current contracts are with financial institutions, based on bankers’ acceptance rates and mature on or before January 31, 2024. 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 2023 ($) 96,948 13,246 87,114 38,350 49,686 285,344 2022 ($) 74,465 12,878 68,258 39,714 51,171 246,486 66 First National Financial Corporation 2023 Annual Report17. Shareholders’ equity [a] Authorized Unlimited number of common shares Unlimited number of cumulative 5-year rate reset preferred shares, Class A Series 1 Unlimited number of cumulative 5-year rate reset preferred shares, Class A Series 2 [b] Capital Stock Balance, December 31, 2023 and 2022 Common shares Preferred shares # $ 59,967,429 4,000,000 122,671 97,394 [c] Preferred shares On January 25, 2011, the Company issued 4 million Class A Series 1 Preferred Shares at a price of $25.00 per share for gross proceeds of $100,000 before issue expenses. Holders of Class A Series 1 Preferred Shares have the right, at their option, every five years on March 31, to convert their shares into cumulative, floating rate Class A Preferred Shares, Series 2 [“Series 2 Preferred Shares”], subject to certain conditions. As at December 31, 2023, 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 fixed dividend at a rate equal to the five year Government of Canada yield plus 2.07%. The dividend rate may be reset every five years, as and when approved by the Board of Directors. The current dividend rate on the Class A Series 1 Preferred Shares is 2.895% annually for a five-year term ending March 31, 2026. Holders of the Class A Series 2 Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three month Government of Canada Treasury bill yield plus 2.07%, as and when declared by the Board of Directors. Both classes of preferred shares do not have voting rights, are redeemable only at the option of the Company, and are therefore classified as equity. The par value per preferred share is $25. [d] Earnings per Share Net income attributable to shareholders Less: dividends declared on preferred shares Net income attributable to common shareholders 2023 ($) 2022 ($) 252,807 (3,855) 248,952 197,732 (3,039) 194,693 Number of common shares outstanding 59,967,429 59,967,429 Basic earnings per common share 4.15 3.25 67 First National Financial Corporation 2023 Annual Report18. Income taxes The major components of deferred provision for (recovery of) The major components of the current income tax expense for income taxes for the years ended December 31 consist of the years ended December 31 consists of the following: the following: Related to origination and reversal of temporary differences 2023 ($) 2022 ($) 2023 ($) 2022 ($) Income taxes relating to the current year 82,100 34,500 9,000 36,850 The effective income tax rate reported in the consolidated statements of income varies from the Canadian tax rate of 26.42% for the year ended December 31, 2023 [2022 – 26.43%] for the following reasons: Company’s statutory tax rate Income before income taxes Income tax at statutory tax rate Increase (decrease) resulting from Permanent differences Prior year adjustment Other Income tax expense 2023 ($) 26.42% 343,907 90,860 325 (150) 65 91,100 2022 ($) 26.43% 269,082 71,118 292 (42) (18) 71,350 68 First National Financial Corporation 2023 Annual ReportThe movement in significant components of the Company’s deferred income tax liabilities and assets for the years ended December 31, 2023 and 2022 are as follows: Deferred income tax Deferred placement fees receivable Deferred costs – securitization 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 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 The amount of deferred tax expense recorded in income and OCI consists of an expense of $9,000 [2022 –$36,850] recorded in net income and a recovery of $7,500 [2022 – expense of $24,550] recorded in OCI related to unrealized gains on cash flow hedges. The calculation of taxable income of the Company is based on estimates and the interpretation of tax legislation. In the event that the tax authorities take a different view from management, the Company may be required to change its provision for income taxes or deferred income tax balances and the change could be significant. As at January 1, 2023 ($) Recognized in income and OCI ($) As at December 31, 2023 ($) 17,087 155,437 5,251 13,050 (13,523) (13,121) (3,163) (10,496) (1,122) 149,400 2,438 12,302 845 (726) 396 (13,930) 223 364 (412) 1,500 19,525 167,739 6,096 12,324 (13,127) (27,051) (2,940) (10,132) (1,534) 150,900 As at January 1, 2022 ($) Recognized in income and OCI ($) As at December 31, 2022 ($) 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 69 First National Financial Corporation 2023 Annual Report19. Financial instruments and risk management Risk management The various risks to which the Company is exposed and the Company’s policies and processes to measure and manage them individually are set out below: Interest rate risk Interest rate risk is the risk that the fair value or future cash interest rate dependent financial instruments vary inversely with flows of a financial instrument will fluctuate because of