ANNUAL REPORT 2011
MCAN MORTGAGE CORPORATION
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
DESCRIPTION OF BUSINESS
MCAN is a public company listed on the Toronto Stock Exchange (“TSX”) under the symbol MKP and is a reporting issuer in all
provinces and territories in Canada. MCAN is a Loan Company under the Trust and Loan Companies Act (the “Trust Act”) and
also qualifies as a mortgage investment corporation (“MIC”) under the Income Tax Act (Canada) (the “Tax Act”).
Our objective is to generate a reliable stream of income by investing our funds in a portfolio of mortgages (including single
family residential, residential construction, non-residential construction and commercial loans), as well as other types of loans
and investments, real estate and securitization investments. We employ leverage by issuing term deposits eligible for Canada
Deposit Insurance Corporation (“CDIC”) deposit insurance up to a maximum of five times capital (on a non-consolidated basis)
as limited by the provisions of the Tax Act applicable to a MIC.
The term deposits are sourced through a network of independent financial agents. As a MIC, we are entitled to deduct from
income for tax purposes 50% of capital gains dividends and 100% of non-capital gains dividends that we pay to shareholders.
Such dividends are received by our shareholders as capital gains dividends and interest income, respectively.
TABLE OF CONTENTS
PRESIDENT AND CEO’S MESSAGE TO SHAREHOLDERS ..................................................................................... 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS .................................................................... 3
CONSOLIDATED FINANCIAL STATEMENTS ......................................................................................................... 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..................................................................................... 48
DIRECTORS, OFFICERS AND MANAGEMENT ....................................................................................................... 89
CORPORATE INFORMATION .................................................................................................................................... 90
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
MESSAGE TO SHAREHOLDERS
2011 Highlights
In 2011, MCAN Mortgage Corporation (the “Company”, “MCAN” or “we”) recorded strong asset growth in a challenging
environment as we delivered a 40% increase in corporate assets. Net income of $27.1 million was up from $26.7 million in the
prior year, while earnings per share were $1.68 compared to $1.85 in the prior year due to the dilution effects of our $31 million
share issuance in April 2011. Earnings from our investment in MCAP Commercial LP (“MCLP”) contributed significantly to
MCAN’s results this year. Return on equity for 2011 was 18.5%, down from 22.0% in 2010.
Total consolidated assets were $3.9 billion at December 31, 2011, which included $754 million of corporate assets, up from $538
million at December 31, 2010. Corporate asset growth during 2011 was driven by $220 million of mortgage growth as we
deployed the additional capacity from the share issuance. Approximately 70% of this growth was in single family mortgages,
which resulted in an improvement to MCAN’s overall risk profile, as these mortgages generally have a lower risk profile than our
construction and commercial loans. Portfolio quality continued to improve, with total mortgage arrears decreasing to $76 million
at December 31, 2011 from $92 million at December 31, 2010.
Dividends per share were $1.81 in 2011, up from $1.19 in 2010. We have declared a first quarter dividend of $0.60 per share to
be paid March 30, 2012 to shareholders of record as of March 15, 2012. MCAN’s capital levels remain strong with Tier 1 and
Total capital ratios of 22.21% and 22.26% respectively at December 31, 2011.
As a result of the growth and rebalancing of our corporate asset portfolio, our core earnings have increased and we have achieved
earnings stability and a lower risk profile.
2012 Objectives
In 2012, we plan to optimally invest our corporate assets and utilize the remaining capacity from the 2011 share issuance. Our
pipeline of new and existing unfunded mortgage commitments should result in the full investment of the balance sheet by the end
of the first quarter of 2012. As we reach our lending capacity, we expect to improve the profitability of our corporate assets
through portfolio optimization and the continued investment in higher yielding non-mortgage assets, while proactively managing
our risk profile.
We expect our core income to increase as a result of the full investment of the balance sheet, which we also expect to have a
positive impact on our taxable income. We also expect to be more active in securitizations as a result of our continued issuance
of mortgage backed securities (“MBS”).
2012 Outlook
While housing markets are expected to moderate, we continue to observe good lending opportunities within the first-time buyer
and first move-up housing sectors. Canadian real estate markets continue to experience reasonable levels of liquidity and
competition. We continue to observe balanced housing markets within our core lending markets of Alberta, British Columbia
and Ontario. We believe that 2012 will provide MCAN with financing opportunities at good risk-adjusted returns. We continue
to focus on investing in mortgages within our core markets that have strong real estate fundamentals, and we expect to further
refine our portfolio asset mix and geographic diversification throughout 2012. Our investment in MCLP continues to provide
strategic growth opportunities and positive returns. The announced acquisition of ResMor Trust Company by MCLP is expected
to improve their origination network.
MCAN maintains a disciplined and focused business model to create stable and regular dividends for its investors. While we
shall endeavour to continue to grow our business, we are mindful of the continued challenges in world financial markets and the
effects on the Canadian economy. We have seen evidence of a slowing domestic economy and some moderation in select
housing markets, while markets such as Alberta continue to show strength from the growth of Canada’s commodity markets
where strong prices and demand continue to push exploration and distribution related services.
William Jandrisits
President and Chief Executive Officer
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS
This Management’s Discussion and Analysis of Operations (“MD&A”) should be read in conjunction with the consolidated
balance sheets and accompanying notes as at December 31, 2011, December 31, 2010 and January 1, 2010 and the consolidated
statements of income, changes in shareholders’ equity, comprehensive income and cash flows for the years then ended, which
have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and have been presented in
Canadian currency. For all periods up to and including December 31, 2010, the consolidated financial statements were prepared
in accordance with Canadian Generally Accepted Accounting Principles (“CGAAP”). The consolidated financial statements for
the year ended December 31, 2011 are the first annual financial statements that we have prepared in accordance with IFRS. This
MD&A has been prepared as at March 9, 2012.
Additional information regarding MCAN Mortgage Corporation (the “Company”, “MCAN” or “we”), including copies of our
continuous disclosure materials such as the Annual Information Form, is available on our website at www.mcanmortgage.com or
through the System for Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com.
A CAUTION ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS
This MD&A contains “forward-looking statements” within the meaning of applicable Canadian securities laws. The words
“may,” “believe,” “will,” “anticipate,” “expect,” “planned,” “estimate,” “project,” “future,” and other expressions that are
predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements.
Such statements reflect management’s current beliefs and are based on information currently available to management. The
forward-looking statements in this MD&A include, among others, statements with respect to:
the current business environment and outlook;
•
• possible or assumed future results;
• ability to create shareholder value;
• business goals and strategy;
•
the stability of home prices;
• effect of challenging conditions on us;
•
• sufficiency of our access to capital resources; and
•
factors affecting our competitive position within the housing markets;
the timing of the effect of interest rate changes on our cash flows.
Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and
other factors, which may cause the actual results to differ materially from the anticipated future results expressed or implied by
such forward-looking statements. Factors that could cause actual results to differ materially from those set forth in the forward-
looking statements include, but are not limited to:
• global market activity;
• worldwide demand for and related impact on commodity prices;
• changes in government and economic policy;
• changes in general economic, real estate and other conditions;
• changes in interest rates;
• mortgage rate and availability changes;
• adverse legislation or regulation;
•
• confidence levels of consumers;
• ability to raise capital on favourable terms;
• our debt and leverage;
• competitive conditions in the homebuilding industry, including product and pricing pressures;
• ability to retain our executive officers;
•
• additional risks and uncertainties, many of which are beyond our control, referred to in this MD&A and our other public
relationships with our mortgage originators; and
technology changes;
filings with the applicable Canadian regulatory authorities.
Subject to applicable securities law requirements, we undertake no obligation to publicly update any forward-looking statements
whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in
subsequent reports should be consulted.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
TABLE OF CONTENTS - MD&A
SELECTED FINANCIAL INFORMATION ................................................................................................................................... 5
HIGHLIGHTS .................................................................................................................................................................................. 6
OUTLOOK ....................................................................................................................................................................................... 6
PERFORMANCE CHARTS ............................................................................................................................................................ 7
RESULTS OF OPERATIONS ......................................................................................................................................................... 9
FINANCIAL POSITION ................................................................................................................................................................ 15
SUMMARY OF FOURTH QUARTER RESULTS ....................................................................................................................... 21
SELECTED QUARTERLY FINANCIAL DATA ......................................................................................................................... 25
SECURITIZATION PROGRAMS ................................................................................................................................................. 26
DESCRIPTION OF CAPITAL STRUCTURE ............................................................................................................................... 27
SHARE ISSUANCE ....................................................................................................................................................................... 27
DIVIDEND POLICY AND RECORD ........................................................................................................................................... 27
OFF-BALANCE SHEET ARRANGEMENTS .............................................................................................................................. 28
CONTRACTUAL OBLIGATIONS ............................................................................................................................................... 28
TRANSACTIONS WITH RELATED PARTIES ........................................................................................................................... 28
CAPITAL MANAGEMENT .......................................................................................................................................................... 29
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS .................................................................................................. 31
LIQUIDITY .................................................................................................................................................................................... 31
RISK FACTORS ............................................................................................................................................................................ 32
RISK MANAGEMENT ................................................................................................................................................................. 34
PEOPLE ......................................................................................................................................................................................... 36
REGULATORY COMPLIANCE................................................................................................................................................... 36
INTERNAL AUDIT ....................................................................................................................................................................... 37
CRITICAL ACCOUNTING POLICIES AND ESTIMATES ........................................................................................................ 37
INTERNATIONAL FINANCIAL REPORTING STANDARDS .................................................................................................. 38
FUTURE CHANGES IN ACCOUNTING POLICY ..................................................................................................................... 40
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING ........ 41
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SELECTED FINANCIAL INFORMATION
Table 1: Income Statement Highlights
(in thousands except for per share amounts and %)
2011
IFRS
2010
IFRS
2009
CGAAP
Change from 2010
(%)
($)
Operating Results
Net investment income - corporate assets
Net investment income - securitization assets
before market value adjustment
Fair market value adjustment
Net investment income - securitization assets
Net investment income
Operating expenses
Income before income taxes
Provision for (recovery of) income taxes
Net income
$
25,650
$
27,380
$ (1,730)
(6.3%)
5,830
228
6,058
31,708
6,860
24,848
(2,255)
27,103
$
9,055
1,629
10,684
38,064
6,100
31,964
5,306
26,658
$
(3,225)
(1,401)
(4,626)
(6,356)
760
(7,116)
7,561
445
$
$
$
30,641
5,899
24,742
-
24,742
Average mortgage portfolio yield - corporate
Term deposit average interest rate
6.53%
2.36%
7.59%
2.10%
7.48%
3.12%
Average mortgage portfolio yield - securitized
Financial liabilities from securitization - average
interest rate
4.23%
4.32%
3.66%
3.64%
n/a
n/a
Basic and diluted earnings per share
Taxable income per share
Dividends per share
$
$
$
1.68
1.42
1.81
$
$
$
1.85
1.79
1.19
$
$
$
1.73
1.17
1.44
$
$
$
(0.17)
(0.37)
0.62
Return on average shareholders’ equity
18.52%
21.97%
20.69%
Table 2: Balance Sheet Highlights
(35.6%)
(86.0%)
(43.3%)
(16.7%)
12.5%
(22.3%)
(142.5%)
1.7%
(14.0%)
12.4%
(2.1%)
0.5%
(9.2%)
(20.7%)
52.1%
(15.7%)
(in thousands except for per share amounts and %)
December 31
2011 (IFRS)
December 31
2010 (IFRS)
January 1
2010 (IFRS)
Change from 2010
(%)
($)
Balance Sheet Highlights
Assets
Corporate
Securitization
Total assets
Mortgages - corporate
Mortgages - securitized
Liabilities
Corporate
Securitization
Total liabilities
$
753,799
3,140,359
$ 3,894,158
$
538,118
3,147,907
$ 3,686,025
$
465,213
3,097,491
$ 3,562,704
$
$
215,681
(7,548)
208,133
$
640,351
$ 1,499,016
$
420,322
$ 1,910,995
$
294,769
$ 2,342,164
$
220,029
$ (411,979)
618,277
$
3,117,416
$ 3,735,693
438,732
$
3,122,214
$ 3,560,946
373,751
$
3,074,999
$ 3,448,750
$
$
179,545
(4,798)
174,747
40.1%
(0.2%)
5.6%
52.3%
(21.6%)
40.9%
(0.2%)
4.9%
Shareholders’ equity
$
158,465
$
125,079
$
113,954
$
33,386
26.7%
Capital Ratios
Tax Assets to Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Credit Quality
Impaired mortgage ratio
Total mortgage arrears
4.91
22.21%
22.26%
4.39
22.10%
22.06%
4.04
27.75%
27.47%
11.8%
0.5%
0.9%
0.67%
76,279
$
0.63%
91,828
$
0.68%
100,054
$
$
(15,549)
6.3%
(16.9%)
Share Information (end of period)
Number of common shares outstanding at year-end
Book value per common share
Common share price - close
Market capitalization
16,862
9.40
$
$
13.40
$ 225,951
$
$
$
14,448
8.66
13.86
200,249
$
$
$
14,321
7.96
13.60
194,766
$
$
$
0.74
(0.46)
25,702
16.7%
8.5%
(3.3%)
12.8%
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
HIGHLIGHTS
• Net income was $27.1 million in 2011 ($1.68 per share), up from $26.7 million in 2010 ($1.85 per share). Our return
on equity was 18.5% for the year compared to 22.0% in 2010.
•
Total consolidated assets were $3.9 billion at December 31, 2011, which included $754 million of corporate assets, up
from $538 million at December 31, 2010. Corporate asset growth during 2011 included $220 million of mortgage
growth.
• We completed a public share issuance during 2011, issuing 2,300,000 new common shares for net proceeds of $31
million.
•
Impaired corporate mortgages as a percentage of the corporate portfolio were 2.24% at December 31, 2011, down from
3.06% in the prior year. Impaired mortgages as a percentage of total mortgages remained low at 0.67% at December
31, 2011 compared to 0.63% in the prior year.
•
Total mortgage arrears decreased to $76 million at December 31, 2011 from $92 million at December 31, 2010.
• Dividends per share were $1.81 in 2011, up from $1.19 in 2010.
• We declared a 2012 first quarter dividend of $0.60 per share to be paid on March 30, 2012 to shareholders of record as
of March 15, 2012. This dividend comprises the regular quarterly dividend of $0.27 per share and an extra dividend of
$0.33 per share, and consists of a $0.05 per share capital gains component and a $0.55 per share taxable component.
OUTLOOK
The Canadian economy has continued to expand, although domestic demand has been somewhat slower than initially anticipated
by economists. The economy is projected to expand with GDP growth of 2.0% for 2012 and 2.8% for 2013. The Canadian
economy saw a moderation in growth in the fourth quarter of 2011, as a result of the European debt crisis and a slow down in the
labour market. We expect moderate growth to continue through 2012 in line with the growth experienced in the latter half of
2011.
New term deposit funding rates continue to remain low by historical standards as central banks maintain neutral monetary policy
to enable economic growth. In light of global economic uncertainty and the instability of financial markets, we believe that
Canadian interest rates will remain low, providing stable funding costs for the coming year.
As we move towards full investment of the balance sheet, our emphasis remains on investing in mortgages with sound borrower
equity, reasonable market acceptance through pre-sales on construction loans and acceptable risk-adjusted returns. We are
closely monitoring market conditions in the geographic markets in which we invest to mitigate balance sheet risk. Our mortgage
portfolio is currently well positioned with a low level of impaired mortgages. In addition, we have good geographic and
borrower diversification. We remain focused on expanding the Canadian markets in which we invest, maintaining prudent
lending practices and investing in quality assets.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
PERFORMANCE CHARTS
The following graph compares MCAN’s cumulative total shareholder return (assuming an investment of $100 on December 31,
2006 on its common shares during the period from January 1, 2007 to December 31, 2011, with the S&P/TSX Composite Index
(Total Return) and the S&P/TSX Financial Services Index (Total Return), assuming reinvestment of all dividends.
Figure 1: Shareholder Return
$250.00
$200.00
$150.00
$100.00
$50.00
$0.00
01/01/2007
31/12/2007
31/12/2008
31/12/2009
31/12/2010
30/12/2011
MCAN
S&P/TSX Capped Financial Index
S&P/TSX Composite Index
MCAN
S&P/TSX Composite Total Return Index
S&P/TSX Capped Financial Index
Jan 1
2007
100
100
100
Dec 31
2007
95.41
109.67
99.14
Dec 31
2008
96.67
73.48
63.62
Dec 31
2009
165.51
99.24
92.74
Dec 31
2010
184.75
116.71
100.64
Dec 30
2011
Compound
Annual Growth
201.18
106.54
96.77
15.01%
1.28%
(0.65%)
Note: Dividends declared on MCAN’s common shares are assumed to be reinvested at the closing price on the payment date.
Figure 2: Dividend Growth
Extra Dividend
Regular Dividend
$1.81
$0.73
$1.44
$0.43
$1.19
$0.15
$1.00
$0.08
$0.96
$0.92
$0.96
$1.01
$1.04
$1.08
$0.97
$0.21
$0.76
$1.18
$0.34
$0.84
2005
2006
2007
2008
2009
2010
2011
(1)compound annual growth rate
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 3: Ten Year Financial Summary
(in thousands, except per share amounts)
December 31
2011 (IFRS)
2010 (IFRS)
2009 (CGAAP)
2008 (CGAAP)
2007 (CGAAP)
2006 (CGAAP)
2005 (CGAAP)
2004 (CGAAP)
2003 (CGAAP)
2002 (CGAAP)
Net
Income
$ 27,103
26,658
24,742
30,348
14,843
15,211
14,116
11,601
8,247
5,430
Earnings
Per Share
1.68
$
1.85
1.73
2.14
1.12
1.23
1.18
1.12
0.84
0.58
Dividends
Per Share
1.81
$
1.19
1.44
0.96
1.00
1.18
0.97
1.11
0.68
0.68
Assets 1
$ 753,799
538,118
506,683
570,154
557,425
498,107
434,369
454,365
369,477
327,059
Shareholders’
Equity
$ 158,465
125,079
122,879
116,609
103,007
84,611
81,164
74,965
61,741
58,383
Market
Capitalization
225,951
$
200,249
194,766
129,438
140,416
141,052
116,918
103,374
83,747
80,293
1 2011 and 2010 consist of corporate assets only as reported under IFRS. 2009 and earlier years consist of total assets under CGAAP.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
RESULTS OF OPERATIONS
MCAN reported net income of $27.1 million for the year ended December 31, 2011, up from $26.7 million in the prior year.
Earnings per share were $1.68 compared to $1.85 in the prior year. The increase is due to higher equity income from MCAP
Commercial LP (“MCLP”) and a recovery of income taxes, partially offset by higher provisions for credit losses, lower
securitization income and lower fee income in the current year.
Table 4: Net Income - For the Years Ended December 31
(in thousands)
2011
2010
Net Investment Income - Corporate Assets
Mortgage interest
Interest on financial investments and other loans
Equity income from MCAP Commercial LP
Fees
Marketable securities
Interest on cash and cash equivalents
Financial Expenses
Term deposit interest and expenses
Mortgage expenses
Provision for (recovery of) credit losses
Net Investment Income - Securitization Assets
Mortgage interest
Interest on financial investments
Interest on short-term investments
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
Net investment income before fair market value adjustment
Fair market value adjustment - derivative financial instruments
Net investment income
Operating expenses
Income before income taxes
Provision for (recovery of) income taxes
Net income
Basic and diluted earnings per share
Taxable income per share
Dividends per share
Net Investment Income - Corporate Assets
$
$
$
$
$
32,593
1,342
5,007
1,593
1,281
592
42,408
12,293
3,407
1,058
16,758
25,650
20,718
5,714
814
9,001
36,247
29,844
573
30,417
5,830
228
6,058
31,708
6,860
24,848
(2,255)
27,103
1.68
1.42
1.81
$
$
$
$
$
27,211
2,507
3,302
3,857
31
230
37,138
7,619
2,831
(692)
9,758
27,380
25,467
3,203
334
10,239
39,243
29,473
715
30,188
9,055
1,629
10,684
38,064
6,100
31,964
5,306
26,658
1.85
1.79
1.19
Mortgage interest income increased by $5.4 million from the prior year as a result of a $152 million increase in the average
mortgage portfolio (from $359 million in 2010 to $511 million in 2011), partially offset by a decrease in the average mortgage
yield to 6.53% in 2011 from 7.59% in 2010. The decrease in the overall portfolio yield was largely driven by a $1.7 million
decrease in discount income from MCAN’s acquired mortgage portfolios.
The mortgages in the acquired portfolios have higher effective yields than those in our regular portfolio, as they have been
acquired at a discount to their par values. The portion of the discount that we expect to recover is amortized into income over the
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
remaining term of the respective mortgages. Upon the payout of a mortgage, the remaining unamortized discount is recognized
as income.
During the year, we realized $2.0 million (2010 - $3.7 million) relating to the partial recovery of purchase price discounts on
MCAN’s acquired portfolios, included in mortgage interest income. We also received $303,000 (2010 - $2.3 million) of fees
from MCLP from a profit sharing arrangement relating to the discounted mortgage portfolios acquired by MCLP. Prior year fee
income from profit sharing was extremely high by historical standards.
Interest on loans and investments decreased by $1.2 million from the prior year as a result of a significantly lower average
portfolio balance in the current year, partially offset by a one-time gain of $876,000 from the sale of a financial investment.
Equity income from our ownership in MCLP increased by $1.7 million from the prior year due to gains from the sale of
mortgages in 2011.
Fees decreased by $2.3 million from 2010, primarily due to the decrease noted above in fees received from MCLP related to
profit sharing on its discounted mortgage portfolios. Fees also include extension, renewal and letter of credit fees earned on our
mortgage portfolio.
Marketable securities income increased by $1.3 million from the prior year as a result of a substantially larger average portfolio.
Term deposit interest and expenses increased by $4.7 million from 2010 as a result of an increase in the average term deposit rate
to 2.36% in 2011 from 2.10% in 2010 and a $163 million increase in the average term deposit balance to $507 million in 2011
from $344 million in 2010.
Mortgage expenses, consisting primarily of mortgage servicing expenses, increased by $576,000 from 2010 as a result of a
significantly larger average portfolio, although the average mortgage servicing rate decreased from 2010.
Details of the provision for credit losses are discussed in “Credit Quality”.
Net Investment Income - Securitization Assets
Net investment income from securitization assets relates to MCAN’s participation in certain securitization programs, including
the Canada Mortgage Bonds (“CMB”) program. As a result of the conversion to IFRS, our ability to participate in future CMB
program transactions has been significantly reduced (refer to “Securitization Programs” discussion). As existing CMB issuances
mature, we expect net investment income from securitization assets to decrease as the related mortgages and reinvestment assets
are removed from our balance sheet. Our existing CMB issuances mature as follows: June 2012 - $423 million, December 2012 -
$665 million, 2013 - $1.1 billion, 2014 - $879 million, 2015 - $47 million. In late 2011, we commenced a mortgage-backed
securities program to allow for our continued participation in securitization transactions (refer to “Securitization Programs”
discussion).
Net investment income from securitized assets before fair market value adjustments was $5.8 million in 2011 compared to $9.1
million in the prior year. Including fair market value adjustments on derivative financial instruments, net investment income on
securitized assets was $6.1 million in 2011 compared to $10.7 million in the prior year.
Mortgage interest income decreased by $4.7 million from the prior year, primarily due to a $388 million decrease in the average
mortgage portfolio over 2010. In addition, the average yield decreased from 4.32% in 2010 to 4.23% in 2011. As the securitized
mortgages repay, we reinvest the collected principal in certain permitted investments, which include financial investments and
short-term investments. Since we do not currently plan to participate in new CMB issuances in the near future, we expect
securitized mortgage interest income to continue to decrease as the mortgages repay, while reinvestment income should increase
as our reinvested asset balances grow.
Interest on financial investments increased by $2.5 million and interest on short-term investments increased by $480,000 from the
prior year, both as a result of a significant increase in the average portfolios from 2010 from the continued repayment of
securitized mortgages.
Other securitization income was $9.0 million in 2011 compared to $10.2 million in the prior year, consisting primarily of interest
rate swap receipts of $8.6 million (2010 - $9.5 million). As part of the CMB program, we enter into “pay floating, receive fixed”
interest rate swaps to hedge interest rate risk.
Interest on financial liabilities from securitization increased by $371,000 from 2010. The average interest rate increased to
3.66% in 2011 from 3.64% in 2010, while the average outstanding balance increased slightly in 2011.
The positive fair market value adjustment to derivative financial instruments of $228,000 (2010 - $1.6 million) relates to the
CMB interest rate swaps. The unrealized portion of this fair market value adjustment can be volatile as it is driven by changes in
the forward interest rate curve. From an economic perspective, this adjustment is generally offset by changes in future expected
income from securitized mortgages and principal reinvestment assets that have a floating interest rate. We regularly monitor our
interest rate swap hedge position to minimize our exposure to interest rate risk. From an accounting perspective, changes in
- 10 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
future expected income from these floating rate assets are not reflected in the consolidated statement of income, which can cause
significant volatility to net income since there is no offset to the fair market value adjustment to derivative financial instruments.
Net Interest Income
Presented in the following tables is an analysis of average rates and net interest income. Net interest income is the difference
between interest earned on certain assets and investments and the interest paid on liabilities to fund those assets.
Table 5: Net Interest Income - For the Year Ended December 31, 2011
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate
Corporate Securitized
Assets
Cash and cash equivalents
Short-term investments
Marketable securities
Mortgages - corporate
Mortgages - securitized
Financial investments
Other loans
Total on interest earning assets
Other assets
Total assets
$ 72,892
-
22,146
511,345
-
10,939
2,975
620,297
36,999
$ 657,296
$
-
277,661
-
-
1,713,674
1,133,824
-
3,125,159
4,456
$ 3,129,615
$
72,892
277,661
22,146
511,345
1,713,674
1,144,763
2,975
3,745,456
41,455
$ 3,786,911
$
592
-
1,281
32,593
-
1,182
160
35,808
-
$ 35,808
$
-
814
-
-
20,718
5,714
-
27,246
-
$ 27,246
$
592
814
1,281
32,593
20,718
6,896
160
63,054
-
$ 63,054
0.81%
-
5.78%
6.53%
-
5.79%
5.38%
5.77%
-
5.45%
-
1.00%
-
-
4.23%
2.01%
-
3.13%
-
3.12%
$ 507,225
Liabilities and Shareholders’ Equity
Term deposits
Financial liabilities from
securitization
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
-
11,294
-
$ 518,519
$
-
$
507,225
$ 12,293
$
-
$ 12,293
2.36%
-
3,115,145
6,854
-
3,115,145
18,148
146,393
-
-
-
29,844
-
-
29,844
-
-
-
-
-
3.66%
-
-
$ 3,121,999
$ 3,786,911
$ 12,293
$ 29,844
$ 42,137
2.36%
3.66%
Net Interest Income2
$ 23,515
$
(2,598)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
4.17%
1The average balance is calculated with reference to opening and closing monthly balances and as such may not be as precise if daily balances were used.
2Net interest income is equal to net investment income less equity income from MCLP, other securitization income, fee income, mortgage expenses and provision for credit losses.
