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
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