changes the values of the mortgage contracts. As interest rates increase, in market interest rates. The Company’s exposure to the risk a gain will be recorded on the economic hedge which will be of changes in market interest rates relates primarily to the offset by the reduced future spread on mortgages pledged Company’s mortgages accumulated for securitization. under securitization as the mortgage rate committed to the The Company uses various strategies to reduce interest borrower is fixed at the point of commitment. rate risk. The Company’s risk management objective is to For single-family mortgages, only a portion of the commitments maintain interest rate spreads from the point that a mortgage issued by the Company eventually fund. The Company must commitment is issued to the transfer of the mortgage to the assign a probability of funding to each mortgage in the pipeline related securitization vehicle or sale to an institutional investor. and estimate how that probability changes as mortgages move Primary among these strategies is the Company’s decision to through the various stages of the pipeline. The amount that sell mortgages at the time of commitment, passing on interest is actually economically hedged is the expected value of the rate risk that exists prior to funding to institutional investors. mortgages funding within the future commitment period. 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 securitization vehicle and the underlying cost of funding is set. As interest rates change, the values of these The table below provides the financial impact that an immediate and sustained 100 basis point and 200 basis point increase and decrease in short-term interest rates would have had on the net income of the Company in 2023 and 2022. Decrease in interest rate(1) Increase in interest rate 2023 ($) 2022 ($) 2021 ($) 2020 ($) 12,287 21,804 (12,287) (21,804) 24,575 43,608 (24,575) (43,608) 100 basis point shift Impact on net income 200 basis point shift Impact on net income 70 First National Financial Corporation 2023 Annual ReportThe Company finances the majority of its mortgages with debt derived from the securitization markets, primarily NHA-MBS, ABCP and CMB. Debt related to NHA-MBS and ABCP securitizations reset monthly such that the receipts of principal on the mortgages are used to pay down the related debt within a 30 day period. Accordingly, these sources of financing amortize at the same rate as the mortgages pledged thereunder, providing an almost perfectly matched asset and liability relationship. Market risk Market risk is the risk of loss that may arise from changes in market factors such as interest rates and credit spreads. The level of market risk to which the Company is exposed varies depending on market conditions, expectations of future interest rates and credit spreads. Customer concentration risk Placement fees and mortgage servicing income from one Canadian financial institution represent approximately 8.5% [2022 – 12.7%] of the Company’s total revenue. Fair value measurement The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments recorded at fair value in the consolidated statements of financial position: Level 1 – quoted market price observed in active markets for identical instruments; Level 2 – quoted market price observed in active markets for similar instruments or other valuation techniques for which all significant inputs are based on observable market data; and Level 3 – valuation techniques in which one or more significant inputs are unobservable. Credit risk Credit risk is the risk of loss associated with a counterparty’s inability or unwillingness to fulfill its payment obligations. The Company’s credit risk is mainly lending related in the form of mortgage default. The Company uses stringent underwriting criteria and experienced adjudicators to mitigate this risk. The Company’s approach to managing credit risk is based on the consistent application of a detailed set of credit policies and prudent arrears management. As at December 31, 2023, 88% [2022 – 88%] of the pledged mortgages were insured mortgages. See details in note 3. The Company’s exposure is further mitigated by the relatively short period over which a mortgage is held by the Company prior to securitization. The maximum credit exposures of the financial assets are their carrying values as reflected on the consolidated statements of financial position. The Company does not have significant concentration of credit risk within any particular geographic region or group of customers. The Company is at risk that the underlying mortgages default and the servicing cash flows cease. The large portfolio of individual mortgages that underlies these assets is diverse in terms of geographical location, borrower exposure and the underlying type of real estate. This diversity and the priority ranking of the Company’s rights mitigate the potential size of any single credit loss. Securities purchased under resale agreements are transacted with large regulated Canadian institutions such that the risk of credit loss is very remote. Securities transacted are all Government of