- 11 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 6: Net Interest Income – For the Year Ended December 31, 2010
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate
Corporate Securitized
Assets
Cash and cash equivalents
Short-term investments
Marketable securities
Mortgages - corporate
Mortgages - securitized
Financial investments
Other loans
Total on interest earning assets
Other assets
Total assets
$ 50,201
-
741
359,391
-
25,370
9,983
445,686
46,437
$ 492,123
$
-
245,814
-
-
2,101,793
716,560
-
3,064,167
22,025
$ 3,086,192
$
50,201
245,814
741
359,391
2,101,793
741,930
9,983
3,509,853
68,462
$ 3,578,315
$
230
-
31
27,211
-
1,933
574
29,979
-
$ 29,979
$
-
334
-
-
25,467
3,203
-
29,004
-
$ 29,004
$
230
334
31
27,211
25,467
5,136
574
58,983
-
$ 58,983
0.46%
-
4.19%
7.59%
-
7.44%
5.75%
6.73%
-
6.09%
-
0.47%
-
-
4.32%
2.05%
-
3.47%
-
3.38%
$ 344,481
Liabilities and Shareholders’ Equity
Term deposits
Financial liabilities from
securitization
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
-
7,167
-
$ 351,648
$
-
$
344,481
$
7,619
$
-
$
7,619
2.10%
-
3,100,080
5,193
-
3,100,080
12,361
121,393
-
-
-
29,473
-
-
29,473
-
-
-
-
-
3.64%
-
-
$ 3,105,273
$ 3,578,315
$
7,619
$ 29,473
$ 37,092
2.10%
3.64%
Net Interest Income2
$ 22,360
$
(469)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
5.49%
1The average balance is calculated with reference to opening and closing monthly balances and as such may not be as precise if daily balances were used.
2Net interest income is equal to net investment income less equity income from MCLP, other securitization income, fee income, mortgage expenses and provision for credit losses.
The income/expense associated with the securitized assets and liabilities in the tables above represents MCAN’s 28% weighted
average share of CMB program economics.
Although net interest income from securitized assets and liabilities shown above is presented as a negative amount for certain
periods, net interest income from securitization before negative fair market value adjustments remains positive due to the impact
of the CMB interest rate swaps, which are “pay-floating, receive-fixed” swaps. Since interest rates have generally decreased
since the original securitization dates, the positive interest rate swap income has offset lower than expected principal
reinvestment income (since the majority of reinvested assets have a floating interest rate). Interest rate swap receipts were $8.6
million in 2011 (2010 - $9.5 million).
Table 7: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Years Ended
(in thousands except %)
December 31, 2011
Interest
Income
Average
Rate
Average
Assets1
December 31, 2010
Interest
Income
Average
Rate
Average
Assets1
Single family
Construction and single family uninsured
(completed inventory loans)
Commercial
Average mortgages - corporate portfolio
$ 256,803
$ 16,616
6.52%
$ 154,467
$ 12,808
8.26%
228,826
25,716
$ 511,345
14,602
1,375
$ 32,593
6.66%
5.39%
6.53%
197,968
6,956
$ 359,391
13,836
567
$ 27,211
7.06%
7.70%
7.59%
1The average is calculated with reference to opening and closing monthly balances and as such may not be as precise if daily balances were used.
- 12 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Credit Quality
Table 8: Provisions for Credit Losses and Write-offs
(in thousands except basis points)
For the Years Ended
Individual provision (recovery)
Single family uninsured
Residential construction
Commercial uninsured
Collective provision (recovery)
Single family uninsured
Residential construction
Commercial
Corporate mortgages - total
Financial investments and other loans
Other provisions
Total provision for (recovery of) credit losses
Corporate mortgage portfolio data:
Provision for (recovery of) credit losses
Net write offs
Net write offs (basis points)
December 31
2011
December 31
2010
$
$
$
$
$
$
$
(144)
-
58
(86)
719
142
286
1,147
(3)
-
1,144
1,058
1,061
275
5.4
$
$
$
$
$
$
$
191
(1,727)
-
(1,536)
205
505
42
752
(108)
200
844
(692)
(784)
66
1.8
The allowance for credit losses reduces the carrying value of mortgage assets to provide for an estimate of the principal amounts
that borrowers may not repay in the future. In assessing the estimated realizable value of assets, we must rely on estimates and
exercise judgment regarding matters for which the ultimate outcome is unknown. A number of factors can affect the amount that
we ultimately collect, including the quality of our underwriting process and credit criteria, the diversification of the portfolio, the
underlying security relating to the mortgages and the overall economic environment. Individual allowances include all of the
accumulated provisions for losses on particular assets required to reduce the related assets to estimated realizable value. The
collective allowance represents losses that we believe have been incurred but not yet specifically identified. The collective
allowance is recorded at the time that mortgage funds are advanced to a borrower. Collective allowance rates depend on asset
class, as different classes have varying underlying risks. Future changes in circumstances could materially affect our future
provisions for credit losses from those provisions determined in the current period, and there could be a need to increase or
decrease the allowance for credit losses.
Collective provisions in both years are consistent with the growth in our corporate mortgage portfolio over those periods.
Individual provision activity from 2010 consists primarily of the reversal of a $2 million individual allowance previously
recorded against a residential construction loan that paid out in full with no principal loss.
During the second quarter of 2011, MCAN and another participant lender received approval from the Court of Queen’s Bench of
Alberta for a foreclosure order on one of its impaired residential construction mortgages with a carrying value of $6.7 million
(net of a $1 million individual allowance). The final ownership structure of this mortgage has been finalized, and MCAN’s
proportionate interest in the property will be held as an investment within a wholly owned subsidiary of MCAN. We expect the
foreclosure proceedings to be completed by March 31, 2012. Since the process was not finalized as at December 31, 2011, the
mortgage was still considered to be impaired at that date.
Corporate mortgage arrears were $29 million as at December 31, 2011, down from $31 million as at December 31, 2010. The
decrease from the prior year includes a $4 million reduction in residential construction loan arrears, partially offset by a small
increase in single family mortgage arrears. Securitized mortgage arrears of $48 million decreased significantly from $61 million
as at December 31, 2010. There were no other assets in arrears at quarter end. We continue to proactively monitor loan arrears
and take prudent steps to collect overdue accounts.
- 13 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Net Impaired Mortgages and Allowances
Table 9: Net Impaired Mortgages and Allowances
(in thousands except %)
Residential construction
Single family (corporate)
Commercial
Single family (securitized)
Net impaired mortgages
Total mortgages
Net impaired as % of total mortgages (net of individual allowances)
Net impaired as % of corporate mortgages (net of individual allowances)
Collective allowance
Individual allowance
Total allowance
Operating Expenses
(in thousands)
Salaries and benefits
General and administrative
December 31
2011
December 31
2010
$
$
9,945
3,759
427
86
14,217
$
$
8,000
4,831
-
1,742
14,573
$ 2,139,367
$ 2,331,317
0.67%
2.24%
2,919
1,160
4,079
2011
3,234
3,626
6,860
$
$
$
$
0.63%
3.06%
2,047
1,246
3,293
2010
2,711
3,389
6,100
$
$
$
$
Operating expenses increased by $760,000 from the prior year, primarily due to higher salaries and benefits from an increase in
the number of employees.
Income Taxes
(in thousands)
Current tax provision (recovery)
Deferred tax provision (recovery)
2011
(2,072)
(183)
(2,255)
$
$
2010
3,442
1,864
5,306
$
$
The recovery of current taxes in 2011 was primarily due to the payment of the substantially higher than usual March 31, 2011
dividend of $14.5 million. This dividend was deductible from 2010 taxable income due to MCAN’s status as a mortgage
investment corporation (“MIC”) under the Income Tax Act (Canada) (the “Tax Act”), which allows us to deduct dividends paid
within 90 days of year end from taxable income. However, this dividend was not deductible in the calculation of December 31,
2010 current taxes payable for accounting purposes since it had not yet been paid as of that date, which created a substantial
current tax liability due to its significant excess over our regular quarterly dividend. As a result of the payment of this dividend
during the first quarter of 2011, current taxes payable decreased significantly from December 31, 2010, leading to the 2011
recovery of current taxes.
The significant current tax provision in 2010 was a result of the excess of 2010 taxable income over dividends paid in the year.
As noted above, this provision was partially reversed in 2011 upon the distribution of remaining 2010 taxable income through the
March 31, 2011 dividend.
The deferred tax charge in 2010 was a result of positive fair market value adjustments to derivative financial instruments and the
reversal of a significant individual mortgage allowance.
MCAN’s taxable income was $23 million ($1.42 per share) in 2011 and $26 million ($1.79 per share) in 2010. As a MIC, we
typically pay out all of our taxable income to shareholders through dividends.
The key differences between estimated taxable income and pre-tax net income include the non-deductibility of fair market value
adjustments, collective provisions for credit losses and the amortization of upfront CMB costs for tax purposes, the treatment of
capital gains income, and differences between equity income from MCLP for accounting and tax purposes.
- 14 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Cash Flows
Operating activities provided cash flows of $389 million in 2011 and provided $478 million in 2010. Net mortgage inflows were
significantly higher in the prior year, while net term deposit inflows were higher in the current year. In addition, we had
substantial positive inflows in 2010 from the issuance of financial liabilities from securitization and a decrease in other assets.
Investing activities used cash flows of $429 million in 2011 and used $465 million in 2010. The net increase in financial
investments was significantly higher in the prior year, although there was an increase in short term investments in the current
year compared to a decrease in the prior year. In addition, we had higher net purchases of marketable securities in the current
year.
Financing activities provided cash flows of $5 million in 2011 and used $15 million in 2010. While dividend outflows were
higher in the current year, there was a significant cash inflow in 2011 as a result of the share issuance.
Summary of Three Year Results of Operations
Note that MCAN’s 2010 and 2011 financial information discussed below has been presented in accordance with IFRS, while
2009 financial information reported below was presented in accordance with CGAAP.
In 2009, MCAN reported strong financial results, with earnings per share of $1.73. We earned significant income from upfront
gains and residual securitization income from our participation in the CMB program, and the recognition of substantial discount
income from portfolios of single family mortgages that had been acquired at a discount to their par values.
In 2010, we continued our solid financial performance with earnings per share of $1.85. Discount income and income related to
the CMB program remain remained strong, and we recognized income from the full reversal of a significant individual mortgage
allowance without principal loss.
Earnings per share of $1.68 were down from 2010, although still solid by historical standards. We continued to earn income
from the CMB program and discounted mortgages, although both were lower than 2009 and 2010. Equity income from MCLP
was significantly higher in 2011 than in recent years.
FINANCIAL POSITION
Total assets were $3.89 billion as at December 31, 2011, consisting of $754 million of corporate assets and $3.14 billion of
securitization assets. Corporate assets increased by $216 million during 2011, including increases of $220 million in mortgages,
$24 million in marketable securities and $4 million in our equity investment in MCLP, and a decrease of $34 million in cash and
cash equivalents.
Table 10: Assets
(in thousands)
Corporate Assets
Cash and cash equivalents
Marketable securities
Mortgages
Financial investments
Other loans
Equity investment in MCAP Commercial LP
Other assets
Securitization Assets
Short-term investments
Mortgages
Financial investments
Derivative financial instruments
Other assets
- 15 -
December 31
2011
December 31
2010
$
51,309
30,149
640,351
12,536
3,027
15,480
947
753,799
345,487
1,499,016
1,279,479
13,348
3,029
3,140,359
$ 3,894,158
$
85,309
6,608
420,322
10,248
3,332
11,530
769
538,118
220,949
1,910,995
996,968
13,120
5,875
3,147,907
$ 3,686,025
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Corporate Assets
Cash and cash equivalents include cash balances with banks and overnight term deposits. These investments provide liquidity to
meet maturing term deposit and new mortgage commitments, and meet our liquidity requirements, as discussed in the “Liquidity”
section.
Marketable securities, consisting of corporate bonds and real estate investment trusts, increased by $24 million in 2011.
Marketable securities provide MCAN with additional liquidity at yields in excess of cash and cash equivalents.
The corporate mortgage portfolio increased by $220 million during the year, consisting of increases of $118 million in uninsured
single family mortgages, $45 million in commercial loans, $33 million in insured single family mortgages and $24 million in
construction loans.
Figure 3: Total Corporate Mortgage Portfolio (in thousands)
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$-
2011
2010
TOTAL
$640,351
$420,322
We invest in insured and uninsured single
family mortgages in Canada. We believe that
the Canadian
residential property market
continues to exhibit healthy fundamentals, but
we expect to observe moderation in sales
volumes in 2012. We do not invest in the
United States mortgage market. The uninsured
mortgages that we invest in may not exceed
80% of the value of the real estate securing
such loans at the time of funding. For the
purposes of this ratio, value is the appraised
value of the property as determined by a
qualified appraiser at the time of funding.
Residential mortgages
insured by Canada
Mortgage and Housing Corporation (“CMHC”)
or Genworth Financial Mortgage Insurance
Company Canada Inc. (“Genworth”) may
exceed this ratio.
Uninsured residential construction loans are made to homebuilders to finance residential construction projects. These loans
generally have a floating rate of interest and terms of one to two years. Our limit on total conventional construction loans is
250% of regulatory capital. Non-residential construction loans may comprise up to one half of this limit. Per our internal limits,
the maximum single conventional construction loan may not exceed the lesser of $15 million or 20% of regulatory capital.
- 16 -
MANAGEM
MCAN MOR
MENT’S DISCUSS
RTGAGE CORPO
ORATION
SION AND ANA
ALYSIS OF OPER
RATIONS / 2011
ANNUAL REPO
RT
The compos
sition of our corp
porate mortgage
e portfolio is as f
follows:
Figure 4: C
Corporate Mo
ortgage Portfo
olio Composit
tion by Produc
ct Type (in tho
ousands)
$350,0
000
$300,0
000
$250,0
000
$200,0
000
$150,0
000
$100,0
000
$50,0
000
$-
$
2011
2010
Single f
d
family uninsured
Single fam
mily insured
on
Constructio
Commercial
$296,695
$
$178,396
$
(46.3%
(42.4%
%)
%)
$77,
$44,
,558
(12.1%)
(10.5%)
,307
1
$208,151
(32.5%)
(43.9%)
7
$184,367
$57,947
$13,252
(9.1
(3.2
1%)
2%)
Figure 5:
Corporate Mo
Geographic D
ortgage Portfo
Distribution (2
olio
2011)
Figure
6: Corporate
Geographi
Mortgage Po
ic Distribution
rtfolio
n (2010)
Other:
11.6%
BC: 17.8%
Other:
6.7%
BC:
%
16.7%
Onta
39.6
ario:
6%
Onta
39.5
ario:
5%
A
Alberta:
31.0%
3
Albe
37.
erta:
1%
Although ho
new mortga
continue to
minimum r
maximize m
ousing markets r
age approvals in
focus on the ri
ates on renewe
mortgage recover
remain balanced
n markets with
isk adjusted retu
d and newly fu
ry.
d, we continue to
h strong real est
urns of our vario
unded constructi
o monitor increas
tate fundamenta
ous mortgage p
ion loans. We
ses in house pric
als. Given the c
ortfolios and wh
continue to agg
ces closely and w
current interest
here possible, w
gressively mana
we continue to fo
rate environme
we have been ap
age arrears in or
ocus on
ent, we
pplying
rder to
Cyclically l
conditions h
account man
mitigate loa
low interest rate
have improved in
nagement of our
an losses. We co
es have contribu
n Canada, we ha
r mortgage servi
ontinue to regard
uted to a stabili
ave observed a d
icers continue to
d residential mor
ization of reside
decline in arrears
o be proactive in
rtgages as a solid
ential property
s levels since 20
n managing arrea
d investment ass
values across C
008. Our accoun
ars. We believe
et class.
Canada. As eco
nt management a
e that these facto
onomic
and the
ors will
As at Decem
of any recov
dependent o
these mortg
mortgages).
mber 31, 2011, w
veries of that am
on the value of t
gages have matu
The realization
we held discoun
mount, and we p
the real estate se
urity dates rang
n of the discount
ted mortgages w
ay the remaining
ecuring the mort
ging from 2012
t is based on man
with a net discou
g 50% to MCLP
tgage, as well as
(for certain fix
nagement’s expe
unt of $9 million
P. The amount o
s the financial ca
ed rate mortgag
ectations as to w
n (2010 - $14 mi
of the discount u
apacity of the bo
ges) to 2032 (fo
when cash will be
illion). We retai
ultimately recov
orrower. Additi
or certain floatin
e received.
in 50%
vered is
ionally,
ng rate
- 17 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 11: Mortgage Originations
(in thousands except %)
For the Periods Ended
Single family uninsured
Single family insured 1
Residential construction (advances)
Commercial
Quarters Ended December 31
2010
2011
Years Ended December 31
2010
2011
$
70,729
-
101,972
19,133
$ 191,834
$
$
25,029
-
51,284
1,381
77,694
$ 249,641
-
226,280
42,523
$ 518,444
$ 155,043
9,338
249,995
14,717
429,093
$
1 Single family insured originations, to the extent reflected above, consist only of mortgages that we intend to hold for investment purposes.
Financial investments increased by $2 million during 2011, primarily due to advances on a commercial real estate equity
investment.
We hold a 22.7% equity interest in MCLP. MCLP is an originator and servicer of mortgage loans for third party investors in
Canada. We outsource the majority of our mortgage and loan origination and servicing to MCLP, and the remainder to other
third party servicers.
On November 30, 2011, MCLP entered into an agreement to acquire the residential mortgage operations and certain related
assets of ResMor Trust Company. The transaction is expected to be completed in the first quarter of 2012, subject to certain
regulatory approvals and other customary closing conditions. If such transaction is successfully completed and MCLP realizes an
increase in income, the Company may in turn realize an increase in equity income given our ownership interest in MCLP.
Securitization Assets
Short-term investments consist of treasury bills and commercial paper held as reinvestment assets for the CMB program, CMB
cash held in trust and cash pledged as collateral. Short-term investments increased by $125 million during 2011, consisting of
increases of $116 million in CMB reinvestment assets and $9 million in CMB cash held in trust and pledged as collateral.
MCAN’s securitized mortgage portfolio consists of insured mortgages securitized through the CMB program and other
securitization programs. All mortgages in the securitized portfolio are insured, therefore they do not have a collective allowance.
- 18 -
MANAGEM
MCAN MOR
MENT’S DISCUSS
RTGAGE CORPO
ORATION
SION AND ANA
ALYSIS OF OPER
RATIONS / 2011
ANNUAL REPO
RT
The compos
sition of our secu
uritized mortgag
ge portfolio is as
follows:
Figure 7: S
Securitized M
Mortgage Portf
folio Composi
ition by Produ
uct Type (in th
housands)
100%
6
$1,499,016
$47,941
$1,910,995
$49,014
Comm
mercial insured
Single
e family insured
80%
60%
40%
20%
0%
$1,451,075
$1,861,981
2011
2010
Figure 8: S
G
Securitized M
Geographic D
Mortgage Portf
Distribution (20
folio
011)
Figure 9: Sec
Geo
curitized Mort
ographic Distr
tgage Portfoli
ribution (2010
io
0)
Other:
12.2%
%
BC: 14.5%
O
Other:
12.1%
1
%
BC: 14.6%
Onta
50.0
ario:
0%
ntario:
On
5
1.2%
Alberta
a:
%
23.3%
Albe
22.1
rta:
1%
Financial in
MCAN’s pa
“Securitizat
$289 million
nvestments consi
articipation in th
tion Programs” d
n in insured MB
ist of insured MB
he Insured Mortg
discussion. Fina
BS held as reinve
BS held as reinv
gage Purchase P
ancial investmen
estment assets an
vestment assets f
Program (“IMPP
nts increased by
nd a $6 million d
for the CMB pro
P”). For further
$283 million du
decrease in the IM
eivable associate
ogram and a rece
the IMPP, refer
information on
isting of an incr
uring 2011, cons
.
MPP receivable.
ed with
r to the
rease of
Derivative f
entered into
increase of
million.
financial instrum
o “pay-floating, r
$228,000 durin
ments at Decemb
receive-fixed” sw
ng 2011 consists
ber 31, 2011 co
waps to hedge a
s of an unrealiz
onsist of interest
against interest ra
zed gain of $8.8
t rate swaps rela
ate risk on reinv
8 million less n
ating to the CM
vested CMB prin
net interest rate
MB program. W
ncipal collection
swap receipts o
We have
ns. The
of $8.6
- 19 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Table 12: Liabilities and Shareholders’ Equity
(in thousands)
Liabilities
Corporate Liabilities
Term deposits
Current tax liabilities
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Other liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Available for sale reserve
December 31
2011
December 31
2010
$
601,577
3,321
5,436
7,943
618,277
$
421,061
5,728
5,311
6,632
438,732
3,111,357
6,059
3,117,416
3,735,693
3,119,601
2,613
3,122,214
3,560,946
132,817
510
23,491
1,647
158,465
$ 3,894,158
100,112
510
24,489
(32)
125,079
$ 3,686,025
Term deposit liabilities increased by $181 million during the year. To fund our corporate operations, we issue term deposits that
are eligible for CDIC deposit insurance. We do not use capital markets (including asset-backed commercial paper) for liquidity.
The small decrease in financial liabilities from securitization relates to the paydown of the liability associated with MCAN’s
participation in the IMPP (refer to “Securitization Programs” discussion). The liabilities associated with the CMB program pay
out in full at the time that a specific issuance matures. Financial liabilities from securitization as at December 31, 2011 mature as
follows: June 2012 - $423,209, December 2012 - $664,774, 2013 - $1,097,875, 2014 - $878,620 and 2015 - $46,879.
Share capital increased by $33 million during the year, which was primarily as a result of the public share issuance, in addition to
the dividend reinvestment plan and the Executive Share Purchase Plan. For further information on share capital, refer to Note 21
to the consolidated financial statements.
Retained earnings decreased by $1.0 million, consisting of net income of $27 million less dividends of $28 million.
The available for sale reserve represents unrealized gains or losses (net of deferred taxes) on available for sale marketable
securities and financial investments.
- 20 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SUMMARY OF FOURTH QUARTER RESULTS
The Company reported net income for the quarter ended December 31, 2011 of $5.2 million ($0.30 per share), compared to $2.0
million ($0.13 per share) in the prior year.
Table 13: Net Income for the Quarters ended December 31
(in thousands)
2011
2010
Net Investment Income - Corporate Assets
Mortgage interest
Interest on financial investments and other loans
Equity income from MCAP Commercial LP
Fees
Marketable securities
Interest on cash and cash equivalents
Financial Expenses
Term deposit interest and expenses
Mortgage expenses
Provision for (recovery of) credit losses
Net Investment Income - Securitization Assets
Mortgage interest
Interest on financial investments
Interest on short-term investments
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
Net investment income before fair market value adjustment
Fair market value adjustment - derivative financial instruments
Net investment income
Operating expenses
Income before income taxes
Provision for income taxes
Net income
Basic and diluted earnings per share
Taxable income per share
Dividends per share
Net Investment Income - Corporate Assets
$
$
$
$
$
8,845
81
3,262
689
399
115
13,391
3,424
822
388
4,634
8,757
4,685
1,504
233
2,593
9,015
7,448
136
7,584
1,431
(3,190)
(1,759)
6,998
1,769
5,229
6
5,223
0.30
0.51
0.27
$
$
$
$
$
7,875
309
1,625
908
31
105
10,853
2,134
851
(72)
2,913
7,940
5,905
1,319
114
2,616
9,954
7,454
178
7,632
2,322
(5,909)
(3,587)
4,353
1,926
2,427
469
1,958
0.13
0.45
0.26
Mortgage interest income increased by $970,000 as a result of a $171 million increase in the average mortgage portfolio from
$410 million to $581 million, partially offset by a 1.26% decrease in the average mortgage yield from 7.47% in 2010 to 6.21% in
2011. Mortgage interest income includes $600,000 (2010 - $1.2 million) of discount income on MCAN’s acquired mortgage
portfolios, which caused the majority of the decrease in the mortgage yield over the prior year.
Interest on financial investments and other loans decreased by $228,000 primarily due to a significantly lower average portfolio
balance in the current year.
- 21 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Equity income from our ownership interest in MCLP increased by $1.6 million from 2010, primarily due to gains from the sale of
mortgages.
Fees decreased by $219,000 in the quarter, as lower fees from the acquired mortgage profit sharing arrangement with MCLP
were partially offset by higher other mortgage fees.
Marketable securities income increased by $368,000 as a result of a significantly higher average portfolio balance in the current
year.
Term deposit interest and expenses increased by $1.3 million in 2011, primarily due to a $166 million increase in the average
outstanding balance from $381 million in 2010 to $547 million in 2011 and an increase in the average term deposit interest rate
from 2.13% in 2010 to 2.42% in 2011.
For details of the provision for credit losses, refer to Table 17.
Net Investment Income - Securitization Assets
Mortgage interest income decreased by $1.2 million as a result of a $382 million decrease in the average mortgage portfolio from
2010.
Interest on financial investments increased by $185,000 and interest on short-term investments increased by $119,000, both due
to increases in the respective average portfolio balances.
Other securitization income for the quarter was unchanged at $2.6 million, consisting primarily of interest rate swap receipts of
$2.3 million (2010 - $2.6 million).
There was a negative fair market value adjustment to derivative financial instruments of $3.2 million (2010 - negative $5.9
million) for the quarter relating to the CMB interest rate swaps.
- 22 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Net Interest Income
Presented in the following tables is an analysis of average rates and net interest income. Net interest income is the difference
between interest earned on certain assets and investments and the interest paid on liabilities to fund those assets.
Table 14: Net Interest Income - For the Quarter Ended December 31, 2011
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate
Corporate Securitized
Assets
Cash and cash equivalents
Short-term investments
Marketable securities
Mortgages - corporate
Mortgages - securitized
Financial investments
Other loans
Total on interest earning assets
Other assets
Total assets
$ 57,647
-
29,567
580,844
-
11,739
2,838
682,635
30,480
$ 713,115
$
-
334,760
-
-
1,559,890
1,225,961
-
3,120,611
3,357
$ 3,123,968
$
57,647
334,760
29,567
580,844
1,559,890
1,237,700
2,838
3,803,246
33,837
$ 3,837,083
$
$
115
-
399
8,845
-
43
38
9,440
-
9,440
$
$
-
233
-
-
4,685
1,504
-
6,422
-
6,422
$
115
233
399
8,845
4,685
1,547
38
15,862
-
$ 15,862
0.79%
-
5.35%
6.21%
-
3.60%
5.31%
5.49%
-
5.25%
-
0.94%
-
-
4.17%
1.91%
-
2.93%
-
2.92%
$ 546,863
Liabilities and Shareholders’ Equity
Term deposits
Financial liabilities from
securitization
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
-
14,678
-
$ 561,541
$
-
$
546,863
$
3,424
$
-
$
3,424
2.42%
-
3,111,397
6,315
-
3,111,397
20,993
157,830
-
-
-
7,448
-
-
7,448
-
-
-
-
-
3.63%
-
-
$ 3,117,712
$ 3,837,083
$
3,424
$
7,448
$ 10,872
2.42%
3.63%
Net Interest Income2
$
6,016
$
(1,026)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
3.79%
1The average balance is calculated with reference to opening and closing monthly balances and as such may not be as precise if daily balances were used.
2Net interest income is equal to net investment income less equity income from MCLP, other securitization income, fee income, mortgage expenses and provision for credit losses.