Canada bonds and, as such, have virtually no risk of credit loss. Liquidity risk and capital resources Liquidity risk is the risk that the Company will be unable to meet its financial obligations as they come due. The Company’s liquidity strategy has been to use bank credit to fund working capital requirements and to use cash flow from operations to fund longer-term assets. The Company’s credit facilities are typically drawn to fund: [i] mortgages accumulated for sale or securitization, [ii] origination costs associated with mortgages pledged under securitization, [iii] cash held as collateral for securitization, [iv] costs associated with deferred placement fees receivable, [v] accounts receivable and sundry, and [vi] mortgage and loan investments. The Company has a credit facility with a syndicate of financial institutions, which provides for a total of $1,500,000 in financing. 71 First National Financial Corporation 2023 Annual ReportValuation methods and assumptions The Company uses valuation techniques to estimate fair values, including reference to third party valuation service providers [d] Servicing liability The fair value of the servicing liability at inception is determined using proprietary pricing models and internal valuation models by internal valuation models using market data inputs, where such as discounted cash flow analysis. The valuation methods possible. The value is determined by discounting the expected and key assumptions used in determining fair values for the future cost related to the servicing of explicit mortgages at financial assets and financial liabilities are as follows: [a] Mortgages and loan investments Commercial segment mortgages and loan investments are market interest rates. The expected future cash flows are estimated based on certain assumptions which have one or more significant inputs that are unobservable. measured at FVTPL. The fair value of these mortgages is based on non-observable inputs and is measured at management’s [e] Other financial assets and financial liabilities The fair value of mortgages accumulated for sale, cash held best estimate of the fair value. [b] Deferred placement fees receivable The fair value of deferred placement fees receivable at inception as collateral for securitization, restricted cash and bank indebtedness correspond to the respective outstanding amounts due to their short-term maturity profiles. is determined by internal valuation models using market data inputs, where possible. The value is determined by discounting [f] Fair value of financial instruments not carried at fair value The fair value of these financial instruments is determined by the expected future cash flows related to the placed mortgages discounting projected cash flows using market industry pricing at market interest rates. The expected future cash flows practices, including the rate of unscheduled prepayment. are estimated based on certain assumptions which are not Discount rates used are determined by comparison to 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. similar term loans made to borrowers with similar credit. This methodology will reflect changes in interest rates which have occurred since the mortgages were originated. These fair values are estimated using valuation techniques in which one or more significant inputs are unobservable [Level 3] and are calculated for disclosure purposes only. 72 First National Financial Corporation 2023 Annual ReportCarrying value and fair value of selected financial instruments The fair value of the financial assets and financial liabilities of the unsecured notes, which have a carrying value of $598,745 [2022 Company approximates its carrying value, except for mortgages – $399,222] and a fair value of $590,820 [2022 – $374,120]. pledged under securitization, which has a carrying value of These fair values are estimated using valuation techniques in $39,427,192 [2022 – $37,285,823] and a fair value of $38,647,614 which one or more significant inputs are unobservable [Level 3]. [2022 – $35,990,243]; debt related to securitized mortgages, which has a carrying value of $38,880,798 [2022 – $36,888,395] and a fair value of $37,270,328 [2022 – $34,968,655]; and senior The following tables represent the Company’s financial instruments measured at fair value on a recurring basis as at December 31: 2023 Financial assets Mortgages accumulated for sale Mortgage and loan investments Total financial assets Financial liabilities Securities sold short Interest rate swaps Total financial liabilities 2022 Financial assets Mortgages accumulated for sale Mortgage and loan investments Total financial assets Financial liabilities Securities sold short Interest rate swaps Total financial liabilities Level 1 ($) Level 2 ($) Level 3 ($) Total ($) — — — — — — 27,113 — 27,113 2,649,249 7,616 2,656,865 — 189,523 189,523 — — — 27,113 189,523 216,636 2,649,249 7,616 2,656,865 Level 1 ($) 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 73 First National Financial Corporation 2023 Annual ReportIn estimating the fair value of financial assets and financial liabilities using valuation techniques or pricing models, certain assumptions are used, including those that have one or more significant inputs which are unobservable [Level 3]. The amount of the change in fair value recognized by the Company in net income for the year ended December 31, 2023 that was estimated using a valuation technique based on assumptions that are not fully supported by observable market prices or rates was approximately a gain of $397 [2022 – losses of $710]. Although the Company’s management believes that the estimated fair values are appropriate as at the date of the consolidated statements of financial position, those fair values may differ 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 2023, the Company did not have any transfers between levels. The following table presents changes in the fair values, including realized gains of $67,865 [2022 – $192,983] of the Company’s financial assets and financial liabilities for the year ended December 31, 2023 and 2022, all of which have been classified as FVTPL: FVTPL mortgages Securities sold short Interest rate swaps The Company does not have any assets or liabilities that are measured at fair value on a non recurring basis. 2023 ($) 2022 ($) 397 19,119 2,605 22,121 (710) 74,441 (14,121) 59,610 74 First National Financial Corporation 2023 Annual ReportMovement in Level 3 financial instruments measured at fair value The following tables show the movement in Level 3 financial instruments in the fair value hierarchy for the years ended December 31, 2023 and 2022. The Company classifies financial instruments to Level 3 when there is reliance on at least one significant unobservable input in the valuation models Fair value as at January 1, 2023 ($) Investments ($) Losses recorded in income ($) Payment and amortization ($) Fair value as at December 31, 2023 ($) 164,919 929,146 397 (904,939) 189,523 Fair value as at January 1, 2022 ($) Investments ($) Losses recorded in income ($) Payment and amortization ($) Fair value as at December 31, 2022 ($) 192,340 400,483 (710) (427,194) 164,919 Financial assets Mortgage and loan investments Financial assets Mortgage and loan investments On May 16, 2022, Refinitiv Benchmark Service (UK) Limited (RBSL), the administrator of CDOR, announced that the calculation and publication of all tenors of CDOR will permanently cease following a final publication on June 28, 2024. The Canadian Alternative Reference Rate Working Group [“CARR”] was created to identify and seek to develop a new risk-free Canadian dollar interest rate benchmark. An enhanced Canadian Overnight Repo Rate Average [“CORRA”] has been designed to comply with recommendations of the Financial Stability Board as part of a global effort to reform benchmark interest rates. There is some uncertainty about how the Canadian dollar benchmark rates will evolve and the speed at which CORRA will become a dominant benchmark for Canadian dollar borrowings. Starting in 2022, CMHC has introduced floating rate NHA MBS pool type for which the coupon is referenced to CORRA. The Company has many swaps and other derivatives that are referenced to CDOR. All of these instruments are with large Canadian financial institutions and the Company will rely on those institutions to amend the agreements as required to incorporate the new reference rate. The Company believes this transition will have a minimal impact, if any, on the Company’s operations. The following table discloses the Company’s exposure to significant interest rate benchmark subject to CDOR reform as of December 31: Non-derivative financial liabilities Derivative notional amounts 2023 ($) 980,143 4,330,230 2022 ($) 946,792 3,937,360 75 First National Financial Corporation 2023 Annual Report20. Capital management The Company’s objective is to maintain a capital base so as to maintain investor, creditor and market confidence and sustain future development of the business. Management defines capital as the Company’s common share capital and retained earnings. FNFLP has a minimum capital requirement as stipulated by its bank credit facility. The agreement limits the debt under bank indebtedness together with the unsecured notes to four times FNFLP’s equity. As at December 31, 2023, the ratio was 1.89:1 [2022 – 1.88:1]. The Company was in compliance with the bank covenant throughout the year. 21. Earnings by business segment The Company operates principally in two business segments, Residential and Commercial. These segments are organized by mortgage type and contain revenue and expenses related to origination, underwriting, securitization and servicing activities. Identifiable assets are those used in the operations of the segments. 