Table 15: Net Interest Income - For the Quarter Ended December 31, 2010
(in thousands except %)
Corporate
Securitized
Total Corporate Securitized
Total
Average Balance1
Income/Expense
Average Rate
Corporate Securitized
Assets
Cash and cash equivalents
Short-term investments
Marketable securities
Mortgages - corporate
Mortgages - securitized
Financial investments
Other loans
Total on interest earning assets
Other assets
Total assets
$
53,077
-
2,407
410,246
-
8,273
8,010
482,013
54,038
$ 536,051
$
-
215,056
-
-
1,941,980
944,686
-
3,101,722
6,472
$ 3,108,194
$
53,077
215,056
2,407
410,246
1,941,980
952,959
8,010
3,583,735
60,510
$ 3,644,245
$
$
105
-
31
7,875
-
162
147
8,320
-
8,320
$
$
-
114
-
-
5,905
1,319
-
7,338
-
7,338
$
105
114
31
7,875
5,905
1,481
147
15,658
-
$ 15,658
0.78%
-
5.11%
7.47%
-
9.60%
7.28%
6.85%
-
6.16%
-
0.73%
-
-
4.33%
2.35%
-
3.44%
-
3.41%
$ 380,539
Liabilities and Shareholders’ Equity
Term deposits
Financial liabilities from
securitization
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
-
13,592
-
$ 394,131
$
-
$
380,539
$
2,134
$
-
$
2,134
2.13%
-
3,120,575
2,010
-
3,120,575
15,602
127,529
-
-
-
7,454
-
-
7,454
-
-
-
-
-
3.61%
-
-
$ 3,122,585
$ 3,644,245
$
2,134
$
7,454
$
9,588
2.13%
3.61%
Net Interest Income2
$
6,186
$
(116)
Spread of Mortgages (Corporate Portfolio) over Term Deposits
5.34%
1The average balance is calculated with reference to opening and closing monthly balances and as such may not be as precise if daily balances were used.
2Net interest income is equal to net investment income less equity income from MCLP, other securitization income, fee income, mortgage expenses and provision for credit losses.
- 23 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
The income/expense associated with the securitized assets and liabilities in the tables above represents MCAN’s 28% weighted
average share of CMB program economics.
Although net interest income from securitized assets and liabilities shown above is presented as a negative amount for certain
periods, net interest income from securitization before negative fair market value adjustments remains positive due to the impact
of the CMB interest rate swaps, which are “pay-floating, receive-fixed” swaps. Since interest rates have generally decreased
since the original securitization dates, the positive interest rate swap income has offset lower than expected principal
reinvestment income (since the majority of reinvested assets have a floating interest rate). Interest rate swap receipts were $1.9
million in the fourth quarter (2010 - $2.0 million).
Table 16: Interest Income and Average Rate by Mortgage Portfolio (Corporate)
For the Quarters Ended
(in thousands except %)
December 31, 2011
Interest
Income
Average
Rate
Average
Assets1
December 31, 2010
Interest
Income
Average
Rate
Average
Assets1
Single family
Construction and single family uninsured
(completed inventory loans)
Commercial
Average mortgages - corporate portfolio
$ 304,932
$
4,712
6.29%
$ 175,032
$
3,645
8.10%
235,122
40,790
$ 580,844
$
3,642
491
8,845
6.33%
4.88%
6.21%
222,053
13,161
$ 410,246
$
4,028
202
7,875
7.06%
5.99%
7.47%
1The average is calculated with reference to opening and closing monthly balances and as such may not be as precise if daily balances were used.
Table 17: Provisions for Credit Losses and Write-Offs
For the Quarters Ended December 31
2011
2010
Individual provision (recovery)
Single family uninsured
Residential construction
Commercial uninsured
Collective provision (recovery)
Single family uninsured
Residential construction
Commercial
Corporate mortgages - total
Financial investments and other loans
$
$
$
$
(138)
-
58
(80)
$
$
119
147
197
463
5
468
$
$
-
-
-
-
(30)
33
(2)
1
(73)
(72)
Total provision for (recovery of) credit losses
$
388
$
(72)
Corporate mortgage portfolio data:
Provision for (recovery of) credit losses
Net write offs
Annualized net write offs (basis points)
Operating Expenses
(in thousands)
For the Quarters Ended December 31
Salaries and benefits
General and administrative
$
$
$
$
383
2
0.1
1
6
0.6
2011
882
887
1,769
$
$
2010
1,038
888
1,926
$
$
Although we had more employees in 2011, salaries and benefits were higher in the prior year as a result of a higher variable
compensation expense.
- 24 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Income Taxes
(in thousands)
For the Quarters Ended December 31
Current tax provision
Deferred tax provision (recovery)
2011
1,612
(1,606)
6
$
$
2010
2,490
(2,021)
469
$
$
The current tax provision was higher in the prior year as a result of higher taxable income. The recovery of deferred taxes in both
years was consistent with the respective negative fair market adjustments to derivative financial instruments.
SELECTED QUARTERLY FINANCIAL DATA
Table 18: Selected Quarterly Financial Data
(in thousands, except per share amounts)
Net investment income -
corporate assets
Net investment income -
securitization assets
before fair market value
adjustment
Fair market value
adjustment
Net investment income -
securitization assets
Net investment income
Operating expenses
Income before income
taxes
Provision for (recovery
of) income taxes
Net income
Basic and diluted earnings
per share
Q1/11
Q2/11
Q3/11
Q4/11
Q1/10
Q2/10
Q3/10
Q4/10
$
5,308
$
6,165
$
5,420
$
8,757
$
5,037
$
6,174
$
8,229
$
7,940
1,469
(3,238)
1,844
1,722
1,086
1,431
1,203
4,934
(3,190)
(1,462)
3,685
4,702
1,845
2,322
4,298
(5,909)
(1,769)
3,566
6,020
(1,759)
(259)
8,387
6,143
(3,587)
3,539
1,672
1,867
9,731
1,793
7,938
(5,222)
7,089
$
733
7,205
$
$
11,440
1,626
9,814
2,228
7,586
$
6,998
1,769
5,229
6
5,223
4,778
1,308
14,561
1,407
14,372
1,459
3,470
13,154
12,913
(656)
4,126
$
3,294
9,860
2,199
$ 10,714
$
$
4,353
1,926
2,427
469
1,958
$
0.49
$
0.44
$
0.45
$
0.30
$
0.29
$
0.69
$
0.74
$
0.13
Taxable income
Taxable income per share
$
$
4,389
0.30
$
$
5,532
0.34
$
$
4,495
0.27
$
$
8,463
0.51
$
$
4,100
0.29
$
$
5,700
0.39
$
$
9,439
0.66
$
$
6,455
0.45
Dividends per share1
Regular
Extra
Total
$
$
0.27
0.73
1.00
$
$
0.27
-
0.27
$
$
0.27
-
0.27
$
$
0.27
-
0.27
$
$
0.26
0.15
0.41
$
$
0.26
-
0.26
$
$
0.26
-
0.26
$
$
0.26
-
0.26
1No dividends paid during the past eight quarters have included a capital gains component.
Net investment income from our corporate portfolio has been stable and consistent for the past eight quarters. The third and
fourth quarters of 2010 were higher than usual due to the full reversal of an individual corporate mortgage allowance upon payout
and strong equity income from MCLP, respectively. The fourth quarter of 2011 also had significant equity income from MCLP.
Net investment income before fair market value adjustments from our securitized portfolio has also been stable, with significant
mortgage penalty income recognized in the second quarter of 2010. The fair market value adjustment is driven by changes in the
forward interest rate curve and is difficult to predict.
We generally recover current taxes in the first quarter based on the magnitude of the extra dividend. We generally incur deferred
tax expense on a positive fair market value adjustment, and vice versa.
- 25 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
SECURITIZATION PROGRAMS
CMB Program
MCAN participates in the CMB program, which involves the securitization of mortgages that are insured by CMHC or
Genworth. Over the term of a CMB issuance, MCAN is entitled to interest income received from the securitized mortgages. As
the securitized mortgages repay, MCAN reinvests the collected principal in certain permitted investments and is also entitled to
interest income from the reinvested assets. As part of the securitization, MCAN also incurs a liability in the amount of the
securitized mortgages and is obligated to pay interest on this liability. This liability does not amortize over the term of the
issuance and is payable in full at maturity. MCAN also recognizes servicing expenses on the mortgages and pays certain upfront
costs. The securitized mortgages and reinvestment assets are held as collateral against the CMB liability.
MCAN participates in the CMB program with MCLP and a private company. MCAN participates in the economics of each
CMB issuance in accordance with a pre-determined economic sharing percentage, which dictates the upfront and ongoing cash
flow rights and obligations of the participants. MCAN’s weighted average economic participation for outstanding CMB
issuances as at December 31, 2011 was 28% (December 31, 2010 - 28%). MCLP and the private company have indemnified
MCAN for the remaining 72% of CMB program obligations.
The CMB securitization process includes the sale of the securitized mortgages to the Canada Housing Trust (“CHT”). Just prior
to the sale to CHT, MCAN purchases the securitized mortgages from MCLP or a third party at fair value, including transaction
costs. The sale to CHT fails to meet derecognition criteria since MCAN does not transfer substantially all risks and rewards on
sale. MCAN accounts for these transactions as collateralized borrowings and records cash received as a financial liability from
securitization.
In connection with the arrangements involving a private company and the participation of MCAN in the economics of CMB
issuances, amounts owing to MCAN under such arrangements in connection with certain renewals and refinances of mortgages
related to the CMB program are currently in disagreement and no payments have been made to MCAN thereunder since 2009.
Although MCAN is following up with these issues, MCAN is uncertain when and if the disagreement will be resolved and, even
if resolved, when and if payments under those arrangements will resume. The inability to recover such amounts or cause the
payments to recommence on account of the mortgage renewals and refinances could be material to MCAN.
As a result of its failure to meet derecognition criteria on the sale of the securitized mortgages to CHT, MCAN recognizes 100%
of the mortgages, reinvestment assets and securitization liability on the consolidated balance sheets until the maturity of the CMB
issuance. MCAN recognizes its 28% weighted average share of mortgage interest income, principal reinvestment income,
interest expense on the securitization liability and certain other program expenses on the accrual basis.
We enter into “pay floating, receive fixed” interest rate swaps as part of the CMB program. The purpose of the interest rate
swaps is to hedge interest rate risk on both securitized mortgages and principal reinvestment assets that have a floating interest
rate, as substantially all interest payments on the securitization liabilities are fixed rate.
The interest rate swaps are classified as held for trading, where changes in fair value are recorded through the consolidated
statements of income. From an economic perspective, these fair value changes are generally offset by changes in future expected
income from securitized mortgages and principal reinvestment assets that have a floating interest rate. From an accounting
perspective, changes in future expected income from these floating rate assets are not reflected in the consolidated statements of
income, which can cause significant volatility to the consolidated statements of income since there is no offset to fair value
changes in the interest rate swaps.
In March 2010, the Office of the Superintendent of Financial Institutions (“OSFI”) released a final advisory with respect to the
impact of IFRS rules regarding securitization on regulatory capital ratios, since IFRS rules regarding securitization require assets
and liabilities that are subject to securitization to be reflected as on-balance sheet items. The advisory indicated that any on-
balance sheet assets and liabilities recognized from securitization transactions (including insured mortgages that are securitized
through the CMB program) were required to be included in the calculation of a regulated financial institution’s regulatory capital
ratios. Pursuant to these guidelines, we are required to include any assets and liabilities recognized from securitization
transactions undertaken after June 30, 2010 in the calculation of our regulatory capital ratios under IFRS. Consequently, our
future participation in securitization transactions, namely through our participation in the CMB program, was significantly
reduced at this time from historical participation levels in order for us to comply with our regulatory capital ratios. In late 2011,
we commenced a mortgage-backed securities program (discussed below under “Other MBS Programs”) to allow for our
continued participation in securitization transactions. However, at this point, we have been unable to develop additional potential
alternative structures and arrangements that may permit our continued participation in the CMB program.
Other MBS Programs
The Company participated in the IMPP, which involves the securitization of insured single family mortgages. Although MCAN
has no economic interest in the IMPP, it earned an up-front fee for its involvement. MCAN participated in the IMPP on behalf of
a third party, who is entitled to 100% of the economics of the IMPP. Since MCAN failed to meet derecognition criteria on the
mortgage sales associated with the IMPP, it recognized a corresponding financial investment and financial liability from
- 26 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
securitization, which represent the receivable from the third party and the liability to the IMPP counterparty, respectively.
MCAN is the counterparty for the ongoing cash flows between the third party and the IMPP counterparty.
In 2011 we commenced a program under which we issue insured mortgage-backed securities (“MBS”) that are sold into the
market and the associated net economics (“interest-only strips”) are sold to a third party. During 2011, all interest-only strip sales
were to MCLP. MCAN met derecognition criteria on the sale of the mortgages (i.e. on creation of MBS), and accordingly they
were removed from our consolidated balance sheet at that time.
Our ability to continue to generate future income under this MBS program is dependent upon on our ability to acquire insured
mortgages from MCLP or other mortgage originators as well as our ability to sell the MBS and interest-only strips on a profitable
basis.
In 2011, we recognized $261,000 of income (2010 - $nil) related to the sale of MBS and the associated interest-only strips.
Timely Payment Guarantee
Consistent with all issuers of MBS, MCAN is required to pass through a “timely payment” to MBS investors (representing
scheduled principal and interest payments), even if these mortgage payments have not been collected from mortgagors.
Similarly, at the maturity of the MBS pools that have been issued by MCAN (including those underlying CMB program
issuances), any outstanding principal must be paid to the MBS investors. If mortgagors are unable to renew their mortgages at
their scheduled maturity, MCAN will be required to use its own financial resources to fund this obligation until proceeds are
received from the mortgage insurers following sale of the mortgaged properties.
DESCRIPTION OF CAPITAL STRUCTURE
The authorized share capital of the Company consists of an unlimited number of common shares with no par value. At December
31, 2011, there were 16,861,575 common shares outstanding. At March 9, 2012, there were 16,881,802 common shares
outstanding. For additional information related to share capital, refer to Note 21 to the consolidated financial statements.
SHARE ISSUANCE
On April 18, 2011, we completed a public share offering of 2,300,000 common shares at a price of $14.50 per share, for net
proceeds of approximately $31 million after deducting $2.3 million of issuance costs.
The purpose of the share issuance was to create additional asset capacity to grow our corporate asset portfolio. Based on our
target assets to capital ratio (governed by our MIC tax status), the share issuance created an additional $178 million of asset
capacity. Although we have had significant corporate asset growth since the share issuance, our remaining asset capacity was
$132 million at December 31, 2011. However, our capital base at this date included a significant amount of taxable income not
yet distributed to shareholders. Due to the magnitude of the 2012 first quarter dividend, our remaining asset capacity will
decrease significantly on March 30, 2012 as a result of the related decrease to shareholders’ equity. We have incorporated this
anticipated decrease in asset capacity into our first quarter growth plans as we approach the full investment of the balance sheet.
The share issuance was MCAN’s first public capital issuance since 1991. In recent years, we have raised capital through rights
offerings to existing shareholders and the quarterly dividend reinvestment plan. As a MIC that typically pays out all of its taxable
income through dividends, MCAN’s capital growth is achieved through new share capital as opposed to the reinvestment of
earnings.
DIVIDEND POLICY AND RECORD
Our dividend policy is to pay out substantially all of our taxable income to our shareholders. As a MIC under the Tax Act, we
can deduct dividends paid to shareholders during the year and within 90 days thereafter from income for tax purposes. We pay
out substantially all of our taxable income to shareholders, whereas other financial institutions generally pay out only a portion of
their taxable income to their shareholders. These dividends are taxable in the shareholders’ hands as interest. In addition, a MIC
can pay certain capital gains dividends which are taxed as capital gains in the shareholders’ hands. We intend to continue to
declare dividends on a quarterly basis.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Dividends per share over the past three years are as follows:
Table 19: Dividends
Fiscal Period
First Quarter - Regular Dividend
First Quarter - Extra Dividend
Second Quarter
Third Quarter
Fourth Quarter
Taxable Dividends
Capital Gains Dividends
2011
$ 0.27
0.73
0.27
0.27
0.27
$ 1.81
$ 1.81
-
$ 1.81
2010
0.26
0.15
0.26
0.26
0.26
1.19
1.19
-
1.19
$
$
$
$
2009
0.25
0.43
0.25
0.25
0.26
1.44
1.44
-
1.44
$
$
$
$
The Board of Directors of the Company (the “Board”) declared a first quarter dividend of $0.60 per share to be paid March 30,
2012 to shareholders of record as of March 15, 2012. The dividend comprises the regular quarterly dividend of $0.27 per share
and a $0.33 per share extra dividend, and consists of a $0.05 per share capital gains component and a $0.55 per share taxable
component.
OFF-BALANCE SHEET ARRANGEMENTS
We commit to fund mortgages to borrowers in advance of funding at agreed upon interest rates. Substantially all of these
commitments relate to floating rate construction loans. At December 31, 2011, outstanding commitments for future fundings of
mortgages intended for our portfolio were $297 million.
Off-balance sheet arrangements relating to the CMB program are discussed in the “CMB Program” section above.
CONTRACTUAL OBLIGATIONS
We have contractual obligations to make principal and interest payments on term deposits and an operating lease. In addition, we
have outstanding commitments for future fundings of mortgages intended for our own portfolio, as discussed above.
As part of the CMB program, we are required to pay servicing expenses on the securitized mortgages and other ongoing costs.
We outsource our mortgage and loan origination and servicing to MCLP and other third party servicers. We continue to pay
servicing expenses as long as the mortgages and loans remain on our balance sheet.
Table 20: Contractual Obligations
As at December 31, 2011
Term deposits
Operating lease
Mortgage fundings
CMB obligations
Less than
one year
One to
five years
Over five
years
$
$
327,010
277
241,656
768
569,711
$
$
274,567
484
55,010
674
330,735
$
$
-
-
-
-
-
$
$
Total
601,577
761
296,666
1,442
900,446
TRANSACTIONS WITH RELATED PARTIES
In 2011, we purchased certain corporate services from MCLP in the amount of $497,000 (2010 - $433,000). We also purchased
certain mortgage origination and administration services from MCLP in the amount of $2.9 million (2010 - $2.8 million). During
2011, we received $2.2 million of mortgage fees from MCLP (2010 - $3.7 million). The fees received from MCLP include
commitments, extension, renewal, and letter of credit fees. We use MCLP systems, including networks, subsystems and general
ledger. We also receive technology support from MCLP.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
In 2011, we paid fees in the amount of $2.7 million to MCLP relating to a profit sharing arrangement on a portfolio of discounted
mortgages (2010 - $4.2 million). We received $303,000 of fees from MCLP relating to a profit sharing arrangement on a
portfolio of discounted mortgages (2010 - $2.3 million).
In 2011, we earned $261,000 from the sale of interest-only strips to MCLP (2010 - $nil), discussed above in “Securitization
Programs.”
The Company has established an Executive Share Purchase Plan (the “Share Purchase Plan”) whereby the Board can approve
loans to key personnel for the purpose of purchasing the Company’s common shares. The maximum amount of loans approved
under the Share Purchase Plan is limited to 10% of the issued and outstanding common shares. During 2011, MCAN advanced
$299,000 of new loans under the Share Purchase Plan (2010 - $789,000). As at December 31, 2011, $1.8 million of loans were
outstanding (December 31, 2010 - $1.7 million). The loans under the Share Purchase Plan bear interest at prime plus 1%, and
have a five-year term.
In 2010, we established a Deferred Share Units Plan (the “DSU Plan”) whereby the Board granted units under the DSU Plan to
the President and Chief Executive Officer (for the purposes of this paragraph, the “Participant”). Each unit is equivalent in value
to one common share of the Company. Following the Participant’s retirement/termination date, the Participant is entitled to
receive cash for each unit. The individual unit value is based on the average market value of the MCAN’s common shares for the
five days preceding the retirement/termination date. The Participant was granted 30,000 units under the DSU Plan during 2010.
In addition, the Participant is entitled to receive dividend distributions in the form of additional units. The underlying units
follow a graded vesting schedule over three years. All dividends paid prior to July 6, 2014 vest as at July 6, 2014. All dividends
paid after July 6, 2014 vest immediately. As at December 31, 2011, 10,000 units had vested (December 31, 2010 - nil).
We recognize compensation expenses associated with the DSU Plan in line with the graded vesting schedule. The compensation
expense recognized for the year ended December 31, 2011 related to the DSU Plan was $181,000 (2010 - $128,000). As at
December 31, 2011, the accrued DSU Plan liability was $309,000 (December 31, 2010 - $128,000), included in accounts payable
and accrued liabilities.
CAPITAL MANAGEMENT
We derive our net investment income from the investment of our equity and the difference or spread between amounts earned on
our assets and the cost of the term deposits that we issue to fund such assets. As a MIC under the Tax Act, we are limited to a
liabilities to capital ratio of 5:1 (or an assets to capital ratio of 6:1), based on our non-consolidated balance sheet measured at its
tax value. As a loan company under the Trust and Loan Companies Act (the “Trust Act”), OSFI regulates our consolidated
regulatory assets to capital and has granted us a maximum consolidated regulatory assets to capital ratio. We borrow to the
extent that we are satisfied that the borrowing and additional investments will increase our overall profitability.
OSFI has issued guidelines to federally regulated companies for capital adequacy, which include meeting a minimum regulatory
capital to risk-weighted assets ratio of 10% for Total capital and 7% for Tier 1 capital. Our internal target minimum Tier 1 and
Total capital ratios are both 20%.
Securitization assets and liabilities are both excluded from the calculation of the Tax Act ratio. Assets securitized through the
CMB program prior to June 30, 2010 are excluded from the calculation of regulatory ratios.
The Tax Act and regulatory ratios as at December 31, 2010 are presented on a CGAAP basis, as it was the accounting framework
in place at that date. Neither regulatory body requires restatements of their respective ratios on an IFRS basis.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Our Tax Act and regulatory ratios are as follows:
Table 21: Regulatory Capital
(amounts in thousands, except %)
Tax Act Ratio
Income tax assets
Income tax capital
Income tax assets to capital ratio
Income tax liabilities to capital ratio
Regulatory Ratios (OSFI)
Tier 1 capital
Share capital
Contributed surplus
Retained earnings
Tier 1 capital deductions
Tier 2 capital
Unrealized gain on available for sale marketable securities
Tier 2 capital deductions
Total capital
Total regulatory assets
Total risk-weighted assets
Capital ratios
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
Assets to capital ratio
December 31
2011 (IFRS)
December 31
2010 (CGAAP)
$
766,065
156,116
4.91
3.91
$
132,817
510
23,491
(229)
156,589
560
(229)
331
$
$
555,360
126,374
4.39
3.39
100,112
510
26,956
(6,815)
120,763
-
(229)
(229)
$
156,920
$
$
818,112
704,954
$
$
$
120,534
595,473
546,411
22.21%
22.26%
5.21
22.10%
22.06%
4.94
We are limited to the lowest maximum assets amount in the above two asset tests, and the maximum leverage permitted under the
Tax Act is more constraining on the Company than the regulatory assets to capital ratio mandated by OSFI. We manage our
assets to a level of 5.75 times capital on a tax basis to provide a prudent cushion between the maximum and total actual assets.
We fund the majority of our investments through the issue of term deposits eligible for CDIC deposit insurance with varying
maturities in certain provinces of Canada. We do not use capital markets (including asset-backed commercial paper) for
liquidity.
In order to promote a more resilient banking sector and strengthen global capital standards, the Basel Committee on Banking
Supervision (“BCBS”) proposed significant enhancements and capital reforms to the current framework. The revised framework,
referred to as Basel III, will be effective January 1, 2013 and provides lengthy periods for transitioning numerous new
requirements.
Significant Basel III reforms include the following:
•
•
•
Introducing a new minimum common equity ratio (the “Common Equity Tier 1 ratio”). Financial institutions will be
required to meet the new Common Equity Tier 1 ratio standard during a transition period beginning January 1, 2013
and ending on January 1, 2019. The minimum requirement, which includes a conservation buffer, increases during the
transition period.
Increasing the minimum Tier 1 capital and Total capital ratios. These increases will also be phased-in commencing
January 1, 2013 with financial institutions expected to meet the new standards through a transition period ending on
January 1, 2019.
Introducing a new global leverage ratio to address balance sheet leverage. The BCBS will be monitoring and refining
this new ratio between 2011 and 2017 before its final implementation in 2018.
We maintain prudent capital planning practices to ensure that we are adequately capitalized and continue to satisfy minimum
standards and internal targets. Based on our current understanding of the revised capital requirements proposed by BCBS, we
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
expect to satisfy the new requirements ahead of the implementation timelines that have been proposed by BCBS and confirmed
by OSFI.
In conjunction with the annual strategic planning and budgeting process, we complete an Internal Capital Adequacy Assessment
Process (“ICAAP”) in order to ensure that we have the capital adequacy to support our business plan and risk appetite. The
ICAAP assesses the capital available to support the various inherent risks that we face including credit, liquidity, interest rate,
market, geographic concentration and reputational risks. The Company’s business plan is also stress tested under various adverse
scenarios in order to determine the impact on our results from operations and financial condition. The ICAAP is reviewed by
both management and the Board and is submitted to OSFI annually. Based on our 2012 ICAAP, we have determined that the
Company remains adequately capitalized.
For additional information on our capital management, refer to Note 32 to the consolidated financial statements.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
The majority of our consolidated balance sheet consists of financial instruments, and the majority of net income is derived from
the related income, expenses, gains and losses. Financial instruments include cash and cash equivalents, short-term investments,
marketable securities, mortgages, financial investments, other loans, financial liabilities from securitization, term deposits and
derivative financial instruments, which are discussed throughout this MD&A.
The use of financial instruments exposes us to interest rate, credit, liquidity and market risk. A discussion of these risks and how
these risks are managed is found under “Risk Management” below.
Information on the financial statement classification and amounts of income, expenses, gains and losses associated with the
instruments are located in the “Results from Operations” and “Financial Position” sections of this MD&A. Information on the
determination of the fair market value of financial instruments is located in the “Critical Accounting Policies and Estimates”
section of this MD&A.
LIQUIDITY
Our liquidity management process includes a Liquidity Risk Management Framework that incorporates multi scenario stress
testing. Results of the stress testing are reported to management on a monthly basis and to the ICB on a quarterly basis. The
table below shows the composition of our liquidity ratios over the last two years.
Table 22: Liquidity Ratios
(in thousands except %)
Tier 1 liquidity
Cash and cash equivalents
Tier 2 liquidity
Marketable securities
Tier 3 liquidity
CMHC Single Family Mortgages less 25%
Total liquidity
100 day term deposit maturities
Tier 1 & 2 liquidity to 100 day term deposit maturities
Total liquidity to 100 day term deposit maturities
December 31
2011
December 31
2010
$
51,309
$
85,309
30,149
6,608
19,001
6,476
$ 100,459
$
88,953
$
$
98,393
67,002
92%
113%
137%
147%
We have established and maintain liquidity policies which meet the standards set under the Trust Act and any regulations or
guidelines issued by OSFI.
For further analysis of our liquidity risks and how we manage them, refer to the “Risk Factors” and “Risk Management” sections
below.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
RISK FACTORS
The shaded areas of this MD&A represent a discussion of risk factors and risk management policies and procedures relating to
credit, liquidity, interest rate and market risks as required under IFRS 7, Financial Instruments: Disclosures. The relevant
MD&A sections are identified by shading within boxes and the content forms an integral part of the consolidated financial
statements.
We are exposed to a number of risks that can adversely affect our ability to achieve our business objectives or execute our
business strategies, and which may result in a loss of earnings, capital and/or reputation. The risks that have been identified may
not be the only risks faced by the Company. Other risks of which the Company is not aware of or which the Company currently
deems to be immaterial may surface and have a material adverse impact on the Company’s business, results from operations and
financial condition.
The significant risks to which we are exposed are as follows:
Credit Risk
Credit risk is the risk of financial loss resulting from the failure of a counterparty, for any reason, to fully honour its financial or
contractual obligations to the Company, primarily arising from our mortgage and lending activities. Fluctuations in real estate
values may increase the risk of default and may also reduce the net realizable value of the collateral property to the Company.
These risks may result in defaults and credit losses, which may result in a loss of earnings. Credit losses occur when a
counterparty fails to meet its obligations to the Company and the value realized on the sale of the underlying security deteriorates
below the carrying amount of the exposure.