2023 Revenue Interest revenue – securitized mortgages Interest expense – securitized mortgages Net interest – securitized mortgages Placement and servicing Mortgage investment income [note 6] Realized and unrealized gains (losses) on financial instruments Expenses Amortization Interest Other operating Income before income taxes Identifiable assets Goodwill Total assets Residential ($) Commercial ($) Total ($) 937,470 (787,375) 150,095 385,274 109,978 21,712 667,059 12,171 127,320 320,376 459,867 207,192 398,593 (332,100) 66,493 140,898 29,951 409 237,751 1,989 26,087 72,960 101,036 136,715 1,336,063 (1,119,475) 216,588 526,172 139,929 22,121 904,810 14,160 153,407 393,336 560,903 343,907 30,362,969 15,564,654 45,927,623 — — 29,776 30,362,969 15,564,654 45,957,399 76 First National Financial Corporation 2023 Annual Report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 financial instruments Expenses Amortization Interest Other operating Income before income taxes Identifiable 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 22. Related party and other transactions The Company has servicing contracts in connection with A senior executive and shareholder of the Company has a commercial bridge and mezzanine mortgages originated significant investment in a Canadian bank. The Company has an by the Company and subsequently sold to various entities agreement to originate and adjudicate applications for secured controlled by a senior executive and shareholder of the credit cards for the bank. These applications are originated Company. The Company services these mortgages during their through the Company’s mortgage broker relationships. The terms at market commercial servicing rates. During the year, Company receives a market fee for successfully adjudicating the Company originated $103,808 of new mortgages for the such applications. related parties. The related parties also funded several progress draws totalling $27,184 on existing mortgages originated by the Company. All such mortgages, which are administered by the Company, have a balance of $204,011 as at December 31, 2023 [2022 – $259,673]. In the third quarter of 2023, a senior executive and shareholder of the Company made a significant investment in a Canadian financial institution. The Company has existing agreements to originate and service mortgages with the financial institution. Mortgages are generally originated through the relationships A senior executive and shareholder of the Company has a the Company has directly with mortgage borrowers and significant investment in a mortgage default insurance company. are transacted at market rates with the financial institution. In the ordinary course of business, the insurance company Subsequent to the purchase, the Company closed $151,865 provides insurance policies to the Company’s borrowers at of mortgages which commitments had been placed with the market rates. In addition, the insurance company has also financial institution previous to the purchase. As at December provided the Company with portfolio insurance at market 31, 2023, the Company administered a $5,132,839 mortgage premiums. The total bulk insurance premium paid by the Company in 2023 was $3,514 [2022 – $1,899], net of third-party investor reimbursement. portfolio for the financial institution at market servicing rates. 77 First National Financial Corporation 2023 Annual Report78 First National Financial Corporation 2023 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 confidence of investors and increasing shareholder value. As such, First National is committed to the highest standards of integrity, transparency, compliance and discipline. These standards define the relationships among all of our stakeholders – Board, management and shareholders – and are the basis for building these values and nurturing a culture of accountability and responsibility across the organization. Policies The Board supervises and evaluates the management of the Company, oversees matters related to our strategic direction and assesses results relative to our goals and objectives. As such, the Board has adopted several policies that reflect recommended practices in governance and disclosure. These include a Disclosure Policy, a Code of Business Ethics and Conduct Policy, a Whistleblower Policy and an Insider Trading Policy. These policies follow the corporate governance guidelines of the Canadian Securities Administrators. As a public company, First National’s Board continues to update, develop and implement appropriate governance policies and practices as it sees fit. Committees The Board of Directors has established an Audit Committee and Governance Committee a Governance Committee to assist in the efficient functioning of the Company’s corporate governance strategy. Audit Committee The Governance Committee’s responsibilities include: • Periodically assessing and making recommendations on the Company’s approach to governance issues; The Audit Committee’s responsibilities include: • Assisting in the development of governance policies, • Management of the relationship with the external auditor, including the oversight and supervision of the audit of the practices and procedures for approval by the Board of Directors; Company’s financial statements; • Reviewing conflicts of interest and transactions involving • Oversight and supervision of the quality and integrity of related parties of the Company; and the Company’s financial statements, and • Periodically reviewing the composition and effectiveness • Oversight and supervision of the adequacy of the Company’s internal accounting controls and