Liquidity Risk
Liquidity risk is the risk that cash inflows, supplemented by assets readily convertible to cash, will be insufficient to honour all
cash outflow commitments (both on and off-balance sheet) as they come due. The failure of borrowers to make regular mortgage
payments increases the uncertainties associated with liquidity management, notwithstanding that we may eventually collect the
amounts outstanding, which may result in a loss of earnings or capital, or have an otherwise adverse effect on our financial
condition and results of operations.
Interest Rate Risk
Interest rate risk is the potential impact of changes in interest rates on our earnings and capital. Interest rate risk arises when our
assets and liabilities, both on and off-balance sheet, have mismatched repricing dates. Changes in interest rates where we have
mismatched repricing dates may have an adverse effect on our financial condition and results of operations. In addition, interest
rate risk may arise when changes in the underlying interest rates on assets do not match changes in the interest rates on liabilities.
This potential mismatch may have an adverse effect on our financial condition and results of operations.
Our exposure to interest rate risk is discussed further in Note 31 to the consolidated financial statements.
Outsourcing Risk
Outsourcing risk is the risk incurred when we contract out a business function to a service provider instead of performing the
function ourselves, and the service provider performs at a lower standard than we would have under similar circumstances. We
outsource all mortgage and loan origination, servicing and collections to MCLP and other third parties.
Economic Conditions
The Canadian economy continued to demonstrate modest strength in 2011, as evidenced by growth in both gross domestic
product and employment. Cyclically low interest rates contributed to the robustness of the housing market. We expect the
economy to remain stable in 2012, however, housing sales are expected to decline in all key markets as a result of lower levels of
inventory for new homes that require an extended timeline to move through the construction process. Resales are expected to
decline slightly as a result of recent changes to CMHC mortgage insurance rules.
Higher interest rates or a decline in general economic conditions may cause default rates to increase as creditworthiness decreases
for borrowers who are more highly leveraged or as unemployment increases. This decline may negatively affect our net income.
In addition, a general decline in economic conditions may slow the pace of housing sales and adversely affect growth in the
single family mortgage market, which could adversely affect our ability to grow our mortgage portfolio.
Regulatory Risk
Changes in laws and regulations, including interpretation or implementation, may affect the Company by limiting the products or
services that we can provide and increasing the ability of competitors to compete with our products and services. Also, any
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
failure by the Company to comply with applicable laws and regulations may result in sanctions and financial penalties which may
adversely impact our earnings and damage our reputation. Increasing regulations and expectations as a result of the recent
financial crisis, both globally and domestically, have increased the cost and resources necessary to meet regulatory expectations
for the Company.
Market Risk
Market risk is the exposure to adverse changes in the value of financial assets. For the Company, market risk factors include
price risk on marketable securities, interest rates, real estate values, commodity prices and foreign exchange rates, among others.
Any changes in these market risk factors may negatively affect the value of our financial assets, which may have an adverse
effect on our financial condition and results of operations. We do not undertake trading activities as part of our regular
operations, and therefore are not exposed to risks associated with activities such as market making, arbitrage or proprietary
trading.
Reliance on Key Personnel
Our future performance is dependent on the abilities, experience and efforts of our management team and other key personnel.
There is no assurance that we will be able to continue to attract and retain key personnel, although it remains a key objective of
the Company. Should any key personnel be unwilling or unable to continue their employment with MCAN, there may be an
adverse effect on our financial condition and results of operations.
Operational and Infrastructure Risk
We are exposed to many types of operational risks that affect all companies. Such risks include the risk of fraud by employees or
others, unauthorized transactions by employees, and operational or human error. We are also exposed to the risk that computer
or telecommunication systems could fail, despite efforts to maintain these systems in working order. Shortcomings or failures in
internal processes, employees or systems, including any of our financial, accounting or other data processing systems, may lead
to financial loss and damage to our reputation. In addition, despite our contingency plans in place, our ability to conduct business
may be adversely affected by a disruption in the infrastructure that supports our operations.
Competition Risk
Our operations and income are a function of the interest rate environment, the availability of mortgage products at reasonable
yields and the availability of term deposits at reasonable cost. The availability of mortgage products for the Company and the
yields thereon are dependent on market competition. In the event that we are unable to compete successfully against our current
or future competitors or raise term deposits to fund our lending activities, there may be an adverse effect on our financial
condition and results of operations.
Monetary Policy
Our earnings are affected by the monetary policies of the Bank of Canada. Changes in the supply and demand of money and the
general level of interest rates could affect our earnings. Changes in the level of interest rates affect the interest spread between
our mortgages, loans and investments, securitization investments and term deposits, and as a result may impact our net
investment income. Changes to monetary policy and in financial markets in general are beyond our control and are difficult to
predict or anticipate.
Environmental Risk
We recognize that environmental hazards are a potential liability. This risk exposure can result from non-compliance with
environmental laws, either as principal or lender, which may negatively affect our financial condition and results of operations.
We aim to mitigate this risk by complying with all environmental laws and by applying a rigorous environmental policy and
procedures to our commercial and development lending activities.
Changes in Laws and Regulations
Changes to current laws, regulations, regulatory policies or guidelines (including changes in their interpretation, implementation
or enforcement), the introduction of new laws, regulations, regulatory policies or guidelines or the exercise of discretionary
oversight by regulatory or other competent authorities including OSFI, may adversely affect us, including by limiting the
products or services that we provide, restricting the scope of our operations or business lines, increasing the ability of competitors
to compete with our products and services or requiring us to cease carrying on business. In addition, delays in the receipt of any
regulatory approvals and authorizations that may be necessary to the operation of our business may adversely affect our
operations and financial condition. Our failure to comply with applicable laws and regulations may result in sanctions and
financial penalties that could adversely impact our earnings and damage our reputation.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Changes in Accounting Standards and Accounting Policies
We may be subject to changes in the financial accounting and reporting standards that govern the preparation of our consolidated
financial statements. These changes may materially impact how we record and report our financial condition and results of
operations and, in certain circumstances, we may be required to retroactively apply a new or revised standard that results in our
restating prior period financial statements. Please refer to the “Future Changes in Accounting Policy” section of this MD&A for
further details.
Accuracy and Completeness of Information on Customers and Counterparties
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we rely on information
furnished by them, including financial statements and other information. We may also rely on the representations of customers
and counterparties as to the accuracy and completeness of that information. Our financial condition and results of operations may
be negatively affected to the extent that we rely on financial statements and other information that do not comply with GAAP,
that are materially misleading or that do not fairly represent, in all material respects, the financial condition and results of
operations of the customers and counterparties.
Leverage
Leverage increases our potential exposure to all risk factors described above.
No Assurance of Achieving Investment Objectives or Payment of Dividends
As a result of the risks discussed above, there is no assurance that the Company will be able to achieve its investment objectives
or be able to pay dividends at targeted or historic levels. The funds available for the payment of dividends to our shareholders
will vary according to, among other things, the principal and interest payments received in respect of the Company’s investments.
There can be no assurance that the Company will generate any returns or be able to pay dividends to our shareholders in the
future.
RISK MANAGEMENT
We operate in changing regulatory and economic environments. As a result, our management team and the Board of Directors
are particularly diligent in their consideration of all identified risks. Our goal is not to eliminate risk, as this would result in
significantly reduced earnings, but rather to be proactive in our assessment and management of risk, as a means to gain a strategic
advantage and ultimately enhance shareholder value.
Our senior management team is responsible for the quality of processes, policies, procedures and controls and for internal
reporting on a day-to-day basis. The Board is actively involved in the risk management process, providing oversight and
guidance on an ongoing basis and at least quarterly. Internal audit is involved in the risk management process to provide
validation of its effectiveness, with reports provided to senior management and the Board.
As discussed above under “Risk Factors,” we are exposed to various inherent risks, particularly credit risk, liquidity risk and
interest rate risk. We mitigate these risks through prudent credit limits, established lending policies and procedures, effective
monitoring and reporting, investment diversification and by the diligent management of assets and liabilities.
Credit Risk
Credit and commitment exposure is closely monitored through a reporting process that includes a formal monthly review
involving the Asset and Liability Committee (“ALCO”) and a formal quarterly review involving the Investment Committee of
the Board (“ICB”). A Dashboard Report, which identifies, assesses, ranks and provides trending analysis on all material risks to
the Company, is provided to the Audit Committee of the Board on a quarterly basis. Weekly monitoring also takes place through
our Capital Commitments Committee, which is comprised of management.
Our exposure to credit risk is managed through prudent risk management policies and procedures that emphasize the quality and
diversification of our investments. Credit limits, based on capital capacity and risk appetite, have been established for
concentration by asset class, geographic region, dollar amount and borrower. These policies are amended on an ongoing basis to
reflect changes in market conditions and our risk appetite. All members of management are subject to limits on their ability to
commit the Company to credit risk.
We identify potential risks in our mortgage portfolio by way of regular review of market metrics, which are a key component of
semi-annual market reports provided to the ICB. We also undertake site visits of active mortgage properties. Existing risks in
our mortgage portfolio are identified by arrears reporting, portfolio diversification analysis, annual reviews of large loans and risk
rating trends of the entire mortgage portfolio. The aforementioned reporting and analysis provides adequate monitoring of and
control over our exposure to credit risk. In the current economic environment, we have increased our monitoring of real estate
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
market values for single family mortgages, with independent assessments of value obtained as individual mortgages exceed 90
days in arrears.
We assess a credit score and risk rating for all mortgages at the time of underwriting based on the quality of the borrower and the
underlying real estate. Risk ratings are reviewed annually for large exposures, and whenever there is an amendment or a material
adverse change such as a default or impairment.
We have established a methodology for determining the adequacy of our collective allowances. The adequacy of collective
allowances is assessed periodically, taking into consideration economic factors such as employment and housing market
conditions.
We record an individual allowance to the extent that the estimated realizable value of a mortgage has decreased below its net
book value. Individual allowances include all of the accumulated provisions for credit losses on a particular mortgage. At
December 31, 2011, we had recorded $1.2 million (December 31, 2010 - $1.2 million, January 1, 2010 - $2.8 million) of
individual allowances on our mortgage portfolio (refer to Note 10 to the consolidated financial statements).
Our maximum credit exposure on our individual financial assets is equal to the carrying value of the respective assets, except for
our corporate mortgage portfolio, whose maximum credit exposure also includes outstanding commitments for future mortgage
fundings.
Liquidity Risk
We closely monitor our liquidity position to ensure that we have sufficient cash to meet liability obligations as they become due.
The ICB is responsible for the review and approval of liquidity policies. ALCO is responsible for liquidity management. We
have an internal target of a standard level of liquid investments (cash and cash equivalents, marketable securities and 75% of
insured single family mortgages) of at least 100% or 125% of term deposits maturing within 100 days, depending on projected
term deposit growth over the subsequent three months. As at December 31, 2011 our standard level was 100%. In addition, all
single family mortgages are readily marketable within a time frame of one to three months, providing us with added flexibility to
meet unexpected liquidity needs. We have access to capital through our ability to issue term deposits eligible for CDIC deposit
insurance. These term deposits also provide us with the ability to fund asset growth as needed. We also maintain an overdraft
facility to fund asset growth or meet our short-term obligations as required. The overdraft facility is a component of a larger
credit facility that also has a portion which guarantees letters of credit used to support the obligations of borrowers to
municipalities in conjunction with construction loans. The total facility is $50 million, with sub-limits of $30 million for
overdrafts and $30 million for letters of credit. Since our issued letters of credit at December 31, 2011 were $27 million, the
available portion of the credit facility at this date dedicated to overdrafts was $23 million.
We believe that our liquidity position and our access to capital markets in the form of term deposits and the banking facility
support our ability to meet current and future commitments. We are not aware of any contingencies or known events that are
likely to materially affect our liquidity position.
Management has developed a Liquidity Risk Management Framework that is reviewed and approved annually by the Board.
This framework details the daily, monthly and quarterly analysis that is performed by management. Management monitors
changes in cash and cash requirements on a daily basis and formally reports to ALCO on a monthly basis. Management also
completes monthly and quarterly stress testing which is reviewed by ALCO and the ICB. Management monitors trends in
deposit concentration with significant term deposit brokers on a monthly basis.
Our liquidity position and access to funding support our ability to meet current and expected future commitments. Our liquid
investments were 113% of term deposits maturing within 100 days at December 31, 2011. Our target as of December 31st was at
least 100%, based on term deposit growth in the second half of 2011. For further details on our liquid assets and our ability to
meet liability obligations, refer to Note 31 to the consolidated financial statements.
We have established and maintain liquidity policies which meet the standards set under the Trust Act and any regulations or
guidelines issued by OSFI.
Our sources and uses of liquidity are outlined in the table below. We manage our net liquidity surplus/deficit by raising term
deposits as mentioned above.
- 35 -
Table 23: Liquidity Analysis
(in thousands)
Sources of liquidity
Cash and cash equivalents
Marketable securities
Mortgages - corporate
Financial investments
Other loans
Uses of liquidity
Term deposits
Other liabilities
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
Within 3 Months
3 Months To 1 Year
1 to 5
Years
Over 5
Years
December 31 December 31
2010
2011
January 1
2010
$
- $
$ 51,309
-
100,508
22
117
151,956
2,086
270,661
-
1,097
273,844
-
7,110
236,890
910
-
244,910
$
-
20,953
32,292
11,604
1,813
66,662
$ 51,309
30,149
640,351
12,536
3,027
737,372
$ 85,309
6,608
420,322
10,248
3,332
525,819
$ 88,201
-
294,769
60,327
11,844
455,141
75,629
7,943
83,572
251,381
-
251,381
274,567
-
274,567
-
-
-
601,577
7,943
609,520
421,061
6,632
427,693
360,744
7,304
368,048
Net liquidity surplus (deficit)
$ 68,384 $ 22,463 $ (29,657) $ 66,662
$ 127,852
$ 98,126
$ 87,093
Off-Balance Sheet
Unfunded mortgage commitments
$ 159,141
$ 82,515 $ 55,010
$
-
$ 296,666
$ 199,678
$ 96,173
The above table excludes securitized assets and liabilities and pledged assets as they are restricted.
For a discussion regarding liquidity risk relating to the maturity of CMB program issuances and other MBS programs, refer to the
“Timely Payment Guarantee” section of the “Securitization Programs” discussion.
Interest Rate Risk
We evaluate our exposure to a variety of changes in interest rates across the term spectrum of our assets and liabilities, including
both parallel and non-parallel changes in interest rates. By managing and matching the terms of corporate assets and term
deposits so that they offset each other, we seek to reduce the risks associated with interest rate changes, and in conjunction with
liquidity management policies, we also manage cash flow mismatches. ALCO reviews our interest rate exposure on a monthly
basis using interest rate spread and gap analysis as well as interest rate sensitivity analysis based on various scenarios. This
information is also formally reviewed by the ICB each quarter. We do not currently use derivative financial instruments outside
of the CMB program, however the potential use of such instruments for our on-balance sheet assets is analyzed and reported to
ALCO on a monthly basis.
We manage interest rate risk associated with securitization assets and liabilities through the use of “pay-floating, receive-fixed”
interest rate swaps. For further details, refer to the “CMB Program” section of this MD&A.
Ultimately, risk management is monitored and controlled at the highest level of the Company. ALCO reviews and manages these
risks on a monthly basis. Our Board also reviews and approves all risk management policies and procedures. Management
reports to the Board on the status of risk management at least quarterly.
Market Risk
Our marketable securities portfolio is susceptible to market price risk arising from uncertainties about future values of the
securities. We manage the equity price risk through diversification and limits on both individual and total securities. Reports on
the portfolio are submitted to the Company’s senior management on a regular basis and to the Board on a quarterly basis.
PEOPLE
As at December 31, 2011, we had 17 employees, an increase of two from the prior year.
REGULATORY COMPLIANCE
Our Chief Compliance Officer ensures that management understands the impact of all relevant legislation affecting the business,
assesses compliance with current and pending legislation and works with management to address any gaps in policies and
procedures. We use a Legislative Compliance Management System that ensures all managers assess their compliance with
relevant legislation on a quarterly basis. Senior management liaises with regulators to keep them apprised of Company progress
and changes to our business. Our Chief Compliance Officer reports quarterly to the Conduct Review, Corporate Governance &
Human Resources Committee of the Board.
- 36 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
INTERNAL AUDIT
During 2011, we appointed a Chief Audit Officer. Prior to that time, we outsourced our Internal Audit function to Protiviti, an
independent risk consulting firm. The Internal Audit function has unrestricted access to our operations, records, property and
personnel, including senior management and the Chairman of the Audit Committee of the Board (the “Audit Committee”).
Internal Audit formulates an annual risk-based plan for approval by the Audit Committee and then undertakes internal audit
reviews throughout the year with regular and direct reporting to both senior management and the Audit Committee.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Note 4 to our consolidated financial statements provides detailed information on our significant accounting policies, the method
of applying those policies, and the material components of the amounts in the consolidated balance sheets and the statements of
income, changes in shareholders’ equity, comprehensive income and cash flows. The policies discussed below are considered
particularly important, as they require management to make judgments involving estimations, which are discussed in Note 6 to
the consolidated financial statements. We have control procedures to ensure that these policies are applied consistently and that
the policies are independently reviewed on at least an annual basis. Changes to accounting policies are made only after an
appropriate amount of research and discussion has occurred and independent advice is obtained. Estimates are considered
carefully and reviewed at an appropriate level within the Company. We believe that our estimates of the value of our assets and
liabilities are appropriate. Actual results may differ from those estimates.
Financial Instruments
All financial instruments are initially recognized on the trade date, and are classified based on management’s intentions.
Financial assets are classified as held for trading, held to maturity, available for sale or loans and receivables, and financial
liabilities are classified as held for trading or at amortized cost. Changes in the unrealized fair value of financial instruments
classified as held for trading are recognized to income. Changes in the unrealized fair value of available for sale financial assets
are recognized in the available for sale reserve, except for those considered to be changes attributable to impairment which are
charged to income. Upon disposal, the cumulative change in fair value is transferred to income. Other classifications are
subsequently measured at amortized cost. From time to time, the Company may use derivative and non-derivative financial
instruments to manage interest rate risk. Hedge accounting is optional, and where it can be applied, it requires the Company to
document the hedging relationship and to test the effectiveness of the hedging item to offset changes in value of the underlying
hedged item on an ongoing basis. At December 31, 2011, the Company did not have any hedge accounting relationships.
All financial instruments that are carried on the consolidated balance sheets at fair value are estimated using valuation techniques
based on observable market data such as market interest rates currently charged for similar financial investments to expected
maturity dates.
For further details on financial instruments, refer to Notes 4, 6, 8, 9, 10, 11, 12, 15, 16, 17 and 20 to the consolidated financial
statements.
Allowance for Credit Losses
The allowance for credit losses reduces the carrying value of mortgage assets to provide for an estimate of the principal amounts
that borrowers may not repay in the future. In assessing the estimated realizable value of assets, we must rely on estimates and
exercise judgment regarding matters for which the ultimate outcome is unknown. A number of factors can affect the amount that
we ultimately collect, including the quality of our own underwriting process and credit criteria, the diversification of the
portfolio, the underlying security relating to the loans and the overall economic environment. Individual allowances include all
of the accumulated provisions for losses on particular assets required to reduce the related assets to estimated realizable value.
The collective allowance represents losses that we believe have been incurred but not yet specifically identified. The collective
allowance is established by considering historical loss trends during economic cycles, the risk profile of our current portfolio,
estimated losses for the current phase of the economic cycle and historic industry experience. Allowance rates depend on asset
class, as different classes have varying underlying risks. Future changes in circumstances could materially affect our future
provisions for credit losses from those provisions determined in the current year, and there could be a need to increase or
decrease the allowance for credit losses.
We complete a review of all provisioning policies at least annually. We continue to monitor asset performance and current
economic conditions, focusing on any regionally specific issues to assess the adequacy of the current provisioning policies.
Provisioning rates are reviewed on a quarterly basis.
In addition to considering current economic conditions, we assessed the probability of default, expected loss as a result of default
and the mortgage exposure at the time of default when establishing our collective allowance. We continue to review our
underwriting and credit requirements on a regular basis, and we have taken measures as warranted by changes in the market and
economic conditions.
- 37 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
We believe that we have established adequate provisioning rates given the current economic concerns. Our current provisioning
rates consider the impact of a decline in real estate values and anticipated default/loss percentages that are sufficient to offset
current and historical loss experiences.
On an ongoing basis, we reassess the fair value of other loans and financial investments, determined on the basis of expected
discounted cash flows. When a decline in value is identified as a result of impairment that is other than temporary, an allowance
is recorded through the income statement.
For further details on our accounting policies and balances of the allowances for credit losses, refer to Notes 4, 6, 10, 11 and 12 to
the consolidated financial statements.
Discount Income Recognition
The Company may acquire mortgage portfolios from third parties at fair market value. A mortgage discount will exist to the
extent that the fair market value of a mortgage is less than its par value. The discount is allocated between a valuation reserve
component and an accretion component. The valuation reserve component represents the risk of credit loss, while the accretion
component represents the part of the discount to be recognized to income over time, thereby adjusting the yield on the mortgage
from its face rate to an effective yield. The accretion component is amortized to income over the term of the related mortgage
through the application of the effective interest rate method. The valuation reserve component is only recognized into income
upon payout, less any realized credit loss.
Income Taxes
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities.
The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the consolidated
financial statement date. Deferred tax is provided on temporary differences at the consolidated financial statement date between
the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
For further details on our accounting policies and balances relating to income taxes, refer to Notes 4 and 18 to the consolidated
financial statements. We will continue to proactively monitor the appropriateness of our position on a quarterly basis.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
The consolidated financial statements for the year ended December 31, 2011 are the first annual statements that we have prepared
in accordance with IFRS. For years up to and including the year ended December 31, 2010, we prepared our consolidated
financial statements in accordance with CGAAP.
Accordingly, we prepared consolidated financial statements which comply with IFRS, as described in the accounting policies in
Note 4 to the consolidated financial statements. In preparing these consolidated financial statements, we prepared an opening
consolidated balance sheet as at January 1, 2010, which was our date of transition to IFRS. In addition, we restated our CGAAP
consolidated balance sheet as at December 31, 2010 and our previously published CGAAP statements of income and
comprehensive income for the year ended December 31, 2010.
The most significant changes to our financial statements are as follows:
• We have recognized $3.1 billion of new assets and $3.1 billion of new liabilities, primarily due to the on-balance sheet
treatment of mortgages securitized through the CMB program. As the securitization issuances mature, the securitization
liability and related assets (securitized mortgages and principal reinvestment assets) will be removed from the balance
sheet. Since we are not currently participating in new CMB issuances, we expect that the Company’s securitization assets
and liabilities will decrease significantly over the next three years. The CMB securitization liabilities mature as follows:
June 2012 - $423 million, December 2012 - $665 million, 2013 - $1.1 billion, 2014 - $879 million, 2015 - $47 million.
• We now recognize ongoing CMB program mortgage interest income, principal reinvestment income and securitization
liability interest expense on the accrual basis. We reversed up-front gains from securitization previously recognized under
CGAAP through opening retained earnings as at January 1, 2010 upon transition to IFRS.
•
Fair market value changes in the CMB interest rate swaps are no longer generally offset by fair market value changes in
CMB interest-only strips, as the interest-only strips do not exist under IFRS due to the reversal of up-front gains from
securitization previously recognized under CGAAP. The lack of an offset has led to increased volatility to net income
under IFRS despite the fact that, from an economic perspective, interest rate risk remains largely mitigated through the
interest rate swaps.
• We now recognize current and deferred taxes through the statement of income, which has led to increased volatility to net
income. Under CGAAP, we charged current and deferred taxes directly to retained earnings.
- 38 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
We have restated our CGAAP consolidated balance sheet as at December 31, 2010 and our previously published CGAAP
statements of income and comprehensive income for the year ended December 31, 2010.
Since MCAN adopted the IFRS accounting framework in 2011, it is not appropriate to compare our financial results under IFRS
to those reported under CGAAP.
CMB Program
The most significant IFRS difference for MCAN is the accounting for the securitization of insured mortgages through our
participation in the CMB program. Under IFRS, we no longer account for these transactions as sales of mortgages and
accordingly we have reversed all previously recognized up-front gains from securitization through opening retained earnings.
This reversal was partially offset by mortgage interest income, principal reinvestment income and penalty income less liability
interest expense that was recognized from the dates of the respective CMB issuances to the date of transition. Our IFRS balance
sheet also includes mortgages securitized through the CMB program, assets in which principal repayments have been re-invested
and a liability to the CHT. Under IFRS, we now recognize ongoing mortgage interest income, principal reinvestment income and
liability interest expense on the accrual basis, and we will include any future mortgages securitized through the CMB program on
our balance sheet.
Under CGAAP, and from a general economic perspective, changes in the fair value of the interest rate swaps (which are used to
hedge interest rate risk on securitized mortgages and reinvestment assets that have a floating interest rate) were generally offset
by changes in the fair value of the interest-only strips (which consisted of the discounted value of future mortgage interest,
principal reinvestment interest and penalty income less liability interest payments). Since the interest-only strips were eliminated
on the transition to IFRS, changes in the fair value of the interest rate swaps no longer have a natural offset, which has led to
increased volatility to net income under IFRS.
For regulatory purposes, we exclude mortgages securitized prior to June 30, 2010 from our regulatory assets to capital ratio.
As a result of CMB program adjustments related to the conversion to IFRS, retained earnings as at January 1, 2010 decreased by
$433,000 (including a deferred tax charge of $270,000) from CGAAP. As at December 31, 2010, retained earnings increased by
$4.4 million (net of a deferred tax charge of $2.1 million) from CGAAP. In addition, January 1, 2010 and December 31, 2010
IFRS balances include $3.1 billion of new assets and $3.1 billion of new liabilities from IFRS adjustments related to the CMB
program.
Other Adjustments
While the calculation of the IFRS collective allowance follows similar principles to the calculation of the CGAAP general
allowance for credit losses, IFRS also provides additional guidance on how the credit loss assessment model should be designed
and documented, based on historical loss experience that is adjusted for observable market conditions. Our IFRS mortgage, loan
and investment collective allowance as at January 1, 2010 decreased by $641,000 from CGAAP (December 31, 2010 -
$945,000), which led to an increase to IFRS retained earnings of $387,000 (December 31, 2010 - $570,000), net of deferred
taxes.
To the extent that MCLP’s IFRS retained earnings were impacted as at January 1, 2010, we adjusted the IFRS value of our equity
investment in MCLP based on our pro-rata share of the total retained earnings impact at that date based on information provided
by MCLP. As at January 1, 2010, our equity investment in MCLP under IFRS decreased by $8.3 million (December 31, 2010 -
$8.8 million) from CGAAP, which decreased IFRS retained earnings by $7.1 million (December 31, 2010 - $7.3 million), net of
taxes.
Under CGAAP, we were able to charge our current and future tax liabilities directly to retained earnings instead of recognizing
the changes through net income. Under IFRS, we are not able to charge current and deferred taxes directly to retained earnings,
which has led to increased volatility to net income. In addition, MCAN’s future tax position has changed to the extent that the
accounting values of balance sheet items that have differing values for accounting and tax purposes were impacted by the
transition to IFRS.
The overall decrease to retained earnings as at January 1, 2010 as a result of the conversion to IFRS was $7.2 million (December
31, 2010 - $2.5 million) while the overall decrease to accumulated other comprehensive income from CGAAP to IFRS was $1.7
million (December 31, 2010 - $1.8 million). In addition, total IFRS assets and liabilities as at January 1, 2010 and December 31,
2010 increased by $3.1 billion from CGAAP.