procedures, as well as its financial reporting practices. The Audit Committee consists of three independent directors, all of whom are considered financially literate for the purposes of the Canadian Securities Administrators’ Multilateral Instrument 52-110 – Audit Committees. Committee Members Robert Mitchell (Chair), Robert Pearce and Diane Sinhuber 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 80 First National Financial Corporation 2023 Annual ReportBoard of Directors Stephen Smith Moray Tawse Stephen Smith is the Chairman and CEO of Smith Financial Corporation (SFC). Throughout his career, he has been an innovator in the development and utilization of various securitization techniques to finance mortgage assets and a leader in the development and application of information technology in the financial services industry. Through SFC, he has significant equity investments in a range of financial entities: First National Financial Corporation, Canada Guaranty Mortgage Moray Tawse is Senior Executive Vice President and Secretary, as well as Co-founder of First National. Mr. Tawse directs the operations of all of First National’s commercial mortgage origination activities. With over 30 years of experience in the real estate finance industry, Mr. Tawse is one of Canada’s leading experts on commercial real estate and is often called upon to deliver keynote addresses at national real estate symposiums. Insurance, Home Trust, Fairstone Bank of Canada and Peloton Capital Management. Jason Ellis Jason Ellis is the President and Chief Executive Officer for First Mr. Smith co-founded First National Financial Corporation in National and is responsible for the design and maintenance of 1988, serving as CEO until 2022 at which time he was appointed strategy and operational excellence across the organization. Executive Chairman. He served as Chair of Canada Guaranty Mr. Ellis joined First National in 2004 as Director, Capital Mortgage Insurance Company from 2010-2023. He is the Markets responsible for leading First National’s capital markets’ Chairman of Peloton Capital Management, a mid-market North activities including interest rate risk management, funding, American private equity firm, Glass, Lewis & Co., a leading global and securitization for all commercial and residential mortgage proxy advisory firm and Fairstone Bank of Canada, a 240 branch origination. Mr. Ellis was appointed Chief Operating Officer in bank focused on consumer lending. Mr. Smith is Chair of Historica Canada, the creator of the Heritage Minutes and publisher of The Canadian Encyclopedia. He is a member of the Boards of the Rideau Hall Foundation, Canada Infrastructure Bank and the C.D. Howe Institute and is an 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 then 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. In 2023, Mr. Smith pledged $100-million to the Queen’s faculty of engineering, now named Smith Engineering, the largest gift ever made to an engineering faculty in Canada. Mr. Smith holds a B.Sc. (Hons.) in Electrical Engineering from Queen’s University and an M.Sc. in Economics from the London School of Economics. In 2017, Queen’s University awarded him an honourary LL.D. 2018 and President in 2019. On January 12, 2022, Mr. Ellis was appointed Chief Executive Officer. Prior to joining First National in 2004, Mr. Ellis was with the Asset/Liability Management group at Manulife Financial and with RBC Dominion Securities in Toronto and New York where he traded fixed income and interest rate derivatives. Mr. Ellis holds a BA degree from the University of Western Ontario, an MBA degree from McMaster University and is a CFA charterholder. Duncan N. R. Jackman Duncan N. R. Jackman has been Chairman, President and Chief Executive Officer of E-L Financial Corporation, an investment and insurance holding company, since 2003. In 2003, he was also elected Chairman of the board of directors of The Empire Life Insurance Company. Mr. Jackman is also Chairman of Algoma Central Corporation, the largest Great Lakes bulk shipper, as well as Chairman and President of Economic Investment Trust Limited and United Corporations Limited, two Canadian listed closed-end funds. He also serves as a member of the board of directors of several other public and private companies. Mr. Jackman is a member of the Business Council of Canada and formerly served on the Economic Advisory Council to the Minister of Finance, Government of Canada. Mr. Jackman graduated from McGill University in Montreal. 