Impact to Net Income and Earnings per Share
Net income for the year ended December 31, 2010 increased from $25.4 million under CGAAP to $26.7 million under IFRS.
Earnings per share increased from $1.76 under CGAAP to $1.85 under IFRS.
For further information on our conversion to IFRS, including comparative consolidated financial statement reconciliations from
2010, refer to Note 5 to the consolidated financial statements.
- 39 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
FUTURE CHANGES IN ACCOUNTING POLICY
Standards issued but not yet effective up to the date of issuance of the Company’s consolidated financial statements are listed
below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable at a future
date. The Company intends to adopt those standards when they become effective.
IFRS 7, Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements
The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the
user of the Company’s consolidated financial statements to understand the relationship with those assets that have not been
derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in
derecognized assets to enable the user to evaluate the nature of, and risks associated with, the entity’s continuing involvement in
those derecognized assets. The amendment becomes effective for annual periods beginning on or after July 1, 2011. The
Company has not fully assessed the impact of adopting IFRS 7.
IFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities
This standard will require entities to disclose gross amounts subject to right of set-off, amounts set off in accordance with the
accounting standards followed, and the related net credit exposure. Effective for periods beginning on or after January 1, 2013.
Retrospective application will be required.
IFRS 9, Financial Instruments: Classification and Measurement
This standard as issued reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and
measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods
beginning on or after January 1, 2015. In subsequent phases, the IASB will address hedge accounting and impairment of financial
assets. The Company has not fully assessed the impact of adopting IFRS 9.
IFRS 10, Consolidated Financial Statements
This standard is effective for annual periods beginning on or after January 1, 2013 and will replace portions of IAS 27,
Consolidated and Separate Financial Statements and interpretation SIC-12, Consolidation - Special Purpose Entities. Under
IFRS 10, consolidated financial statements include all controlled entities under a single control model that applies to all entities,
including special purpose entities and structured entities. A group will still continue to consist of a parent and its subsidiaries;
however IFRS 10 uses different terminology from IAS 27 in describing its control model. The changes introduced by IFRS 10
will require management to exercise significant judgment to determine which entities are controlled, and therefore are required to
be consolidated by a parent, compared with the requirements that were in IAS 27. The Company has not fully assessed the impact
of adopting IFRS 10.
IFRS 11, Joint Arrangements
This standard replaces IAS 31, Interests in Joint Ventures and SIC-13, Jointly-Controlled Entities - Non-Monetary Contributions
by Venturers. IFRS 11 uses some of the terms that were used by IAS 31, but with different meanings. Whereas IAS 31 identified
three forms of joint ventures (i.e., jointly controlled operations, jointly controlled assets and jointly controlled entities), IFRS 11
addresses only two forms of joint arrangements (joint operations and joint ventures) where there is joint control. IFRS 11 defines
joint control as the contractually agreed sharing of control of an arrangement which exists only when the decisions about the
relevant activities require the unanimous consent of the parties sharing control.
Because IFRS 11 uses the principle of control in IFRS 10 to define joint control, the determination of whether joint control exists
may change. In addition, IFRS 11 removes the option to account for jointly controlled entities (“JCEs”) using proportionate
consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. For joint
operations (which includes former jointly controlled operations, jointly controlled assets, and potentially some former JCEs), an
entity recognizes its assets, liabilities, revenues and expenses, and/or its relative share of those items, if any. In addition, when
specifying the appropriate accounting, IAS 31 focused on the legal form of the entity, whereas IFRS 11 focuses on the nature of
the rights and obligations arising from the arrangement.
IFRS 11 is effective for annual periods commencing on or after January 1, 2013. The Company has not fully assessed the impact
of adopting IFRS 11.
IFRS 12, Disclosure of Interests in Other Entities
This standard includes disclosure requirements about subsidiaries, joint ventures, and associates, as well as unconsolidated
structured entities. Many of the disclosure requirements were previously included in IAS 27, IAS 1 and IAS 28 while others are
new. This standard is effective for annual periods beginning on or after January 1, 2013. The Company has not fully assessed
the impact of adopting IFRS 12.
- 40 -
MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS / 2011 ANNUAL REPORT
MCAN MORTGAGE CORPORATION
IFRS 13, Fair Value Measurement
This standard provides guidance on how to measure the fair value of financial and non-financial assets and liabilities when fair
value is required or permitted per IFRS. While many of the concepts in IFRS 13 are consistent with current practice, certain
principles could have a significant effect on some entities adopting the standard. IFRS 13 is effective January 1, 2013 and will be
adopted prospectively. The Company has not fully assessed the impact of adopting IFRS 13.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
REPORTING
Disclosure Controls and Procedures (“DC&P”)
A disclosure committee, comprised of members of our senior management (the “Disclosure Committee”) is responsible for
establishing and maintaining adequate disclosure controls and procedures. As of December 31, 2011, we have evaluated the
effectiveness of the design and operation of our DC&P in accordance with requirements of National Instrument 52-109 of the
Canadian Securities Commission – Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”). Our Chief
Executive Officer and Chief Financial Officer supervised and participated in this evaluation. Based on the evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports we file or submit is recorded, processed, summarized and reported within
the time periods specified in securities legislation and is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Internal Controls over Financial Reporting (“ICFR”)
The Disclosure Committee is responsible for establishing and maintaining adequate ICFR. Under the supervision and with the
participation of the Disclosure Committee, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of our ICFR based upon the framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, a recognized control model, and the requirements of NI 52-109. Based on the evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our ICFR were effective as of December 31, 2011.
Ernst & Young LLP, our Independent Registered Chartered Accountants, have audited our consolidated financial statements for
the year ended December 31, 2011.
Changes in ICFR
There were no changes in our ICFR that occurred during the period beginning on January 1 and ending on December 31, 2011
that have materially affected, or are reasonably likely to materially affect, our ICFR.
Inherent Limitations of Controls and Procedures
All internal control systems, no matter how well designed, have inherent limitations. As a result, even systems determined to be
effective may not prevent or detect misstatements on a timely basis, as systems can provide only reasonable assurance that the
objectives of the control system are met. In addition, projections of any evaluation of the effectiveness of ICFR to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may change.
- 41 -
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
2011 CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION
The accompanying consolidated financial statements of MCAN Mortgage Corporation (“MCAN” or the “Company”) are the
responsibility of management and have been approved by the Board of Directors. Management is responsible for the information
and representations contained in these consolidated financial statements, the Management’s Discussion and Analysis of Operations
and all other sections of the annual report. The consolidated financial statements have been prepared by management in accordance
with International Accounting Standards (“IAS”), including the accounting requirements of our regulator, the Office of the
Superintendent of Financial Institutions Canada.
The Company’s accounting system and related internal controls are designed, and supporting procedures maintained to provide
reasonable assurance that the Company’s financial records are complete and accurate and that assets are safeguarded against loss
from unauthorized use or disposition.
The Office of the Superintendent of Financial Institutions Canada makes such examination and enquiry into the affairs of MCAN as
deemed necessary to be satisfied that the provisions of the Trust and Loan Companies Act are being duly observed for the benefit of
depositors and that the Company is in sound financial condition.
The Board of Directors is responsible for ensuring that management fulfils its responsibility for financial reporting and is ultimately
responsible for reviewing and approving the consolidated financial statements. These responsibilities are carried out primarily
through an Audit Committee of unrelated directors appointed by the Board of Directors. The Chief Financial Officer reviews
internal controls, control systems and compliance matters and reports thereon to the Audit Committee.
The Audit Committee meets periodically with management and the external auditors to discuss internal controls over the financial
reporting process, auditing matters and financial reporting issues. The Audit Committee reviews the consolidated financial
statements and recommends them to the Board of Directors for approval. The Audit Committee also recommends to the Board of
Directors and Shareholders the appointment of external auditors and approval of their fees.
The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, in accordance
with Canadian generally accepted auditing standards. Ernst & Young LLP has full and free access to the Audit Committee.
William Jandrisits
President and Chief Executive Officer
Tammy Oldenburg
Vice President and Chief Financial Officer
Toronto, Canada,
February 29, 2012
- 42 -
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
Independent auditors’ report
To the Shareholders of MCAN Mortgage Corporation
We have audited the accompanying consolidated balance sheets of MCAN Mortgage Corporation as at December 31, 2011,
December 31, 2010 and January 1, 2010 and the consolidated statements of income, changes in shareholders’ equity, comprehensive
income and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards 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.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of MCAN
Mortgage Corporation as at December 31, 2011 and December 31, 2010, and the results of its operations and its cash flows for the
years then ended in accordance with International Financial Reporting Standards.
Chartered Accountants
Chartered Accountants
Licensed Public Accountants
Licensed Public Accountants
Toronto, Canada,
February 29, 2012
- 43 -
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
As at
Assets
Corporate Assets
Cash and cash equivalents
Marketable securities
Mortgages
Financial investments
Other loans
Equity investment in MCAP Commercial LP
Other assets
Securitization Assets
Short-term investments
Mortgages
Financial investments
Derivative financial instruments
Other assets
Liabilities and Shareholders’ Equity
Liabilities
Corporate Liabilities
Term deposits
Current tax liabilities
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Other liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Available for sale reserve
Note
December 31
2011
December 31
2010
January 1
2010
8
9
10
11
12
13
14
15
10
11
16
14
17
18
18
19
20
19
21
21
23
$
51,309
30,149
640,351
12,536
3,027
15,480
947
753,799
345,487
1,499,016
1,279,479
13,348
3,029
3,140,359
$ 3,894,158
$
601,577
3,321
5,436
7,943
618,277
3,111,357
6,059
3,117,416
3,735,693
132,817
510
23,491
1,647
158,465
$ 3,894,158
$
85,309
6,608
420,322
10,248
3,332
11,530
769
538,118
220,949
1,910,995
996,968
13,120
5,875
3,147,907
$ 3,686,025
$
421,061
5,728
5,311
6,632
438,732
3,119,601
2,613
3,122,214
3,560,946
100,112
510
24,489
(32)
125,079
$ 3,686,025
$
88,201
-
294,769
60,327
11,844
9,562
510
465,213
290,228
2,342,164
409,303
11,490
44,306
3,097,491
$ 3,562,704
$
360,744
2,248
3,455
7,304
373,751
3,074,793
206
3,074,999
3,448,750
98,490
510
14,954
-
113,954
$ 3,562,704
The accompanying notes and shaded areas of the “Risk Factors” and “Risk Management” sections of Management’s Discussion and Analysis of
Operations are an integral part of these consolidated financial statements.
On behalf of the Board:
William Jandrisits
President and Chief Executive Officer
David G. Broadhurst
Director, Chairman of the Audit Committee
- 44 -
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of Canadian dollars except for per share amounts)
Years Ended December 31
Note
2011
2010
Net Investment Income - Corporate Assets
Mortgage interest
Interest on financial investments and other loans
Equity income from MCAP Commercial LP
Fees
Marketable securities
Interest on cash and cash equivalents
Term deposit interest and expenses
Mortgage expenses
Provision for (recovery of) credit losses
Net Investment Income - Securitization Assets
Mortgage interest
Interest on financial investments
Interest on short-term investments
Other securitization income
Interest on financial liabilities from securitization
Mortgage expenses
Net investment income before fair market value adjustment
Fair market value adjustment - derivative financial instruments
Net Investment Income
Operating Expenses
Salaries and benefits
General and administrative
Income Before Income Taxes
Provision for (recovery of) income taxes
Current
Deferred
Net Income
Basic and diluted earnings per share
Dividends per share
Weighted average number of basic and diluted shares (000’s)
13
24
25
26
27
25
16
18
18
$
$
$
$
32,593
1,342
5,007
1,593
1,281
592
42,408
12,293
3,407
1,058
16,758
25,650
20,718
5,714
814
9,001
36,247
29,844
573
30,417
5,830
228
6,058
31,708
3,234
3,626
6,860
24,848
(2,072)
(183)
(2,255)
27,103
1.68
1.81
16,147
$
$
$
$
27,211
2,507
3,302
3,857
31
230
37,138
7,619
2,831
(692)
9,758
27,380
25,467
3,203
334
10,239
39,243
29,473
715
30,188
9,055
1,629
10,684
38,064
2,711
3,389
6,100
31,964
3,442
1,864
5,306
26,658
1.85
1.19
14,389
The accompanying notes and shaded areas of the “Risk Factors” and “Risk Management” sections of Management’s Discussion and Analysis of
Operations are an integral part of these consolidated financial statements.
- 45 -
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of Canadian dollars)
Years Ended December 31
Net income
Other comprehensive income (loss)
Change in unrealized gain on available for sale marketable securities
Change in unrealized gain on available for sale financial investments
Less: deferred taxes
2011
2010
$
27,103
$
26,658
736
1,249
(306)
1,679
(39)
-
7
(32)
Comprehensive income
$
28,782
$
26,626
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands of Canadian dollars)
Years Ended December 31
Share capital
Balance, beginning of year
Common shares issued
Balance, end of year
Contributed surplus
Balance, beginning of year
Changes to contributed surplus
Balance, end of year
Retained earnings
Balance, beginning of year
Net income
Dividends declared
Balance, end of year
Available for sale reserve
Balance, beginning of year
Other comprehensive income (loss)
Balance, end of year
Total shareholders’ equity
2011
2010
$
100,112
32,705
132,817
$
98,490
1,622
100,112
510
-
510
24,489
27,103
(28,101)
23,491
(32)
1,679
1,647
510
-
510
14,954
26,658
(17,123)
24,489
-
(32)
(32)
$
158,465
$
125,079
The accompanying notes and shaded areas of the “Risk Factors” and “Risk Management” sections of Management’s Discussion and Analysis of
Operations are an integral part of these consolidated financial statements.
- 46 -
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars)
Years Ended December 31
2011
2010
Cash provided by (used for):
Operating Activities
Net income
Adjusted for non-cash items:
Current taxes
Deferred taxes
Equity income
Provision for (recovery of) credit losses
Fair market value adjustment - derivative financial instruments
Gain on sale of financial investment
Amortization of securitized mortgage and liability transaction costs
Amortization of other assets
Amortization of mortgage discounts (premiums)
Mortgage advances
Mortgage reductions
Proceeds on sale of mortgages
Issuance of term deposits
Repayment of term deposits
Repayment of financial liabilities from securitization
Issuance of financial liabilities from securitization
Decrease in other assets
Increase in other liabilities
Cash flows from operating activities
Investing Activities
Increase in marketable securities
Decrease (increase) in short-term investments
Increase in financial investments
Proceeds on sale of financial investment
Decrease in other loans
Distributions from MCAP Commercial LP
Cash flows for investing activities
Financing Activities
Issue of common shares
Dividends paid
Cash flows from (for) financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary Information
Interest received
Interest paid
Taxes paid
$
27,103
$
26,658
(2,072)
(183)
(5,007)
1,058
(228)
(876)
3,610
110
(116)
(1,204,705)
893,692
499,054
607,643
(427,127)
(8,886)
-
2,552
3,623
389,245
(22,803)
(124,538)
(284,285)
1,619
305
1,057
(428,645)
32,705
(27,305)
5,400
(34,000)
85,309
51,309
2011
57,309
36,342
323
$
$
3,442
1,864
(3,319)
(692)
(1,629)
-
3,556
986
168
(947,543)
777,814
472,612
554,080
(493,763)
(4,707)
49,312
37,185
1,534
477,558
(6,647)
69,279
(537,547)
-
8,599
1,334
(464,982)
1,622
(17,090)
(15,468)
(2,892)
88,201
85,309
2010
56,403
34,996
186
$
$
The accompanying notes and shaded areas of the “Risk Factors” and “Risk Management” sections of Management’s Discussion and Analysis of
Operations are an integral part of these consolidated financial statements.
- 47 -
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
Page
Corporate Information ........................................................................................................................................................... 49
1.
Basis of Preparation ............................................................................................................................................................... 49
2.
Basis of Consolidation ........................................................................................................................................................... 49
3.
Summary of Significant Accounting Policies ........................................................................................................................ 50
4.
First-Time Adoption of IFRS ................................................................................................................................................ 56
5.
Significant Accounting Judgments and Estimates ................................................................................................................. 64
6.
Securitization Activities ........................................................................................................................................................ 65
7.
8.
Cash and Cash Equivalents ................................................................................................................................................... 65
9. Marketable Securities ............................................................................................................................................................ 66
10. Mortgages .............................................................................................................................................................................. 66
11. Financial Investments ............................................................................................................................................................ 71
12. Other Loans ........................................................................................................................................................................... 72
13. Equity Investment in MCAP Commercial LP ....................................................................................................................... 72
14. Other Assets .......................................................................................................................................................................... 73
15. Short-Term Investments ........................................................................................................................................................ 74
16. Derivative Financial Instruments ........................................................................................................................................... 74
17. Term Deposits ....................................................................................................................................................................... 75
Income Taxes ........................................................................................................................................................................ 75
18.
19. Other Liabilities ..................................................................................................................................................................... 76
20. Financial Liabilities From Securitization .............................................................................................................................. 76
21. Share Capital and Contributed Surplus .................................................................................................................................. 77
22. Dividends .............................................................................................................................................................................. 77
23. Available for Sale Reserve .................................................................................................................................................... 78
24. Fees ....................................................................................................................................................................................... 78
25. Mortgage Expenses ............................................................................................................................................................... 78
26. Provision for Credit Losses ................................................................................................................................................... 78
27. Other Securitization Income .................................................................................................................................................. 78
28. Related Party Disclosures ...................................................................................................................................................... 79
29. Commitments and Contingencies .......................................................................................................................................... 80
30. Credit Facilities ..................................................................................................................................................................... 81
31.
Interest Rate Sensitivity ......................................................................................................................................................... 81
32. Capital Management .............................................................................................................................................................. 83
33. Financial Instruments ............................................................................................................................................................ 85
34. Standards Issued But Not Effective ....................................................................................................................................... 87
35. Comparative Amounts ........................................................................................................................................................... 88
- 48 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
1. Corporate Information
MCAN Mortgage Corporation (the “Company” or “MCAN”) is a Loan Company under the Trust and Loan Companies Act
(the “Trust Act”) and a Mortgage Investment Corporation (“MIC”) under the Income Tax Act (Canada) (the “Tax Act”).
The Company’s primary objective is to generate a reliable stream of income by investing its corporate funds in a portfolio
of mortgages (including single family residential, residential construction, non-residential construction and commercial
loans), as well as other types of financial investments, loans and real estate investments. MCAN employs leverage by
issuing term deposits eligible for Canada Deposit Insurance Corporation (“CDIC”) deposit insurance up to a maximum of
five times capital (on a non-consolidated tax basis) as limited by the provisions of the Tax Act applicable to a MIC. The
term deposits are sourced through a network of independent financial agents. As a MIC, MCAN is entitled to deduct from
income for tax purposes 50% of capital gains dividends and 100% of other dividends paid. Such dividends are received by
the shareholders as capital gains dividends and interest income, respectively.
MCAN also participates in the Canada Mortgage Bonds (“CMB”) program, and other securitizations of insured mortgages.
For further details, refer to Note 7.
MCAN is incorporated in Canada. Its head office is located at 200 King Street West, Suite 400, Toronto, Ontario, Canada.
MCAN is listed on the Toronto Stock Exchange.
The consolidated financial statements were approved in accordance with a resolution of the Board of Directors on February
16, 2012.
2. Basis of Preparation
The consolidated financial statements of the Company have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
For all periods up to and including the year ended December 31, 2010, the Company prepared its consolidated financial
statements in accordance with Canadian Generally Accepted Accounting Principles (“CGAAP”). These financial
statements for the year ended December 31, 2011 are the first annual financial statements that the Company has prepared in
accordance with IFRS.
The consolidated financial statements have been prepared on a historical cost basis, except for marketable securities, certain
financial investments designated as available for sale and derivative financial instruments, which have been measured at
fair value. The consolidated financial statements are presented in Canadian dollars.
The disclosures that accompany the consolidated financial statements include the significant accounting policies applied
(Note 4) and the significant judgments and estimates applicable to the preparation of the consolidated financial statements
(Note 6), and the other disclosure requirements of IFRS 1, First-Time Adoption of International Financial Reporting
Standards relevant to the consolidated financial statements (Note 5).
The Company separates its assets into its corporate and securitization portfolios for reporting purposes. Corporate assets
represent the Company’s core strategic investments, and are funded by term deposits and share capital. Securitization
assets consist primarily of mortgages securitized through the CMB program and reinvestment assets purchased with
mortgage principal repayments, and are funded by financial liabilities from securitization.
3. Basis of Consolidation
The consolidated financial statements include the accounts of MCAN and its subsidiaries as at December 31, 2011. Refer
to Note 28 for a full analysis of the Company’s corporate structure.
All intra-group balances, transactions, income and expenses are eliminated in full.
Subsidiaries are fully consolidated from the date on which control is transferred to the Company. Control is achieved
where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from
its activities.
- 49 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies
The following are the significant accounting policies applied by the Company in the preparation of its consolidated
financial statements:
(1) Financial instruments - initial recognition and subsequent measurement
(i) Date of recognition
All financial assets and liabilities are initially recognized on the trade date, which is the date that the Company becomes a
party to the contractual provisions of the instrument. This includes purchases or sales of financial assets that require
delivery of assets within the time frame generally established by market convention.
(ii)
Initial measurement of financial instruments
The classification of financial instruments at initial recognition depends on the purpose and management’s intention for
which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at
their fair value plus, in the case of financial instruments not subsequently recorded at fair value through the consolidated
statements of income, directly attributable transaction costs.
(iii) Derivatives recorded at fair value through the consolidated statements of income
Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair
value is negative. Changes in the fair value of derivatives are included in the consolidated statements of income.
The Company uses derivative financial instruments such as interest rate swaps to hedge its interest rate risk as part of its
participation in the CMB program.
No derivative financial instruments have been designated for hedge accounting.
(iv) Financial assets or financial liabilities held for trading
Financial assets or financial liabilities held for trading are recorded at fair value. Changes in fair value are recognized in
the consolidated statements of income. Interest income or expense is recorded in the consolidated statements of income on
the accrual basis.
A financial asset or financial liability is classified as held for trading if:
(a)
it is acquired or incurred principally for the purpose of selling or repurchasing in the near term;
(b) on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for
which there is evidence of a recent actual pattern of short-term profit-taking; or
(c)
it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging
instrument).
(v) Financial assets and financial liabilities designated at fair value through the consolidated statements of income
Financial assets and financial liabilities classified in this category are those that have been designated by management on
initial recognition. Management may only designate an instrument at fair value through the consolidated statements of
income upon initial recognition when the following criteria are met, and designation is determined on an instrument by
instrument basis:
•
•
•
The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from
measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or
The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their
performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy;
or
The financial instrument contains one or more embedded derivatives, which significantly modify the cash flows that
otherwise would be required by the contract.
- 50 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
Financial assets and financial liabilities designated at fair value through the consolidated statements of income are recorded
in the consolidated financial statements at fair value. Changes in fair value are recorded in the consolidated statements of
income. Interest earned or incurred is accrued in interest income or interest expense, respectively, using the effective
interest rate method (“EIRM”), while dividend income is recorded in income when the right to the payment has been
established.
(vi) “Day 1” profit or loss
When the transaction price is different from the fair value of other observable current market transactions in the same
instrument or based on a valuation technique whose variables include only data from observable markets, the Company
immediately recognizes the difference between the transaction price and fair value (a “Day l” profit or loss). In cases
where fair value is determined using data which is not observable, the difference between the transaction price and model
value is only recognized in the consolidated statements of income when the inputs become observable, or when the
instrument is derecognized.
(vii) Available for sale financial investments
Available for sale investments include equity and debt securities and an equity investment in commercial real estate.
Equity investments classified as available for sale are those that are neither classified as held for trading nor designated at
fair value through the consolidated statements of income.
Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be
sold in response to needs for liquidity or in response to changes in the market conditions.
(viii) Held to maturity financial investments
Held to maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed
maturities which the Company has the intention and ability to hold to maturity. After initial measurement at fair value,
held to maturity financial investments are subsequently measured at amortized cost using the EIRM, less impairment.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral
part of the EIRM. The amortization is included in interest on financial investments and other loans in the consolidated
statements of income. The losses arising from impairment of such investments are recognized in the consolidated
statements of income.
The Company has not designated any financial assets as held to maturity.
(ix) Loans and receivables
Loans and receivables include mortgages, other loans, non-derivative financial assets and certain financial investments with
fixed or determinable payments that are not quoted in an active market, other than:
•
•
•
Those that the Company intends to sell immediately or in the near term and those that the Company upon initial
recognition designates at fair value;
Those that the Company, upon initial recognition, designates as available for sale; or
Those for which the Company may not recover substantially all of its initial investment, other than because of credit
deterioration.
After initial measurement, loans and receivables are subsequently measured at amortized cost using the EIRM, less
allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and
fees and costs that are an integral part of the EIRM. The amortization is included in mortgage interest income or interest on
financial investments and other loans in the consolidated statements of income. The losses arising from impairment are
recognized in the consolidated statements of income.
(x) Financial liabilities
After initial recognition, interest bearing financial liabilities are subsequently measured at amortized cost using the EIRM.
Premiums and discounts on the liabilities are recognized in the consolidated statements of income when the liabilities are
extinguished as well as through amortization using the EIRM.
- 51 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an
integral part of the effective interest rate (“EIR”). The EIR amortization is included in the related line in the consolidated
statements of income.
(xi) Transaction costs
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset
or financial liability. These costs are defined as costs that would not have been incurred if the Company had not acquired,
issued or disposed of the related financial instrument. Transaction costs are capitalized and amortized over the expected
life of the instrument using the EIRM, except for transaction costs which are related to financial assets or financial
liabilities classified as held for trading or designated at fair value, which are expensed.
(2) Derecognition of financial assets and financial liabilities
(i) Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is
derecognized when:
•
•
The rights to receive cash flows from the asset have expired; or
The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the
received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either:
•
•
the Company has transferred substantially all the risks and rewards of the asset, or
the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has
transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through
arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred
control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. In that
case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured
on a basis that reflects the rights and obligations that the Company has retained.
(ii) Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an
existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an
existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original
liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the
consolidated statements of income.
(3) Determination of fair value
The fair value for financial instruments traded in active markets is based on their quoted market price or other trading data,
without any deduction for transaction costs.
For all other financial instruments not traded in an active market, the fair value is determined by using appropriate
valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for
which market observable prices may exist and other relevant valuation models.
Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or
observable market data are not available. Their fair value is determined using a valuation model that has been tested
against prices or inputs to actual market transactions and using the Company’s best estimate of the most appropriate model
assumptions. Models are adjusted to reflect counterparty credit and liquidity spread and limitations in the models.
- 52 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
(4)
Impairment of financial assets
The Company assesses at each consolidated financial statement date whether there is any objective evidence that a financial
asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if,
and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial
recognition of the asset (an incurred “loss event”) and that loss event (or events) has an impact on the estimated future cash
flows of the financial asset or the group of financial assets that can be reliably estimated.
Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant
financial difficulty, the probability that they will enter bankruptcy or other financial reorganization, default or delinquency
in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated
future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
(i) Financial assets carried at amortized cost
For financial assets carried at amortized cost, the Company first assesses individually whether objective evidence of
impairment exists for financial assets that are significant, or collectively for financial assets that are not individually
significant. If the Company determines that no objective evidence of impairment exists for an individually assessed
financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively
assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or
continues to be, recognized are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit
losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognized in the consolidated statements of income. Interest income continues to be
accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for
the purpose of measuring the impairment loss.