81 First National Financial Corporation 2023 Annual ReportRobert Mitchell Diane Sinhuber Robert Mitchell was appointed Executive Chair and Chair of the Diane Sinhuber serves on the board of directors of First National Investment Committee of Dixon Mitchell Investment Counsel and Scarborough Health Network and is an independent and Inc., a Vancouver-based investment management company, objective financial expert, as well as a risk, governance and on January 1, 2021. From 2000 to 2020, he was President of controls professional with over 35 years’ experience providing Dixon Mitchell Investment Counsel Inc. and although he retired accounting and auditing services, including reporting to and from Dixon Mitchell in June, 2023, he still serves as a member chairing Audit Committees. Ms. Sinhuber is a retired Deputy of the board. Prior to that, he was Vice President, Investments Chief Auditor of TD Bank Group and held several positions with at Seaboard Life Insurance Company and is a former board Ernst & Young LLP over a 29 year period, including as leader member of Equestrian Canada. Mr. Mitchell is also a member of of EY Canada’s Financial Services Organization. She previously the investment committee for the First Nations Child and Family served on a number of Boards including as Chair of the YMCA Compensation Trust and holds an MBA from the University of of Greater Toronto and the Kidney Foundation of Canada in Western Ontario and a Bachelor of Commerce (Finance) from Toronto. Ms. Sinhuber has a Bachelor of Business Administration the University of Calgary; he is also a CFA charterholder. from Wilfred Laurier University, is a Fellow of Chartered Barbara Palk Professional Accountants of Ontario (FCPA) and holds the ICD.D certification. Barbara Palk retired as President of TD Asset Management Inc. in 2010, following a 30-year career in institutional investment Martine Irman and investment management. Her experience on boards of Martine Irman serves on the board of directors of First National, directors include Crombie Real Estate Investment Trust where the TMX Group of Companies, Ontario Teachers’ Pension Plan she chaired the Governance and Nominating Committee and Plan International Canada. She also sits on the Board of St. and the Human Resources Committee; Ontario Teachers’ Michael’s Hospital Foundation and the Campaign Committee of Pension Plan, where she chaired the Investment Committee; MAP Centre For Urban Health Solutions, and is the Immediate TD Asset Management USA Funds Inc.; Canadian Coalition Past Chair of the Board for Export Development Canada. Ms. for Good Governance, where she chaired the Governance Irman is a senior financial executive and brings over 30 years’ Committee; Greenwood College School; the Investment experience in international banking, treasury, securities and Counselling Association of Canada; the Perimeter Institute; trade and has spent 20 years sitting on both corporate and the Shaw Festival; UNICEF Canada; and Queen’s University, not-for-profit boards along with Executive Advisory Councils. where she was the Chair of the Board of Trustees. Ms. Palk is She held several senior level positions over a 30 year period a member of the Institute of Corporate Directors, a Fellow of with TD including as Vice-Chair, TD Securities and Senior Vice the Canadian Securities Institute and a CFA charterholder. She President, TD Bank Group. She is also a Past Chair of the Board holds a Bachelor of Arts (Honours) in Economics from Queen’s of the YMCA of Greater Toronto. Ms. Irman holds a Bachelor University and has been named one of Canada’s Top 100 Most of Arts in Economics and Financial Studies and has completed Powerful Women (2004). Robert Pearce 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 certification and the Global Competent Board Robert Pearce serves on the board of directors of Canada International ESG Désignation, GCB.D. Guaranty Mortgage Insurance Company, Fairstone Bank of Canada and Home Trust Company. Mr. Pearce spent 26 years with BMO Bank of Montreal from 1980 to 2006, most recently holding the position of President and Chief Executive Officer, Personal and Commercial Client Group. He also served on the board of directors of MasterCard International from 1998 to 2006 and as Chairman of the Canadian Bankers’ Association from 2004 to 2006. Mr. Pearce holds a BA from the University of Victoria and an MBA from the University of British Columbia. Mr. Pearce brings over 40 years of operational and leadership experience in the financial services industry to the Board of Directors. 82 First National Financial Corporation 2023 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.firstnational.ca Annual Meeting of Shareholders May 2, 2024, 10:00 a.m. EDT TMX Market Centre 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 Investor Relations Contacts Robert Inglis Chief Financial Officer rob.inglis@firstnational.ca Ernie Stapleton President, Fundamental ernie@fundamental.ca Auditors Ernst & Young LLP, Toronto, Ontario Legal Counsel Torys LLP, Toronto, Ontario Senior Executives of First National Financial Corporation Stephen Smith Co-founder and Executive Chairman Moray Tawse Co-founder and Senior Executive Vice President Jason Ellis President and Chief Executive Officer Robert Inglis Chief Financial Officer Thomas Kim Executive Vice President and Managing Director, Class A Series 2 Preference Shares: (TSX) FN.PR.B Capital Markets Scott McKenzie Executive Vice President, Residential Mortgages Jeremy Wedgbury Executive Vice President, Commercial Mortgages Hilda Wong Executive Vice President and General Counsel 20 23 Vancouver Calgary Toronto Montréal Halifax firstnational.ca Printed on 100% sustainably-sourced paper 

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