The interest income is recorded as part of the related interest income component. Mortgages, together with the associated
allowance, are written off when there is no realistic prospect of future recovery and all collateral has been realized or has
been transferred to the Company. If, in a subsequent period, the amount of the estimated impairment loss increases or
decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is
increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to
the provision for credit losses
The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a mortgage has a
variable interest rate, the discount rate for measuring any impairment loss is the current EIR. The calculation of the present
value of estimated future cash flows reflects the projected cash flows less costs to sell.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Company’s
internal system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type,
past-due status and other relevant factors.
Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of
historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience
is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss
experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of
changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to
year (such as changes in unemployment rates, property prices, payment status or other factors that are indicative of incurred
losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are
reviewed regularly to reduce any differences between loss estimates and actual loss experience.
(ii) Available for sale financial investments
For available for sale financial investments, the Company assesses at the consolidated financial statement date whether
there is objective evidence that an investment or a group of investments is impaired.
- 53 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
In the case of equity investments classified as available for sale, objective evidence would include a significant or
prolonged decline in the fair value of the investment below its cost. ‘Significant’ is evaluated against the original cost of the
investment and ‘prolonged’ against the period in which the fair value has been below its original cost. Where there is
evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair
value, less any impairment loss on that investment previously recognized in the consolidated statements of income - is
removed from other comprehensive income and recognized in the consolidated statements of income. Impairment losses on
equity investments are not reversed through the consolidated statements of income; increases in their fair value after
impairment are recognized directly in other comprehensive income.
In the case of debt instruments classified as available for sale, impairment is assessed based on the same criteria as financial
assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the
difference between the amortized cost and the current fair value, less any impairment loss on that investment previously
recognized in the consolidated statements of income.
Future interest income continues to be accrued based on the reduced carrying amount of the asset, using the rate of interest
used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded to
the related interest income component. If, in a subsequent year, the fair value of a debt instrument increases and the
increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated
statements of income, the impairment loss is reversed through the consolidated statements of income.
(5) Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated financial statements if,
and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on
a net basis, or to realize the asset and settle the liability simultaneously.
(6) Taxes
(i) Current tax
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the
consolidated financial statement date.
Current tax relating to items recognized directly to shareholders’ equity is recognized in equity and not in the consolidated
statements of income. Management periodically evaluates positions taken in the Company’s tax returns with respect to
situations in which applicable tax regulations are subject to interpretation, and establishes provisions where appropriate.
(ii) Deferred tax
Deferred tax is provided on temporary differences at the consolidated financial statement date between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for
all taxable temporary differences, except:
•
In respect of taxable temporary differences associated with investments in subsidiaries or associates and interests in
joint ventures where the timing of the reversal of the temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused
tax losses, to the extent that it is probable that taxable income will be available against which the deductible temporary
differences, and the carry forward of unused tax credits and unused tax losses can be used, except in the following
instances:
• Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an
asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the
accounting income nor taxable income; and
•
In respect of deductible temporary differences associated with investments in subsidiaries or associates and interests in
joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will
reverse in the foreseeable future and taxable income will be available against which the temporary differences can be
utilized.
- 54 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
The carrying amount of deferred tax assets is reviewed at each consolidated financial statement date and reduced to the
extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax
asset to be utilized. Unrecognized deferred tax assets are reassessed at each consolidated financial statement date and are
recognized to the extent that it has become probable that future taxable income will allow the deferred tax asset to be
recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is
realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the
consolidated financial statement date.
Deferred tax relating to items recognized directly in shareholders’ equity is recognized in shareholders’ equity and not in
the consolidated statements of income.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets
against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
(7) Dividends on common shares
Dividends on common shares are deducted from shareholders’ equity in the quarter that they are approved. Dividends that
are approved after the consolidated financial statement date are disclosed as an event after the consolidated financial
statement date.
(8)
Investment in associates
The Company’s investment in its associates are accounted for using the equity method. An associate is an entity in which
the Company has significant influence.
Under the equity method, the investment in the associate is carried on the consolidated balance sheets at cost plus post
acquisition changes in the Company’s share of net assets of the associate.
The consolidated statements of income reflect the share of the results of operations of the associate. Where there has been a
change recognized directly in the equity of the associate, the Company recognizes its share of any changes and discloses
this, when applicable, in the consolidated statements of changes in shareholders’ equity. Unrealized gains and losses
resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the
associate.
The most recent available financial statements of the associate are used by the investor in applying the equity method.
When the financial statements of an associate used in applying the equity method are prepared as of a different date from
that of the investor, adjustments shall be made for the effects of significant transactions or events that occur between that
date and the date of the investor’s financial statements.
Where necessary, adjustments are made to harmonize the accounting policies of the associate with those of the Company.
After application of the equity method, the Company determines whether it is necessary to recognize an additional
impairment loss on the Company’s investment in its associate. The Company determines at each consolidated financial
statement date whether there is any objective evidence that the investment in the associate is impaired. If this is the case,
the Company then calculates the amount of impairment as the difference between the recoverable amount of the associate
and its carrying value and recognizes the amount in the consolidated statements of income.
Upon loss of significant influence over the associate, the Company measures and recognizes any retained investment at its
fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value
of the retained investment and proceeds from disposal is recognized in the consolidated statements of income.
(9) Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and that the
revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of
the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes
and duty. The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as
principal or agent. The Company has concluded that it is acting as a principal in all of its revenue arrangements.
- 55 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
4.
Summary of Significant Accounting Policies (continued)
Interest income or expense
For all financial investments measured at amortized cost and interest bearing financial assets classified as available for sale,
interest income or expense is recorded using the EIRM, which reflects the rate that exactly discounts the estimated future
cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the
net carrying amount of the financial asset or liability. Interest income or expense is included in the appropriate component
of the consolidated statement of income.
(10) Cash and short-term investments
Cash and short-term investments on the consolidated balance sheets comprise cash held at banks and short-term deposits
with original maturity dates of less than 90 days.
(11) Share-based payment transactions
The cost of cash-settled transactions is measured initially at fair value at the grant date, further details of which are
discussed in Note 28. The obligations are adjusted for fluctuations in the market price of the Company’s common shares.
Changes in the obligations are recorded as salaries and benefits in the consolidated statements of income with a
corresponding change to other liabilities. The liability is re-measured at fair value at each consolidated financial statement
date up to and including the settlement date.
5. First-Time Adoption of IFRS
The consolidated financial statements are the first annual consolidated financial statements that the Company has prepared
in accordance with IFRS. For periods up to and including the year ended December 31, 2010, the Company prepared its
consolidated financial statements in accordance with CGAAP.
Accordingly, the Company has prepared consolidated financial statements which comply with IFRS applicable for periods
ending on or after December 31, 2011 as described in the accounting policies. In preparing these consolidated financial
statements, the Company’s opening consolidated balance sheet was prepared as at January 1, 2010, the Company’s date of
transition to IFRS. This note explains the principal adjustments made by the Company in restating its CGAAP consolidated
balance sheets as at January 1, 2010 and December 31, 2010 and its previously published CGAAP consolidated statements
of income and comprehensive income for the year ended December 31, 2010.
Exemptions applied
IFRS 1 allows first-time adopters certain exemptions from the general requirement to apply IFRS.
The Company has applied the following exemptions:
• Derecognition of financial assets and financial liabilities - The Company is required to apply the derecognition
requirements in IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”), prospectively for
transactions occurring after January 1, 2004. Accordingly, the Company applied IAS 39 to all securitization
transactions entered into by the Company on or after January 1, 2004.
• Designation of previously recognized financial instruments - A first time adopter of IFRS may designate financial
assets and liabilities at the date of transition to IFRS. On transition, the Company designated its mortgages and certain
financial investments as loans and receivables, its investment - commercial real estate (Note 15) as available for sale
and its marketable securities as available for sale.
• Estimates - Hindsight cannot be used to create or revise estimates and accordingly, the estimates previously made by
the Company under CGAAP were not revised for the application of IFRS except where necessary to reflect any
difference in accounting policies.
• Business combinations - The Company has elected not to apply IFRS 3, Business Combinations, retrospectively to
business combinations that took place before the date of transition.
- 56 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
5. First-Time Adoption of IFRS (continued)
RECONCILIATION OF CONSOLIDATED BALANCE SHEET
AS AT JANUARY 1, 2010
CGAAP Line Items
Note
CGAAP
Adjustments
IFRS IFRS Line Items
Assets
Assets
Cash and cash equivalents
Mortgages
Securitization investments
Loans receivable and other
investments
Equity investment in MCAP
Commercial LP
Other assets
Derivative financial instruments
k
a,c,k
b,d,k
$
89,843 $
295,415
73,590
(1,642) $
(646)
(13,263)
Corporate Assets
88,201 Cash and cash equivalents
294,769 Mortgages
60,327 Financial investments
a,b,d,k
16,885
(5,041)
11,844 Other loans
Equity investment in MCAP
e
b,k
b,k
b,k
17,905
1,555
495,193
(8,343)
(1,045)
(29,980)
9,562 Commercial LP
510 Other assets
465,213
-
-
-
11,490
-
11,490
290,228
2,342,164
409,303
-
44,306
3,086,001
$ 506,683 $ 3,056,021
Securitization Assets
290,228 Short-term investments
2,342,164 Mortgages
409,303 Financial investments
11,490 Derivative financial instruments
44,306 Other assets
3,097,491
$ 3,562,704
Liabilities and Shareholders’ Equity
Liabilities and Shareholders’ Equity
Liabilities
Liabilities
Term deposits
$ 360,744 $
Future taxes payable
Securitization liabilities
Accounts payable and accrued charges b,h,k
b
g
b
-
7,011
5,048
11,001
383,804
-
2,248
(3,556)
(5,048)
(3,697)
(10,053)
Corporate Liabilities
$ 360,744 Term deposits
2,248 Current tax liabilities
3,455 Deferred tax liabilities
-
7,304 Other liabilities
373,751
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive
income
m
m
i,m
j,m
-
-
-
383,804
3,074,793
206
3,074,999
3,064,946
98,490
510
22,165
-
-
(7,211)
1,714
122,879
(1,714)
(8,925)
$ 506,683 $ 3,056,021
Securitization Liabilities
3,074,793 Financial liabilities from securitization
206 Other liabilities
3,074,999
3,448,750
Shareholders’ Equity
98,490 Share capital
510 Contributed surplus
14,954 Retained earnings
- Available for sale reserve
113,954
$ 3,562,704
- 57 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
5. First-Time Adoption of IFRS (continued)
RECONCILIATION OF CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2010
CGAAP Line Items
Note
CGAAP
Adjustments
IFRS
IFRS Line Items
Net Investment Income
Mortgage interest
k
$
25,828
$
1,383 $
27,211
Interest on loans and investments
Equity income from MCAP
Commercial LP
Fees
Marketable securities
Interest on cash and cash equivalents
Other securitization income
e
k
b, 35
Term deposit interest and expenses
Mortgage expenses
Provision for (recovery of) credit losses
k
a
b
b
b
b
b
b
b
Net Investment Income
Corporate Assets
Mortgage interest
Interest on financial investments and
other loans
Equity income from MCAP
Commercial LP
Fees
Marketable securities
Interest on cash and cash equivalents
Term deposit interest and expenses
Mortgage expenses
Provision for (recovery of) credit losses
2,507
3,743
5,561
31
230
3,949
41,849
7,619
2,921
(387)
10,153
-
2,507
(441)
(1,704)
-
-
(3,949)
(4,711)
-
(90)
(305)
(395)
3,302
3,857
31
230
-
37,138
7,619
2,831
(692)
9,758
31,696
(4,316)
27,380
25,467
3,203
334
10,239
39,243
29,473
715
30,188
25,467
3,203
334
10,239
39,243
29,473
715
30,188
Securitization Assets
Mortgage interest
Interest on financial investments
Interest on short-term investments
Other securitization income
Interest on financial liabilities from
securitization
Mortgage expenses
9,055
9,055 Net investment income before fair market
35
1,629
1,629
10,684
10,684
value adjustment
Fair market value adjustment - derivative
financial instruments
Net Investment Income
31,696
6,368
38,064 Net Investment Income
Operating Expenses
Salaries and benefits
General and administrative
Income Before Income Taxes
Net Income
Basic and diluted earnings per share
Dividends per share
Weighted average number of basic and
diluted shares (000’s)
2,711
3,620
6,331
25,365
-
-
-
25,365
1.76
1.19
$
$
$
h
g
$
$
$
Operating Expenses
Salaries and benefits
General and administrative
Income Before Income Taxes
Provision for income taxes
Current
Deferred
-
(231)
(231)
2,711
3,389
6,100
6,599
31,964
3,442
1,864
5,306
1,293 $
3,442
1,864
5,306
26,658 Net Income
0.09 $
- $
1.85 Basic and diluted earnings per share
1.19 Dividends per share
14,389
-
14,389
Weighted average number of basic and
diluted shares (000’s)
- 58 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
5. First-Time Adoption of IFRS (continued)
RECONCILIATION OF CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2010
CGAAP Line Items
Note
CGAAP
Adjustments
IFRS
IFRS Line Items
k
$
a,c,k
b,d,k
$
89,373
6,608
422,393
13,605
a,b,d,k
10,079
e
b,k
b,k
Assets
Corporate Assets
Cash and cash equivalents
Marketable securities
Mortgages
Financial investments
Other loans
Equity investment in MCAP
Commercial LP
Other assets
Securitization Assets
Short-term investments
Mortgages
Financial investments
Derivative financial instruments
Other assets
Liabilities and Shareholders’ Equity
Liabilities
Corporate Liabilities
Term deposits
Current tax liabilities
Deferred tax liabilities
Other liabilities
Securitization Liabilities
Financial liabilities from securitization
Other liabilities
$
(4,064)
-
(2,071)
(3,357)
(6,747)
(8,785)
(2,440)
(27,464)
85,309
6,608
420,322
10,248
3,332
11,530
769
538,118
220,949
1,910,995
996,968
-
5,875
3,134,787
$ 3,107,323
220,949
1,910,995
996,968
13,120
5,875
3,147,907
$ 3,686,025
$
$
-
5,728
(5,152)
(7,000)
(4,177)
(10,601)
421,061
5,728
5,311
-
6,632
438,732
3,119,601
2,613
3,122,214
3,111,613
3,119,601
2,613
3,122,214
3,560,946
-
-
(2,467)
(1,823)
(4,290)
$ 3,107,323
100,112
510
24,489
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
(32) Available for sale reserve
125,079
$ 3,686,025
20,315
3,209
565,582
-
-
-
13,120
-
13,120
578,702
421,061
-
10,463
7,000
10,809
449,333
-
-
-
449,333
100,112
510
26,956
1,791
129,369
578,702
$
$
$
Assets
Cash and cash equivalents
Marketable securities
Mortgages
Securitization investments
Loans receivable and other
investments
Equity investment in MCAP
Commercial LP
Other assets
Derivative financial instruments
Liabilities and Shareholders’ Equity
Liabilities
Term deposits
Future taxes payable
Securitization liabilities
Accounts payable and accrued charges
g
b
b,h,k
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive
income
m
m
i,m
j,m
- 59 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
5. First-Time Adoption of IFRS (continued)
RECONCILIATION OF CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2010
Note
CGAAP
Adjustments
IFRS
Net income
$
25,365
$
1,293
$
26,658
Other comprehensive income, net of deferred taxes
Change in unrealized gain on available for sale marketable securities
Change in unrealized gain on available for sale mortgages
Change in unrealized gain on available for sale financial investments
Other changes
c
d
(32)
631
(544)
22
77
-
(631)
544
(22)
(109)
(32)
-
-
-
(32)
Comprehensive income
$
25,442
$
1,184
$
26,626
Notes to remeasurements
(a) Mortgage, loan and investment allowances
Specific and general allowances for mortgages, loans and investments were previously recognized under CGAAP, while
under IFRS they are referred to as individual and collective allowances, respectively. The impairment approach under
IFRS places incremental reliance on objective evidence of incurred losses. In accordance with the impairment calculation
methodology as set out in IAS 39, the conversion to IFRS led to decreases in the Company’s mortgage, loan and
investment allowances as follows:
Decrease to gross allowances
Less: deferred tax recovery
Net increase to retained earnings
December 31
2010
January 1
2010
$
$
945
375
570
$
$
641
254
387
The adjustment to mortgage, loan and investment allowances led to a $305 decrease in the provision for credit losses for the
year ended December 31, 2010.
(b) Securitization activities
Under CGAAP, as part of the securitization of mortgages through the CMB program, the Company recognized interest-
only strips and certain CMB-related securitization liabilities on its consolidated balance sheets. Under IFRS, these balance
sheet items do not exist, as all up-front gains on securitization were reversed on transition. The Company recognizes the
securitized mortgages and certain transaction costs, principal reinvestment assets and financial liabilities from securitization
on its consolidated balance sheets as a result of MCAN’s failure to meet derecognition criteria as part of the mortgage sales
associated with the CMB program. In addition, the Company recognizes income and expenses associated with these
financial instruments on an accrual basis under IFRS.
As part of the conversion to IFRS, the increases (decreases) to retained earnings from CGAAP related to securitization
activities as follows:
Gross increase (decrease) to retained earnings
Less: deferred tax provision (recovery)
Net increase (decrease) to retained earnings
December 31
2010
January 1
2010
$
$
6,549
(2,104)
4,445
$
$
(163)
(270)
(433)
- 60 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
5. First-Time Adoption of IFRS (continued)
As part of the conversion to IFRS, the Company also recognized balance sheet items as follows (which include mortgages
that did not meet derecognition criteria and CMB principal reinvestment assets):
Short-term investments
Mortgages - securitized
Financial investments
Other assets
Financial liabilities from securitization
December 31
2010
January 1
2010
$
216,885
1,910,995
823,625
4,595
2,946,258
$
288,586
2,342,164
231,127
44,290
2,896,617
Financial liabilities from securitization include certain transaction costs.
On January 1, 2010, the Company also reversed $12,626 of existing financial investments (December 31, 2010 - $3,124)
and $2,913 of existing other liabilities (December 31, 2010 - $169).
The reversal of interest-only strips on January 1, 2010 included the reversal of $5,048 of interest-only strips in a liability
position (December 31, 2010 - $7,000), classified as securitization liabilities under CGAAP.
The Company has also securitized mortgages through the Insured Mortgage Purchase Program (“IMPP”). On January 1,
2010, the Company recognized $178,176 of financial investments (December 31, 2010 - $173,343) and $178,176 of
financial liabilities from securitization (December 31, 2010 - $173,343) on its consolidated balance sheets as a result of its
participation in the IMPP. The inclusion of these items on MCAN’s balance sheets is a result of MCAN’s failure to meet
derecognition criteria as part of the mortgage sales associated with the IMPP (Note 7).
Under CGAAP, the Company recognized other securitization income, which consisted primarily of fair market value
changes in the interest rate swaps and interest-only strips, net interest rate swap receipts and refinancing and renewal gains.
Under IFRS, the Company recognizes interest on its on-balance sheet assets and liabilities, including mortgages, short-term
investments, financial investments and financial liabilities from securitization. Other securitization income under IFRS
consists of net interest rate swap receipts and refinancing and renewal gains.
(c) Mortgages
Under CGAAP, the Company carried all investment mortgages as available for sale. As part of the conversion to IFRS, the
Company classified its corporate mortgage portfolio as loans and receivables and reversed gross unrealized gains in the
available for sale reserve as follows:
Reversal of gross unrealized gains in available for sale reserve
Less: deferred tax impact
Net decrease to available for sale reserve
(d) Financial investments
December 31
2010
January 1
2010
$
$
2,270
447
1,823
$
$
1,490
298
1,192
Under CGAAP, the Company carried mortgage-backed securities (“MBS”) (included in financial investments) as available
for sale. As part of the conversion to IFRS, the Company classified these assets as loans and receivables and reversed gross
unrealized gains in the available for sale reserve as follows:
Reversal of gross unrealized gains in available for sale reserve
Less: deferred tax impact
Net decrease to available for sale reserve
December 31
2010
January 1
2010
$
$
-
-
-
$
$
662
140
522
The Company reclassified $5,070 of other loans to financial investments on January 1, 2010 (December 31, 2010 - $6,757),
which had no impact to retained earnings.
- 61 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
5. First-Time Adoption of IFRS (continued)
The Company’s investment - commercial real estate (Note 11) was classified as available for sale as part of the conversion
to IFRS. At January 1, 2010, both its amortized cost and fair market value were $100 (December 31, 2010 - $3,973).
(e) Equity investment in MCLP
As part of the conversion to IFRS, the Company recorded decreases to its equity investment in MCAP Commercial LP
(“MCLP”) as follows:
Decrease to equity investment in MCLP
Less: deferred tax impact
Net decrease to retained earnings
December 31
2010
January 1
2010
$
$
8,785
1,460
7,325
$
$
8,343
1,252
7,091
The Company recorded its pro-rata share of MCLP’s IFRS adjustments to retained earnings.
The adjustment to the equity investment in MCLP led to a $441 decrease in equity income from MCLP for the year ended
December 31, 2010.
(f) Following quarter dividend
MCAN is a MIC under the Tax Act. As such, the Company is able to deduct from income for tax purposes dividends paid
within 90 days of year-end. Under CGAAP, the dividend to be paid in the following quarter was deductible in the
calculation of the current tax liability. For IFRS purposes, dividends paid in the following quarter that have not been
declared and accrued prior to quarter-end are not deductible in the calculation of the current tax liability. As a result of this
difference, there was an increase to current taxes payable of $2,441 as at January 1, 2010 (December 31, 2010 - $5,881). In
addition, there was a decrease to opening retained earnings of $2,441 on transition to IFRS.
Under CGAAP, the Company also recorded a corresponding deferred tax liability in regards to the following quarter
dividends. The reversal of this liability as part of the conversion to IFRS resulted in a positive impact to retained earnings
of $2,390 as at January 1, 2010 (December 31, 2010 - $5,724).
(g) Deferred taxes
As part of the conversion to IFRS, the Company recorded decreases (increases) to its deferred tax liability as follows:
Mortgage, loan and investment allowances
Securitization activities
Equity investment in MCLP
Following quarter dividend
Impact on retained earnings
Impact on available for sale reserve
Total deferred tax impact
Note
a
b
e
f
c, d
December 31
2010
January 1
2010
$
$
(375)
(2,104)
1,460
5,724
4,705
447
5,152
$
$
(254)
(270)
1,252
2,390
3,118
438
3,556
Under IFRS, MCAN recognized a deferred tax provision of $1,864 for the year ended December 31, 2010.
(h) Current tax liabilities
As part of the conversion to IFRS, the following increases were made to current tax liabilities relating to the following
quarter dividend (as noted in (f) above):
Following quarter dividend
Total current tax impact
Note
f
December 31
2010
January 1
2010
$
$
5,881
5,881
$
$
2,441
2,441
Under IFRS, MCAN recognized a current tax provision of $3,442 for the year ended December 31, 2010.
- 62 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
5. First-Time Adoption of IFRS (continued)
(i)
Shareholders’ equity reconciliation - retained earnings
As part of the conversion to IFRS, the Company recorded increases (decreases) to retained earnings as follows:
Impact due to revision of mortgage, loan and investment
allowances
Impact on securitization activities
Impact on equity investment in MCLP
Following quarter dividend - deferred tax impact
Following quarter dividend - current tax impact
Other items
Net decrease to retained earnings
Note
December 31
2010
January 1
2010
a
b
e
f
h
$
$
570
4,445
(7,325)
5,724
(5,881)
-
(2,467)
$
$
387
(433)
(7,091)
2,390
(2,441)
(23)
(7,211)
(j)
Shareholders’ equity reconciliation - available for sale reserve
The transition from CGAAP to IFRS had the following impact on the available for sale reserve:
Mortgages
Financial investments
Net impact on available for sale reserve
(k) Other reclassifications
Note
c
d
December 31
2010
January 1
2010
$
$
(1,823)
-
(1,823)
$
$
(1,192)
(522)
(1,714)
In adopting IFRS, the Company made additional reclassifications to the consolidated balance sheets as follows:
CGAAP Line Item
IFRS Line Item
Short-term investments
Cash
Financial investments
Loans receivable
Other assets
Mortgages
Accounts payable and accrued charges Mortgages
Other assets
Other liabilities
December 31
2010
January 1
2010
$
4,064
243
1,008
1,734
153
$
1,642
22
851
593
(194)
In adopting IFRS, the Company made additional reclassifications to the consolidated statements of income as follows:
CGAAP Line Item
IFRS Line Item
Fees
Mortgage expenses
General and administrative
Mortgage interest income
Mortgage interest income
Mortgage interest income
(l) Consolidated statement of cash flows
Year Ended
December 31, 2010
$
1,704
90
231
Within operating and investing activities, the transition to IFRS has led to significant changes to mortgage reductions and
short-term investment and financial investment activity, respectively, due to securitized mortgage repayments and their
subsequent reinvestment. Net cash flows from financing activities has not changed significantly. On a total basis, the
consolidated statement of cash flows did not change significantly as a result of the transition to IFRS.
(m) Consolidated statement of changes in shareholders’ equity
Changes to retained earnings and the available for sale reserve that arose from the conversion to IFRS are discussed above
in notes (i) and (j), respectively. There was no impact to share capital or contributed surplus.
- 63 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
6.
Significant Accounting Judgments and Estimates
The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates
and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of
contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future
periods.
Going concern
The Company’s management has made an assessment of the Company’s ability to continue as a going concern and is
satisfied that the Company has the resources to continue in business for the foreseeable future. Furthermore, management
is not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going
concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis.
Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the consolidated financial statements cannot be
derived from active markets, they are determined using a variety of valuation techniques that include the use of
mathematical models. The inputs to these models are derived from observable market data where possible, but where
observable market data are not available, judgment is required to establish fair values. The judgments include
considerations of liquidity and model inputs such as discount rates, prepayment rates and default rate assumptions for
certain investments.
Impairment losses on mortgages
The Company reviews its individually significant mortgage balances at each consolidated financial statement date to assess
whether an impairment loss should be recorded in the consolidated statements of income. In particular, judgment by
management is required in the estimation of the amount and timing of future cash flows when determining the impairment
loss. In estimating these cash flows, the Company makes judgments about the borrower’s financial situation and the net
realizable value of collateral. These estimates are based on assumptions about a number of factors and actual results may
differ, resulting in future changes to the allowance.
Mortgages that have been assessed individually and found not to be impaired and all individually insignificant mortgages
are then assessed collectively, in groups of mortgages with similar risk characteristics, to determine whether a provision
should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The
collective assessment takes account of data from the mortgage portfolio (such as credit quality, levels of arrears, credit
utilization, loan to value ratios, etc.), concentrations of risks and economic data (including levels of unemployment, real
estate prices indices and the performance of different individual groups).
Taxes
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and
timing of future taxable income. Differences arising between the actual results and the assumptions made, or future changes
to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Company
establishes provisions, based on reasonable estimates, for possible consequences of audits by relevant tax authorities. The
amount of such provisions is based on various factors, such as experience of previous tax audits and interpretations of tax
regulations by the responsible tax authority. As the Company assesses the probability for a litigation and subsequent cash
outflow with respect to taxes as remote, no contingent liability has been recognized.
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable income will be
available against which the losses can be used. Significant management judgment is required to determine the amount of
deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable income together with
future tax planning strategies.
Further details on taxes are disclosed in Note 18.
- 64 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
7.
Securitization Activities
MCAN participates in the CMB program, which involves the securitization of mortgages that are insured by Canada
Mortgage and Housing Corporation (“CMHC”) or Genworth Financial Mortgage Insurance Company Canada Inc.
(“Genworth”). Over the term of a CMB issuance, MCAN is entitled to interest income received from the securitized
mortgages. As the securitized mortgages repay, MCAN reinvests the collected principal in certain permitted investments
and is also entitled to interest income from the reinvested assets. As part of the securitization, MCAN also incurs a liability
in the amount of the securitized mortgages and is obligated to pay interest on this liability. This liability does not amortize
over the term of the issuance and is payable in full at maturity. MCAN also recognizes servicing expenses on the
mortgages and pays certain upfront costs. The securitized mortgages and reinvestment assets are held as collateral against
the CMB liability.
MCAN participates in the CMB program with MCLP and a private company. MCAN participates in the economics of each
CMB issuance in accordance with a pre-determined economic sharing percentage, which dictates the upfront and ongoing
cash flow rights and obligations of the participants. MCAN’s weighted average economic participation for outstanding
CMB issuances as at December 31, 2011 was 28% (December 31, 2010 - 28%, January 1, 2010 - 28%). MCLP and the
private company have indemnified MCAN for the remaining 72% of CMB program obligations.
The CMB securitization process includes the sale of the securitized mortgages to the Canada Housing Trust (“CHT”). Just
prior to the sale to CHT, MCAN purchases the securitized mortgages from MCLP or a third party at fair value, including
transaction costs. The sale to CHT fails to meet derecognition criteria since MCAN does not transfer substantially all risks
and rewards on sale. MCAN accounts for these transactions as collateralized borrowings and records cash received as a
financial liability from securitization.
As a result of its failure to meet derecognition criteria on the sale of the securitized mortgages to CHT, MCAN recognizes
100% of the mortgages (Note 10), reinvestment assets (Notes 11 and 15) and securitization liability (Note 20) on the
consolidated balance sheets until the maturity of the CMB issuance. MCAN recognizes its 28% share of mortgage interest
income, principal reinvestment income, interest expense on the securitization liability and certain other program expenses
on the accrual basis. MCAN has also capitalized certain costs associated with the securitized mortgages and securitization
liability, both of which are amortized using the EIRM.
The Company enters into “pay floating, receive fixed” interest rate swaps as part of the CMB program (Note 16). The
purpose of the interest rate swaps is to hedge interest rate risk on both securitized mortgages and principal reinvestment
assets that have a floating interest rate, as substantially all interest payments on the securitization liabilities are fixed rate.
The interest rate swaps are classified as held for trading, where changes in fair value are recorded through the consolidated
statements of income. From an economic perspective, these fair value changes are generally offset by changes in future
expected income from securitized mortgages and principal reinvestment assets that have a floating interest rate. From an
accounting perspective, changes in future expected income from these floating rate assets are not reflected in the
consolidated statements of income, which can cause significant volatility to the consolidated statements of income since
there is no offset to fair value changes in the interest rate swaps.
The Company also participated in the IMPP, which involves the securitization of insured single family mortgages.
Although MCAN has no economic interest in the IMPP, it earned an up-front fee for its involvement. MCAN participated
in the IMPP on behalf of a third party, who is entitled to 100% of the economics of the IMPP. Since MCAN failed to meet
derecognition criteria on the mortgage sales associated with the IMPP, it recognized a corresponding financial investment
(Note 11) and financial liability from securitization (Note 20), which represent the receivable from the third party and the
liability to the IMPP counterparty, respectively. MCAN is the counterparty for the ongoing cash flows between the third
party and the IMPP counterparty.
8. Cash and Cash Equivalents
Cash balances with banks
Bankers’ acceptances and term deposits
December 31
2011
December 31
2010
January 1
2010
$
$
8,309
43,000
51,309
$
$
7,309
78,000
85,309
$
$
43,201
45,000
88,201
Cash and cash equivalents include balances with banks and short-term investments with original maturity dates of less than
90 days.
Refer to Note 30 for an analysis of the Company’s available credit facilities.
- 65 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
9. Marketable Securities
Corporate bonds
Real estate investment trusts
December 31
2011
December 31
2010
January 1
2010
$
$
18,866
11,283
30,149
$
$
4,956
1,652
6,608
$
$
-
-
-
Marketable securities are designated as available for sale. The marketable securities portfolio has no specific maturity date
except for corporate bonds, which have varying maturity dates. Fair values are based on bid prices quoted in active
markets, and changes in fair value are recognized in the consolidated statements of comprehensive income.
10. Mortgages
(a) Summary
As at December 31, 2011
Corporate portfolio:
Single family mortgages
- Uninsured
- Uninsured (completed inventory loans)
- Insured
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
- Insured
Securitized portfolio:
- Single family - insured
- Commercial - insured
As at December 31, 2010
Corporate portfolio:
Single family mortgages
- Uninsured
- Uninsured (completed inventory loans)
- Insured
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
- Insured
Securitized portfolio:
- Single family - insured
- Commercial - insured
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$ 261,724
36,270
77,558
191,628
18,861
54,645
3,744
$ 644,430
$
1,031
166
-
1,219
119
384
-
2,919
$
$
102
-
-
1,133
166
-
$ 260,591
36,104
77,558
1,000
-
58
-
1,160
$
2,219
119
189,409
18,742
442
-
4,079
54,203
3,744
$ 640,351
$
$ 1,451,075
47,941
$ 1,499,016
$
$
-
-
-
$
$
-
-
-
$
$
-
-
-
$ 1,451,075
47,941
$ 1,499,016
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$ 140,356
39,039
44,307
174,915
11,648
12,931
419
$ 423,615
$
573
180
-
1,122
74
98
-
2,047
$ 1,861,981
49,014
$ 1,910,995
$
$
-
-
-
$
$
$
$
246
-
-
1,000
-
-
-
1,246
-
-
-
$
819
180
-
$ 139,537
38,859
44,307
2,122
74
172,793
11,574
98
-
3,293
12,833
419
$ 420,322
-
-
-
$ 1,861,981
49,014
$ 1,910,995
$
$
$
- 66 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
10. Mortgages (continued)
As at January 1, 2010
Corporate portfolio:
Single family mortgages
- Uninsured
- Uninsured (completed inventory loans)
- Insured
Construction loans
- Residential
- Non-residential
Commercial loans
- Uninsured
- Insured
Securitized portfolio:
- Single family - insured
- Commercial - insured
Gross
Principal
Collective
Allowance
Individual
Total
Net
Principal
$
$
97,302
30,380
38,557
125,443
24
419
128
-
758
-
6,727
479
$ 298,912
$
56
-
1,361
$
$
$
55
-
-
$
474
128
-
96,828
30,252
38,557
2,727
-
-
-
2,782
3,485
-
121,958
24
56
-
4,143
6,671
479
$ 294,769
$
$ 2,292,000
50,164
$ 2,342,164
$
$
-
-
-
$
$
-
-
-
$
$
-
-
-
$ 2,292,000
50,164
$ 2,342,164
Gross principal as presented in the tables above includes unamortized capitalized transaction costs.
MCAN’s mortgage portfolio consists of its corporate and securitized portfolios.
MCAN’s corporate portfolio includes insured and uninsured single family mortgages. The Company does not invest in the
United States mortgage market. Uninsured mortgages may not exceed 80% of the value of the real estate securing such
loans at the time of funding. Residential mortgages insured by CMHC or Genworth may exceed this ratio.
Uninsured completed inventory loans are credit facilities extended to provide interim mortgage financing on residential
units (condominium or freehold), where all construction has been completed.
Residential construction loans are made to homebuilders to finance residential construction projects.
Non-residential construction loans provide construction financing for retail shopping developments, office buildings and
industrial developments.
Commercial loans include commercial term mortgages and high ratio mortgage loans.
MCAN’s securitized mortgage portfolio consists of insured mortgages securitized through the CMB program and other
securitization programs. These mortgages are held as collateral against the CMB liability (Notes 7 and 20). Certain
capitalized transaction costs are included in mortgages and are amortized using the EIRM. As at December 31, 2011, the
unamortized capitalized cost balance was $3,965 (December 31, 2010 - $6,539, January 1, 2010 - $9,024). All mortgages
in the securitized portfolio are insured, therefore they do not have a collective allowance.
- 67 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
10. Mortgages (continued)
The weighted average yield of the Company’s mortgage portfolio is as follows:
Corporate portfolio:
Single family
Construction
Commercial
Total
Securitized portfolio:
Single family
Commercial
Total
Overall
December 31
2011
December 31
2010
January 1
2010
5.48%
6.49%
5.63%
5.82%
4.00%
3.49%
3.99%
5.08%
5.36%
6.78%
6.62%
5.74%
6.63%
6.69%
6.02%
6.13%
4.03%
3.41%
4.02%
4.88%
3.91%
3.42%
3.90%
4.59%
Mortgages are classified as loans and receivables and are carried at amortized cost. The fair market value of the corporate
mortgage portfolio as at December 31, 2011 was $644,361 (December 31, 2010 - $422,393, January 1, 2010 - $295,415),
while the fair market value of the securitized mortgage portfolio as at December 31, 2011 was $1,672,958 (December 31,
2010 - $2,201,529, January 1, 2010 - $2,533,736). Fair market values are calculated on a discounted cash flow basis using
the prevailing market rates for similar mortgages. Outside of the change during the periods shown in the above tables,
there were no significant fluctuations in mortgage balances within the periods. For information regarding the maturity of
the Company’s mortgages, refer to Note 31.
As at December 31, 2011, the Company had $nil (December 31, 2010 - $2,499, January 1, 2010 - $4,861) of insured single
family mortgages from its corporate portfolio pledged as collateral related to the CMB program.
As at December 31, 2011, the Company held $969 of second mortgages (December 31, 2010 - $1,538, January 1, 2010 -
$2,368), all of which were uninsured single family mortgages.
Outstanding commitments for future fundings of mortgages intended for the Company’s corporate portfolio were $296,666
at December 31, 2011 (December 31, 2010 - $199,678, January 1, 2010 - $96,173). The majority of these commitments
relate to floating rate construction loans.
(b) Discounted Mortgages
Principal balances presented in section (a) are net of the unamortized discount on the Company’s portfolio of single family
mortgages purchased at a discount. As at December 31, 2011, the Company holds discounted mortgages with an aggregate
discount of $9,141 (December 31, 2010 - $14,357, January 1, 2010 - $22,036). Upon the payout of a mortgage, the
remaining unamortized discount is recognized in mortgage interest income. The Company retains 50% of any recoveries of
the discount and pays the remaining 50% to MCLP (refer to Note 28 for profit sharing fees paid to/from MCLP). In
addition, the Company amortizes the portion of the discount that it expects to recover into income over the remaining term
of the mortgage on an EIRM basis. The amount of the discount ultimately recovered is dependent on the value of the real
estate securing the mortgage, as well as the financial capacity of the borrower. Additionally, these mortgages have maturity
dates ranging from 2012 (for certain fixed rate mortgages) to 2032 (for certain floating rate mortgages). The realization of
the discount is based on management’s expectations as to when cash will be received.
The composition of the discount is as follows:
Fixed rate
Floating rate
December 31
2011
December 31
2010
January 1
2010
$
$
2,310
6,831
9,141
$
$
2,752
11,605
14,357
$
$
4,859
17,177
22,036
- 68 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
10. Mortgages (continued)
(c) Geographic Analysis
As at December 31, 2011 Single Family Construction Commercial
Securitized
Total
Corporate
Ontario
Alberta
British Columbia
Other
$
$
157,624
97,548
71,572
47,509
374,253
$
$
71,710
86,500
37,970
11,971
208,151
$
$
24,423
14,458
4,344
14,722
57,947
$
749,176
348,636
218,030
183,174
$ 1,499,016
$ 1,002,933
547,142
331,916
257,376
$ 2,139,367
46.9%
25.6
15.5
12.0
100.0%
As at December 31, 2010 Single Family Construction Commercial
Securitized
Total
Corporate
Ontario
Alberta
British Columbia
Other
$
$
102,164
67,433
31,987
21,119
222,703
$
$
61,167
77,831
38,390
6,979
184,367
$
$
2,674
10,578
-
-
13,252
$
978,368
422,359
279,121
231,147
$ 1,910,995
$ 1,144,373
578,201
349,498
259,245
$ 2,331,317
49.1%
24.8
15.0
11.1
100.0%
As at January 1, 2010
Corporate
Single Family Construction
Commercial
Securitized
Total
Ontario
Alberta
British Columbia
Other
$
$
81,931
52,846
15,821
15,039
165,637
$
$
52,287
47,545
15,782
6,368
121,982
$
$
4,287
2,863
-
-
7,150
$ 1,221,123
490,023
368,249
262,769
$ 2,342,164
$ 1,359,628
593,277
399,852
284,176
$ 2,636,933
51.6%
22.5
15.2
10.7
100.0%
(d) Mortgage Allowances
Details of the collective allowances for mortgage credit losses are as follows:
Collective
Individual
2011
Total
Collective
Individual
Balance, beginning of year
Provisions (recoveries)
Write-offs
Balance, end of year
$
$
2,047
1,147
(275)
2,919
$
$
1,246
(86)
-
1,160
$
$
3,293
1,061
(275)
4,079
$
$
1,361
752
(66)
2,047
$
$
2,782
(1,536)
-
1,246
$
$
The Company’s individual allowances for mortgage credit losses are as follows:
2010
Total
4,143
(784)
(66)
3,293
Uninsured single family
Residential construction
Commercial - uninsured
December 31
2011
December 31
2010
January 1
2010
$
$
102
1,000
58
1,160
$
$
246
1,000
-
1,246
$
$
55
2,727
-
2,782
- 69 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
10. Mortgages (continued)
(e) Arrears and Impaired Mortgages
Mortgages past due but not impaired are as follows:
As at December 31, 2011
Corporate portfolio:
Single family - uninsured
Single family - insured
Residential construction
Securitized portfolio:
Single family - insured
As at December 31, 2010
Corporate portfolio:
Single family - uninsured
Single family - insured
Residential construction
Commercial - uninsured
Securitized portfolio:
Single family - insured
As at January 1, 2010
Corporate portfolio:
Single family - uninsured
Single family - uninsured
(completed inventory)
Single family - insured
Residential construction
Securitized portfolio:
Single family - insured
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
$
$
7,839
422
-
8,261
$
4,822
367
-
5,189
$
433
-
-
433
$
-
626
-
626
27,713
35,974
$
12,776
17,965
$
3,117
3,550
$
3,947
4,573
$
$
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
$
$
6,233
909
-
673
7,815
$
3,050
-
3,743
-
6,793
24,387
32,202
$
13,492
20,285
$
$
1,499
-
1,941
-
3,440
4,357
7,797
$
$
-
59
-
-
59
16,912
16,971
$
$
1 to 30
days
31 to 60
days
61 to 90
days
Over 90
days
Total
13,094
1,415
-
14,509
47,553
62,062
Total
10,782
968
5,684
673
18,107
59,148
77,255
Total
$
5,232
$
2,561
$
1,560
$
-
$
9,353
-
278
1,627
7,137
406
113
-
3,080
-
-
1,316
2,876
-
251
-
251
34,331
41,468
$
10,841
13,921
$
5,481
8,357
$
18,180
18,431
$
$
Impaired mortgages (net of individual allowances) are as follows:
As at December 31, 2011
Single Family
Residential
Construction
Commercial
Securitized
Ontario
Alberta
British Columbia
Other
$
$
2,055
769
393
542
3,759
$
$
1,237
8,708
-
-
9,945
$
$
427
-
-
-
427
$
$
-
-
-
86
86
$
$
406
642
2,943
13,344
68,833
82,177
Total
3,719
9,477
393
628
14,217
- 70 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
10. Mortgages (continued)
As at December 31, 2010
Single Family
Residential
Construction
Single family
(Completed
Inventory)
Securitized
Total
Ontario
Alberta
British Columbia
Other
As at January 1, 2010
Ontario
Alberta
British Columbia
Other
11. Financial Investments
$
$
1,150
1,458
-
331
2,939
$
$
1,339
6,661
-
-
8,000
$
$
-
-
-
1,892
1,892
$
$
-
614
883
245
1,742
$
$
2,489
8,733
883
2,468
14,573
Single Family
Residential
Construction
Securitized
$
$
266
831
259
-
1,356
$
$
8,916
6,899
-
-
15,815
$
$
425
-
194
87
706
$
$
Total
9,607
7,730
453
87
17,877
Corporate assets:
Investment - commercial real estate
Subordinated loan - residential mortgage securitization program
Other financial investments
Asset-backed commercial paper
Deferred purchase price receivable - residential
construction loan securitization program
- senior position
- first loss position
Insured mortgage-backed securities
Securitization assets:
Insured mortgage-backed securities (in trust for CMB program)
Receivables - IMPP
Corporate Assets
December 31
2011
December 31
2010
January 1
2010
$
$
8,250
2,535
1,294
457
-
-
-
12,536
$
$
3,973
2,946
2,872
457
-
-
-
10,248
$
$
100
4,578
5,619
2,480
3,908
1,671
41,971
60,327
$ 1,112,331
167,148
$ 1,279,479
$ 823,625
173,343
$ 996,968
$ 231,127
178,176
$ 409,303
The Company holds an equity investment in a commercial real estate investment fund in which it has a fixed proportionate
share. As acquisitions are made by the fund, the Company advances its proportionate share to finance the acquisitions. The
investment is designated as available for sale, with changes in fair value recognized in the consolidated statements of
comprehensive income.
The subordinated loan - residential mortgage securitization program bears interest at 10% (December 31, 2010 - 10%,
January 1, 2010 - 10%). The loan is rated BB high by Dominion Bond Rating Service (“DBRS”), classified as loans and
receivables and has no specific maturity date. The subordinated loan is receivable from a special purpose entity (“SPE”).
The Company does not control the SPE and therefore does not consolidate it. The repayment of this investment follows the
cash flows in the securitization program.
- 71 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
11. Financial Investments (continued)
As at January 1, 2010, the Company held investments in the senior position and first loss position of a residential
construction loan securitization program. The senior position yield was prime plus 5% (7.25% at January 1, 2010), while
the first loss position had no fixed yield. During 2010, both of these investments were repaid in full as part of the windup
of the securitization program. The investments were replaced by an indemnity agreement whereby the investors of the
securitization program are responsible for any incurred losses in the underlying loans in accordance with their pro-rata
share of the first loss investment at the time that the securitization program was wound up. Since the Company previously
held 25% of the first loss position, it is responsible for 25% of any losses incurred on the remaining loans in the
securitization program. The Company participates in the indemnity agreement with a related party. As at December 31,
2011, the Company had accrued a $200 liability (refer to Note 19) representing expected losses associated with this
indemnity (December 31, 2010 - $200, January 1, 2010 - $nil). As at December 31, 2011, the outstanding balance of the
remaining loans was $25,282 (December 31, 2010 - $26,420, January 1, 2010 - $nil).
As at January 1, 2010, the Company held insured MBS as a corporate asset (not held in trust for the CMB program) with a
weighted average yield of CDOR plus 1.14% (1.54%) and a fair market value of $43,409.
Securitization Assets
Insured MBS (held in trust for the CMB program) represent receivables from third party MBS issuers held as principal
reinvestment assets as part of the Company’s participation in the CMB program. The weighted average yield was 1.77% at
December 31, 2011 (December 31, 2010 - 2.08%, January 1, 2010 - 2.16%). The fair market value of MBS held in trust for
the CMB program as at December 31, 2011 was $1,121,238 (December 31, 2010 - $834,839, January 1, 2010 - $236,368).
Receivables - IMPP represent the Company’s involvement in the IMPP (Note 7), although it has no economic interest and
therefore recognizes no income.
All financial investments are classified as loans and receivables and carried at amortized cost except for the investment -
commercial real estate, which is classified as available for sale, and an equity investment sold during 2011 that was
included in other financial investments and was not considered to be a financial asset that had a balance of $766 at
December 31, 2010 and $796 at January 1, 2010. The carrying value of all financial investments approximates fair value,
except MBS noted above.
12. Other Loans
Loans receivable - private companies
Loans receivable - employees
Other
Note
28
December 31
2011
December 31
2010
January 1
2010
$
$
1,096
1,831
100
3,027
$
$
1,446
1,699
187
3,332
$
$
10,185
1,397
262
11,844
Loans receivable have been made to two private companies. A loan made to one company bears interest at the greater of
7% and prime plus 4%, 7% at December 31, 2011 (December 31, 2010 - 7%, January 1, 2010 - 7%) and had an outstanding
balance of $1,096 at December 31, 2011 (December 31, 2010 - $1,446, January 1, 2010 - $1,682). One loan previously
advanced to a private company paid out during 2010 and had an interest rate of the greater of 7¾% and prime plus 1⅜%,
7¾% at January 1, 2010. This loan had an outstanding balance of $8,503 at January 1, 2010. Both of these loans are
payable on demand.
All other loans are classified as loans and receivables.
13. Equity Investment in MCAP Commercial LP
The Company has a 22.7% equity interest in MCLP, consisting of 25% of voting class A units and 0% of non-voting class
B units. Since MCLP’s fiscal year end is November 30th, MCAN records equity income from MCLP on a one-month lag.
To the extent that MCLP has a significant transaction during the one-month lag, MCAN is required to reflect the
transaction in the month in which it occurred instead of the subsequent month.
- 72 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
13. Equity Investment in MCAP Commercial LP (continued)
MCAN holds a 25% voting interest in MCLP through its class A units. The remaining 75% of voting class A units are held
by Cadcap Limited Partnership, a subsidiary of the Caisse de dépôt et placement du Québec.
Balance, beginning of year
Equity income
Distributions received
Balance, end of year
2011
$
$
11,530
5,007
(1,057)
15,480
$
$
2010
9,562
3,302
(1,334)
11,530
MCAN recognized $1,216 of equity income in fiscal 2011 related to MCLP’s December 2011 operations (2010 - $nil).
Share of MCLP’s balance sheet:
Assets
Liabilities
Equity
December 31
2011
December 31
2010
January 1
2010
$
109,533
90,063
19,470
$
135,396
119,380
16,016
$
170,747
156,621
14,126
Carrying amount - equity investment in MCLP
$
15,480
$
11,530
$
9,562
The variance between MCAN’s share of MCLP’s equity and MCAN’s carrying amount of its equity investment in MCLP
arose from a corporate reorganization that took place in 2004 in which MCAN reduced its partnership interest in MCLP
from 50% to 25%.
Share of MCLP revenue and net income:
Revenue
Net income
14. Other Assets
2011
2010
$
$
12,010
5,007
$
$
11,154
3,302
Other assets include receivables, capital assets, prepaid expenses and miscellaneous assets relating to the Company’s
participation in the CMB program. Other assets are carried at cost.
Corporate assets:
Capital assets
Other
Securitization assets:
Mortgage principal receivable - CMB program
Miscellaneous CMB program assets
December 31
2011
December 31
2010
January 1
2010
$
$
$
$
379
568
947
-
3,029
3,029
$
$
$
$
241
528
769
-
5,875
5,875
$
$
$
$
291
219
510
34,394
9,912
44,306
The significant receivable balance as at January 1, 2010 relates to CMB principal collections receivable. At that time,
MCAN received principal collections from its third party servicer on a monthly basis. During 2010, MCAN began to
receive principal collections on a daily basis, thus eliminating significant end of period receivable balances.
- 73 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
15. Short-Term Investments
Treasury bills (in trust for CMB program)
Commercial paper (in trust for CMB program)
CMB cash held in trust
Cash pledged as collateral - CMB program
December 31
2011
December 31
2010
January 1
2010
$
$
-
289,719
52,964
2,804
345,487
$
$
144,960
28,687
45,059
2,243
220,949
$
$
258,656
29,930
-
1,642
290,228
Short-term investments consist primarily of treasury bills and commercial paper held as reinvestment assets for the CMB
program in addition to cash pledged as CMB program collateral. The weighted average yields of the CMB principal
reinvestment assets listed above are as follows: treasury bills - n/a (December 31, 2010 - 0.86%, January 1, 2010 - 0.15%),
commercial paper - 1.10% (December 31, 2010 - 1.22%, January 1, 2010 - 0.61%). Short-term investments mature within
90 days.
CMB cash held in trust represents securitized mortgage principal collections from borrowers to be used to acquire principal
reinvestment assets in the following month.
The carrying value of short-term investments approximates fair value.
16. Derivative Financial Instruments
As part of its participation in the CMB program, the Company enters into “pay-floating, receive-fixed” interest rate swaps.
The purpose of these swaps is to hedge interest rate risk on both securitized mortgages and principal reinvestment assets
that have a floating interest rate. The interest rate swap notional is an accreting balance which approximates the sum of
floating rate CMB mortgages and reinvestment assets. The interest rate swap counterparty is a Canadian chartered bank.
The interest rate swaps are carried at fair value, which is calculated by discounting future net cash flows based on forward
interest rates. The fair values displayed below represent only MCAN’s share of the fair value of the interest rate swaps.
The following tables outline the Company’s pro-rata share of derivative financial instruments:
As at December 31, 2011
Less than
one year
One to
five years
Over five
years
Total
CMB interest rate swaps - fair value
CMB interest rate swaps - outstanding notional
$
$
4,165
113,413
$
$
9,183
159,490
$
$
-
-
$
$
13,348
272,903
As at December 31, 2010
Less than
one year
One to
five years
Over five
years
Total
CMB interest rate swaps - fair value
CMB interest rate swaps - outstanding notional
$
$
-
-
$
$
13,120
279,138
$
$
-
-
$
$
13,120
279,138
As at January 1, 2010
Less than
one year
One to
five years
Over five
years
Total
CMB interest rate swaps - fair value
CMB interest rate swaps - outstanding notional
$
$
-
-
$
$
11,490
260,095
$
$
-
-
$
$
11,490
260,095
Derivative financial instrument activity was as follows:
Balance, beginning of year
Net interest rate swap receipts
Unrealized derivative financial instrument gain
2011
2010
$
13,120
$
11,490
(8,587)
8,815
228
(9,525)
11,155
1,630
Balance, end of year
$
13,348
$
13,120
- 74 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
17. Term Deposits
Term deposits
Accrued interest
Fair value
December 31
2011
December 31
2010
January 1
2010
$
$
$
595,747
5,830
601,577
610,944
$
$
$
418,151
2,910
421,061
423,996
$
$
$
357,150
3,594
360,744
364,021
Term deposits are issued to various individuals and institutions with original maturities ranging from 30 days to five years.
The weighted average term deposit rate as at December 31, 2011 was 2.44% (December 31, 2010 - 2.18%, January 1, 2010
- 2.24%). The Company’s term deposits are eligible for CDIC deposit insurance.
Term deposits are classified as other financial liabilities and are recorded at amortized cost. The estimated fair value of
term deposits as presented above is determined by discounting the contractual cash flows, using market interest rates
currently offered for deposits of similar remaining maturities.
18. Income Taxes
The composition of the provision for (recovery of) taxes is as follows:
Income before income taxes
Less: dividends
Income subject to tax
Statutory rate of tax
Tax provision (recovery) before the following:
Statutory rate difference in subsidiaries
Rate changes and other differences
Non-taxable portion of capital gains
Adjustments in respect of prior years
Current tax provision (recovery)
Deferred tax provision (recovery)
The composition of the deferred tax liabilities is as follows:
Provision for credit losses
Equity investment in MCAP Commercial LP
CMB-related items
Loss carryforward benefit
Other
2011
2010
$
$
$
$
24,848
(28,101)
(3,253)
40%
(1,301)
(225)
(6)
(569)
(154)
(2,255)
2011
(2,072)
(183)
(2,255)
$
31,964
(17,123)
14,841
41%
6,085
(142)
132
(760)
(9)
5,306
2010
3,442
1,864
5,306
$
$
$
December 31
2011
December 31
2010
January 1
2010
$
$
(1,198)
(157)
6,529
-
262
5,436
$
$
(869)
(457)
6,959
(299)
(23)
5,311
$
$
(1,567)
(777)
6,602
(881)
78
3,455
The Company has loss carryforward amounts of $nil (December 31, 2010 - $930, January 1, 2010 - $2,809), the benefit of
which has been recorded to deferred taxes.
Current Taxes Payable
As a MIC under the Tax Act, MCAN is able to deduct from income for tax purposes dividends paid within 90 days of year-
end. However, for accounting purposes, dividends paid in the following quarter that have not been declared and accrued
prior to quarter end are not deductible in the calculation of current taxes payable.
- 75 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
19. Other Liabilities
Corporate liabilities:
Accounts payable and accrued charges
Dividends payable
Related party payable - MCLP
Securitization liabilities:
Accrued charges
Other CMB liabilities
December 31
2011
December 31
2010
January 1
2010
$
$
$
$
2,761
4,552
630
7,943
28
6,031
6,059
$
$
$
$
2,702
3,756
174
6,632
45
2,568
2,613
$
$
$
$
2,566
3,723
1,015
7,304
64
142
206
Corporate accounts payable and accrued charges as at December 31, 2011 includes a $200 (December 31, 2010 - $200,
January 1, 2010 - $nil) liability related to expected losses as part of the Company’s indemnity agreement associated with
the securitization program windup discussed in Note 11.
Due to the short-term nature of other liabilities, their carrying value approximates fair value.
20. Financial Liabilities From Securitization
Financial liabilities from securitization include financial liabilities relating to the Company’s participation in the CMB
program and financial liabilities as a result of its involvement in the IMPP.
Financial liabilities - CMB program
Financial liabilities - IMPP
Note
7
7
December 31
2011
December 31
2010
January 1
2010
$ 2,944,209
167,148
$ 3,111,357
$ 2,946,258
173,343
$ 3,119,601
$ 2,896,617
178,176
$ 3,074,793
The financial liabilities - CMB program had a weighted average interest rate of 3.66% as at December 31, 2011 (December
31, 2010 - 3.67%, January 1, 2010 - 3.64%).
As financial liabilities from securitization mature, the securitization liability and related assets (securitized mortgages and
principal reinvestment assets) are removed from the consolidated balance sheets. Financial liabilities from securitization as
at December 31, 2011 mature as follows:
2012
2013
2014
2015
CMB
IMPP
Total
$ 1,087,983
965,441
843,906
46,879
$ 2,944,209
$
$
-
132,434
34,714
-
167,148
$ 1,087,983
1,097,875
878,620
46,879
$ 3,111,357
MCAN does not participate in the economics of the IMPP (Note 7) and therefore pays no interest on this liability, nor does
it recognize interest income from the associated receivable (Note 11).
Certain capitalized transaction costs are included in financial liabilities from securitization and are amortized using the
EIRM. As at December 31, 2011, the unamortized capitalized cost balance was $1,099 (December 31, 2010 - $1,742,
January 1, 2010 - $2,327).
- 76 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
21. Share Capital and Contributed Surplus
The authorized share capital of the Company is unlimited common shares with no par value.
Issued
Balance, January 1
Issued
Share issuance
Dividend reinvestment plan
Executive Share Purchase Plan
Balance, December 31
Number
of Shares
2011
Number
of Shares
2010
14,447,743
$
100,112
14,320,980
$
98,490
2,300,000
93,532
20,300
16,861,575
31,024
1,382
299
132,817
$
-
65,447
61,316
14,447,743
-
833
789
100,112
$
During 2011, the Company completed a public share offering of 2,300,000 common shares at a price of $14.50 per share,
for net proceeds of $31,024 after deducting $2,326 of issuance costs.
During 2011, the Company issued 93,532 (2010 - 65,447) shares under the dividend reinvestment plan out of treasury at the
weighted average trading price for the 20 days preceding such issue. In November 2011, the Company amended its
dividend reinvestment plan such that it is now based on the weighted average trading price for the 5 days preceding such
issue less a discount of 2%. The January 3, 2012 dividend was the first dividend for which the new basis was applicable.
For details on the Executive Share Purchase Plan, refer to Note 28.
The Company had no potentially dilutive instruments for the years ended December 31, 2011 and December 31, 2010.
Contributed surplus of $510 represents the discount on the repurchase of warrants in 2004.
22. Dividends
Dividends on common shares declared in the prior year and paid in the current year
(recognized as a liability at December 31, 2010 and 2009)
Fourth quarter dividend, 2010: $0.26 per share (2009: $0.26 per share)
Dividends on common shares declared and paid during the year
2011: $1.54 per share (2010: $0.93 per share)
Dividends on common shares declared during the year
(recognized as a liability at December 31, 2011 and 2010)
Fourth quarter dividend, 2011: $0.27 per share (2010: $0.26 per share)
2011
2010
$
3,756
$
3,723
$
23,549
$
13,367
$
4,552
$
3,756
Dividends on common shares approved in first quarter (not recognized as a
liability at December 31, 2011 or 2010)
First quarter dividend, 2012: $0.60 per share (2011: $1.00 per share)
$
10,129
$
14,461
Dividends paid within 90 days after year end by a MIC are deductible for income tax purposes, however, where such
dividends are not recognized as a liability at year-end the deduction is not taken into account in determining current taxes
payable for accounting purposes. The payment of the approved 2012 first quarter dividend of $10,129 noted above (2011 -
$14,461), which was not recognized as a liability as at December 31, 2011, is expected to reduce current taxes payable as at
March 31, 2012 by $4,017 (March 31, 2011 - $5,881). Certain additional factors may impact current taxes payable
between December 31, 2011 and March 31, 2012.
- 77 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
23. Available for Sale Reserve
The available for sale reserve consists of unrealized gains and losses (net of deferred taxes) on available for sale marketable
securities.
December 31
2011
December 31
2010
January 1
2010
Unrealized gain (loss) on available for sale marketable securities
Less: deferred taxes
$
Unrealized gain on available for sale financial investments
Less: deferred taxes
697
(137)
560
1,249
(162)
1,087
$
$
(39)
7
(32)
-
-
-
$
1,647
$
(32)
$
24. Fees
Fee income from profit sharing
Mortgagor fees
25. Mortgage Expenses
Corporate Assets
Mortgage servicing expense
Other mortgage expenses
Securitization Assets
Note
28
2011
303
1,290
1,593
2011
2,612
795
3,407
$
$
$
$
Mortgage expenses associated with securitization assets consist primarily of mortgage servicing expenses.
26. Provision for Credit Losses
Mortgages - collective provisions
Mortgages - individual recoveries
Financial investments and other loans - collective recoveries
Other provisions
27. Other Securitization Income
Net interest rate swap receipts
Refinancing and renewal gains
Other
2011
1,147
(86)
(3)
-
1,058
2011
8,587
132
282
9,001
$
$
$
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
2010
2,263
1,594
3,857
2010
2,549
282
2,831
2010
752
(1,536)
(108)
200
(692)
2010
9,525
394
320
10,239
- 78 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
28. Related Party Disclosures
The consolidated financial statements include the financial statements of the Company and the subsidiaries and associates
listed in the following table:
Subsidiaries:
6212484 Canada Inc.
6943993 Canada Inc.
7235003 Canada Inc.
Associate:
MCAP Commercial LP
December 31
2011
% Equity Interest
December 31
2010
January 1
2010
100%
-
-
22.7%
100%
-
100%
22.5%
100%
100%
100%
22.3%
The Company holds a 22.7% equity interest in MCLP, a non-public entity. MCLP’s principal activities include the
origination and servicing of mortgages. The Company holds one of five seats on MCLP’s Board of Directors.
The Company wound up 7235003 Canada Inc. during 2011 and wound up 6943993 Canada Inc. during 2010.
During 2011, the Company purchased certain corporate services from MCLP in the amount of $497 (2010 - $433). During
2011, the Company also purchased certain mortgage origination and administration services from MCLP in the amount of
$2,859 (2010 - $2,769). During 2011, the Company received $2,201 (2010 - $3,663) of mortgage fees from MCLP.
During 2011, the Company paid fees in the amount of $2,685 (2010 - $4,230) to MCLP relating to a profit sharing
arrangement on a portfolio of discounted mortgages. During 2011, the Company received $303 (2010 - $2,263) of fees
from MCLP relating to a profit sharing arrangement on a portfolio of discounted mortgages.
As part of the aforementioned profit sharing arrangements related to discounted mortgages, MCLP pays MCAN 50% of
any recoveries of discounts on mortgages held on MCLP’s balance sheet. In addition, MCAN reimburses MCLP for 50%
of any credit losses on discounted mortgages held on MCLP’s balance sheet (where MCAN participates in a profit sharing
arrangement), and vice versa.
During 2011, MCAN created certain MBS that were sold to a third party. MCAN entered into an economic arrangement
with MCLP wherein MCAN sold to MCLP the rights to all net economics associated with these MBS, consisting primarily
of interest-only strips less upfront costs. MCAN earned $261 from this sale, which is included in other securitization
income. MCAN met derecognition criteria on the sale of the mortgages, therefore they were removed from the
consolidated balance sheet.
All related party transactions noted above were in the normal course of business. Refer to Note 19 for outstanding balances
payable to related parties.
Compensation of Executives of the Company, which include the President and Chief Executive Officer, Vice President and
Chief Financial Officer, Vice President, Investments, Vice President and Chief Risk Officer and Vice President,
Operations, is as follows:
Salaries and short term employee benefits
Other long term benefits
Executive Share Purchase Plan
2011
1,557
181
1,738
$
$
2010
1,123
128
1,251
$
$
The Company has established an Executive Share Purchase Plan (the “Share Purchase Plan”) whereby the Board of
Directors can approve loans to key personnel for the purpose of purchasing the Company’s common shares. During 2011,
20,300 common shares were issued out of treasury under the Share Purchase Plan (2010 - 61,316). The maximum amount
of loans approved under the Share Purchase Plan is limited to 10% of the issued and outstanding common shares.
Dividend distributions on the common shares are used to reduce the principal balance of the loans as follows: 50% of
regular distributions, and 75% of capital gain distributions. Common shares are issued out of treasury for the Share
Purchase Plan at the weighted average trading price for the 20 days preceding such issue.
- 79 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
28. Related Party Disclosures (continued)
MCAN advanced $299 of new loans under the Share Purchase Plan during 2011 (2010 - $789). As at December 31, 2011,
$1,831 of loans were outstanding (December 31, 2010 - $1,699, January 1, 2010 - $1,397) (Note 12). The loans under the
Share Purchase Plan bear interest at prime plus 1%, 4% at December 31, 2011 (December 31, 2010 - 4%, January 1, 2010 -
3.25%) and have a five-year term. The shares are pledged as security for the loans and had a fair market value of $2,749 as
at December 31, 2011 (December 31, 2010 - $2,562, January 1, 2010 - $2,313).
During 2011, MCAN recognized $70 of interest income (2010 - $49) on the Share Purchase Plan loans.
Deferred Share Units Plan
In 2010, the Company established a Deferred Share Units Plan (the “DSU Plan”) whereby the Board of Directors granted
units under the DSU Plan to the President and Chief Executive Officer (the “Participant”). Each unit is equivalent in value
to one common share of the Company. Following his retirement/termination date, the Participant is entitled to receive cash
for each unit. The individual unit value is based on the average market value of the Company’s common shares for the five
days preceding the retirement/termination date. The Participant was granted 30,000 units under the DSU Plan during 2010.
In addition, the Participant is entitled to receive dividend distributions in the form of additional units. The underlying units
follow a graded vesting schedule over three years. All dividends paid prior to July 6, 2014 vest as at July 6, 2014. All
dividends paid after July 6, 2014 vest immediately. As at December 31, 2011, 10,000 units had vested (December 31,
2010 - nil).
The Company recognizes compensation expenses associated with the DSU Plan in line with the graded vesting schedule.
The compensation expense recognized for the year ended December 31, 2011 related to the DSU Plan was $181 (2010 -
$128). As at December 31, 2011, the accrued DSU Plan liability was $309 (December 31, 2010 - $128, January 1, 2010 -
$nil).
29. Commitments and Contingencies
The Company has contractual obligations to make principal and interest payments on term deposits. The Company also has
a monthly operating lease related to its premises, expiring in 2014 with monthly lease payments of $20. In addition, the
Company has outstanding commitments for future fundings of mortgages intended for its corporate portfolio.
As part of the CMB program, MCAN is required to pay servicing expenses on the securitized mortgages and other ongoing
costs. These expenses are accounted for on the accrual basis.
Term deposits
Operating lease
Mortgage fundings
CMB obligations
Less than
one year
One to
five years
Over five
years
$
$
327,010
277
241,656
768
569,711
$
$
274,567
484
55,010
674
330,735
$
$
-
-
-
-
-
$
$
Total
601,577
761
296,666
1,442
900,446
MCAN incurred $238 of operating lease expenses during 2011 (2010 - $174), included in general and administrative
expenses.
MCAN outsources its mortgage and loan origination and servicing. MCAN continues to pay servicing expenses as long as
the mortgages and loans remain on its consolidated balance sheet.
The Company guarantees certain of the credit and operating activities of MCAP Financial Corporation (“MFC”) and
MCLP. CDP Capital - Real Estate Advisory Inc. (“CDP Capital - Real Estate Advisory”) indemnifies the Company to the
extent of 75% of the costs resulting from any claims on the guarantees. The effect of this indemnity is that the cost of any
claim will be borne by the Company and CDP Capital - Real Estate Advisory pro rata to their respective voting interests in
MCLP.
The guarantees subject to the CDP Capital - Real Estate Advisory indemnity as follows:
(a) guarantee of the performance of MFC and MCLP with respect to the warehousing of residential construction loans
related to MCLP’s residential construction loan securitization program; and
(b) guarantee of the premises lease with respect to the premises occupied by MFC, MCLP and the Company at 200 King
Street West, Toronto with a current monthly rent of $116 and expiring in September 2014.
- 80 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
29. Commitments and Contingencies (continued)
MCLP has issued Class B units to management of MCLP, which were financed by bank loans to management. Under
certain circumstances, the Company may be required to contribute up to 25% of the fair value of the Class B units to MCLP
in order to repurchase the Class B units or to repay the bank financing and subrogate the bank’s position. As at December
31, 2011, the outstanding bank loan balance was $5,916 (December 31, 2010 - $6,315, January 1, 2010 - $7,222). As at
December 31, 2011, December 31, 2010 and January 1, 2010, the fair value of the Class B units exceeded the outstanding
bank loan balance.
The Company is a party to an indemnity agreement relating to a residential construction loan securitization program,
discussed in Note 11.
30. Credit Facilities
The Company has a line of credit from a Canadian chartered bank that is a $50,000 facility bearing interest at prime plus
1%, 4% at December 31, 2011 (December 31, 2010 - prime plus 1.5%, 4.50%, January 1, 2010 - prime plus 1.5%, 3.75%).
The facility has a sub limit of $30,000 for issued letters of credit and $30,000 for overdrafts, and is due and payable upon
demand.
As at December 31, 2011, the outstanding overdraft balance was $nil (December 31, 2010 - $nil, January 1, 2010 - $nil).
The letters of credit have a term of up to one year from the date of issuance, plus a renewal clause providing for an
automatic one-year extension at the maturity date subject to the bank’s option to cancel by written notice at least 30 days
prior to the letters of credit expiry date. The letters of credit are for the purpose of supporting developer obligations to
municipalities in conjunction with residential construction loans. As at December 31, 2011, there were letters of credit in
the amount of $26,666 issued (December 31, 2010 - $22,495, January 1, 2010 - $11,143) and additional letters of credit in
the amount of $12,597 committed but not issued (December 31, 2010 - $9,798, January 1, 2010 - $7,670).
31. Interest Rate Sensitivity
Interest rate risk arises when principal and interest cash flows have mismatched repricing and maturity dates. Interest rate
risk, or sensitivity, is the potential impact of changes in interest rates on financial assets and liabilities.
An interest rate gap is a common measure of interest rate sensitivity. A positive gap occurs when more assets than
liabilities reprice within a particular time period. A negative gap occurs when there is an excess of liabilities over assets
repricing. The former provides a positive earnings impact in the event of an increase in interest rates during the time
period. Conversely, negative gaps are positively positioned for decreases in interest rates during that particular time period.
The determination of the interest rate sensitivity or gap position is based upon the earlier of the repricing or maturity date of
each asset and liability, and includes numerous assumptions.
The interest rate sensitivity analysis is based on the Company’s consolidated balance sheets as at December 31, 2011,
December 31, 2010 and January 1, 2010 and does not incorporate mortgage and loan prepayments. The Company currently
cannot reasonably estimate the impact of prepayments on its interest rate sensitivity analysis. The analysis is subject to
significant change in subsequent periods based on changes in customer preferences and in the application of asset/liability
management policies.
Floating rate assets and liabilities are immediately sensitive to a change in interest rates while other assets are sensitive to
changing interest rates periodically, either as they mature, as interest payments are collected or paid, or as contractual
repricing events occur. Non-interest rate sensitive assets and liabilities are not directly affected by changes in interest rates.
The Company manages interest rate risk by matching the terms of corporate assets and term deposits. To the extent that the
two components offset each other, the risks associated with interest rate changes are reduced. The Asset and Liability
Management Committee (“ALCO”) reviews the Company's interest rate exposure on a monthly basis using interest rate
spread and gap analysis as well as interest rate sensitivity analysis based on various scenarios. This information is also
formally reviewed by the Investment Committee of the Board each quarter. The Company does not currently use derivative
financial instruments outside of the CMB program, however the potential use of such instruments is analyzed and reported
to ALCO on a monthly basis.
The interest rate risk associated with securitization assets (including short-term investments, mortgages - securitized and
financial investments) and liabilities (financial liabilities from securitization) from the CMB program is managed through
the use of “pay-floating, receive-fixed” interest rate swaps (included in derivative financial instruments). For further details
on how the Company manages interest rate risk associated with the CMB program, refer to Notes 7 and 16.
- 81 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
31. Interest Rate Sensitivity (continued)
The following table presents the assets and liabilities of the Company by interest rate sensitivity:
As at December 31, 2011
Floating
Rate
Within
3 Months
3 Months to 1
Year
1 to 5
Years
Over 5
Years
Non Interest
Sensitive
Total
Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
$ 146,524
748,409
894,933
$
91,866
375,588
467,454
$ 246,190
615,452
861,642
$
204,508
1,226,768
1,431,276
$
13,663
-
13,663
$
51,048
174,142
225,190
$
753,799
3,140,359
3,894,158
Shareholders’ Equity
-
-
-
-
-
80,505
80,505
75,629
-
75,629
251,381
1,087,983
1,339,364
274,567
1,775,721
2,050,288
-
-
-
-
13,379
173,207
186,586
618,277
3,117,416
3,735,693
158,465
158,465
GAP
$ 814,428
$ 391,825
$ (477,722)
$ (619,012)
$
13,663
$
(119,861)
-
YIELD SPREAD
0.62%
1.13%
1.55%
1.12%
6.63%
As at December 31, 2010
Floating
Rate
Within
3 Months
3 Months
to 1 Year
1 to 5
Years
Over 5
Years
Non Interest
Sensitive
Total
Total Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
$ 161,397
855,456
1,016,853
$
60,726
250,542
311,268
$ 143,306
78,871
222,177
$ 138,515
1,777,229
1,915,744
$
$
10,797
-
10,797
23,377
185,809
209,186
$ 538,118
3,147,907
3,686,025
-
80,466
80,466
57,454
-
57,454
253,954
-
253,954
109,653
2,865,792
2,975,445
-
-
-
17,671
175,956
193,627
438,732
3,122,214
3,560,946
Shareholders’ Equity
-
-
-
-
125,079
125,079
GAP
$ 936,387
$
253,814
$
(31,777)
$(1,059,701)
$
10,797
$ (109,520)
-
YIELD SPREAD
0.16%
1.95%
3.82%
0.96%
7.59%
As at January 1, 2010
Floating
Rate
Within
3 Months
3 Months to
1 Year
1 to 5
Years
Over 5
Years
Non Interest
Sensitive
Total
$ 316,692
761,492
1,078,184
$
22,754
293,444
316,198
$
54,814
21,010
75,824
$
30,027
1,790,026
1,820,053
$
11,875
-
11,875
$
29,051
231,519
260,570
$ 465,213
3,097,491
3,562,704
Shareholders’ Equity
-
-
-
-
-
80,471
80,471
93,724
-
93,724
245,829
-
245,829
21,191
2,816,146
2,837,337
-
-
-
-
13,007
178,382
191,389
373,751
3,074,999
3,448,750
113,954
113,954
GAP
$ 997,713
$ 222,474
$ (170,005)
$(1,017,284)
$
11,875
$
(44,773)
-
YIELD SPREAD
1.57%
(0.43)%
5.38%
0.90%
5.35%
Certain residential construction loans and single family uninsured completed inventory loans are subject to the greater of a
minimum interest rate (ranging between 3.94% and 10%) or a prime based interest rate. To the extent that the minimum
rate exceeds the prime based rate at December 31, 2011, these mortgages have been reflected in the table above as fixed
rate mortgages, as follows: within 3 months - $32,651 (December 31, 2010 - $19,117, January 1, 2010 - $nil), 3 months to
1 year - $57,783 (December 31, 2010 - $76,004, January 1, 2010 - $107,171), and 1 to 5 years - $35,406 (December 31,
2010 - $44,147, January 1, 2010 - $146,308).
- 82 -
Total Assets
Corporate
Securitization
Liabilities
Corporate
Securitization
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
31. Interest Rate Sensitivity (continued)
An immediate and sustained 1% increase (decrease) to market interest rates at December 31, 2011 would have a positive
(adverse) effect of $1,539 (December 31, 2010 - $1,072, January 1, 2010 - $1,902) to net income over the following twelve
month period.
An immediate and sustained 1% increase (decrease) to market interest rates at December 31, 2011 would have an adverse
(positive) effect to the available for sale reserve of $494 (December 31, 2010 - $211, January 1, 2010 - $nil).
When calculating the effect of an immediate and sustained 1% change in market interest rates on net investment income,
the Company determines which assets and liabilities reprice over the following twelve months and applies a 1% change to
their respective yields at the time of repricing to determine the change in net investment income for the duration of the
twelve month period.
32. Capital Management
The Company's primary capital management objectives are to maintain sufficient capital for regulatory purposes and to
earn acceptable and sustainable risk weighted returns for shareholders. Through its risk management and corporate
governance framework, the Company assesses current and projected economic, housing market, interest rate and credit
conditions to determine appropriate levels of capital. The Company typically pays out all of its taxable income by way of
dividends. Capital growth is achieved through retained earnings, public share offerings, rights offerings and the dividend
reinvestment plan. The Company's capital management is driven by the guidelines set out by the Tax Act and OSFI. As a
MIC under the Tax Act, the Company is limited to a liabilities to capital ratio of 5:1 (or an assets to capital ratio of 6:1),
based on the non-consolidated balance sheets measured at their tax values. As a loan company under the Trust Act, the
Company has been granted a maximum consolidated regulatory assets to capital ratio by OSFI. The Company manages its
assets to a level of 5.75 times capital on a non-consolidated tax basis to provide a prudent cushion between its limit and
total actual assets. The Company manages its capital to comply with the requirements of the MIC test and OSFI
regulations at all times.
The Company has adopted the Basel II capital management framework. The Company has implemented the standardized
approach to calculating risk-weighted assets for credit risk and the basic indicator approach for the calculation of
operational risk.
Tier 1 capital includes share capital, contributed surplus, retained earnings and certain components of accumulated other
comprehensive income. Tier 1 and Tier 2 capital are both reduced by 50% of unrated securitization exposures, while Tier 1
capital was reduced by a portion of gains on securitization under CGAAP. OSFI’s target minimum Tier 1 and Total capital
ratios for the Company are 7% and 10%, respectively. The Company’s target minimum Tier 1 and Total capital ratios are
both 20%.
Securitization assets and liabilities are both excluded from the calculation of the Tax Act ratio. Assets securitized through
the CMB program prior to June 30, 2010 are excluded from the calculation of regulatory ratios.
- 83 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
32. Capital Management (continued)
The Company’s Tax Act and regulatory ratios are as follows:
As at
Tax Act Ratio
Income tax assets
Income tax capital
Income tax assets to capital ratio
Income tax liabilities to capital ratio
Regulatory Ratios (OSFI)
Tier 1 capital
Share capital
Contributed surplus
Retained earnings
Tier 1 capital deductions
Tier 2 capital
Unrealized gain on available for sale marketable
securities
Tier 2 capital deductions
December 31
2011 (IFRS)
December 31
2010 (CGAAP)
January 1
2010 (CGAAP)
$
766,065
156,116
4.91
3.91
$
555,360
126,374
4.39
3.39
$
488,024
120,732
4.04
3.04
$
$
$
132,817
510
23,491
(229)
156,589
100,112
510
26,956
(6,815)
120,763
560
(229)
331
-
(229)
(229)
98,490
510
22,165
(9,792)
111,373
-
(1,142)
(1,142)
Total capital
$
156,920
$
120,534
$
110,231
Total regulatory assets
$
818,112
$
595,473
$
508,351
Capital ratios
Tier 1 capital to risk-weighted assets ratio
Total capital to risk-weighted assets ratio
Assets to capital ratio
22.21%
22.26%
5.21
22.10%
22.06%
4.94
27.75%
27.47%
4.61
As at December 31, 2011, December 31, 2010 and January 1, 2010, the Company was in compliance with the capital
guidelines issued by OSFI under Basel II.
- 84 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
33. Financial Instruments
The Company's assets, analyzed on a risk-weighted basis, are as outlined in the table below. Assets securitized through the
CMB program prior to June 30, 2010 are excluded from the calculation of risk-weighted assets.
As at
On-Balance Sheet Assets
Cash and cash equivalents
Short term investments
Marketable securities
Mortgages - corporate
Financial investments
Other loans
Equity investment in MCLP
Other assets
Off-Balance Sheet Assets
Letters of credit
Mortgage funding commitments
Derivative Financial Instruments
CMB interest rate swaps
Outstanding notional
Add-on factor
Potential credit exposure
Positive replacement cost
Credit equivalent
Risk weighting
Risk-weighted equivalent
December 31
2011 (IFRS)
December 31
2010 (CGAAP)
January 1
2010 (CGAAP)
$
$
10,813
561
30,149
402,632
18,414
3,027
15,480
3,976
485,052
13,333
137,526
150,859
$
18,140
-
6,608
294,907
13,926
10,079
20,315
3,209
367,184
11,247
99,839
111,086
272,903
0.5%
1,365
13,348
14,713
20%
2,943
279,138
0.5%
1,396
13,120
14,516
20%
2,903
18,260
-
-
202,272
29,759
16,885
17,905
1,555
286,636
5,572
48,087
53,659
260,095
0.5%
1,300
11,490
12,790
20%
2,558
Charge for operational risk
66,100
65,238
58,475
Total Risk-Weighted Assets
$
704,954
$
546,411
$
401,328
The risk-weighting of all on-balance sheet assets (except derivative financial instruments) and all off-balance sheet assets is
based on a prescribed percentage of the underlying asset position, in addition to adjustments for other items such as
impaired mortgages and unrated securitization investments. The derivative financial instrument credit equivalent consists
of the fair market value of the derivative and an amount representing the potential future credit exposure. Risk-weighted
assets also include an operational risk charge, which is based on certain components of the Company’s net investment
income over the past three years.
In order to promote a more resilient banking sector and strengthen global capital standards, the Basel Committee on
Banking Supervision (“BCBS”) proposed significant enhancements and capital reforms to the current framework. The
revised framework, referred to as Basel III, will be effective January 1, 2013 and provides lengthy periods for transitioning
numerous new requirements.
Significant Basel III reforms include the following:
•
•
Introducing a new minimum common equity ratio (the “Common Equity Tier 1 ratio”). Financial institutions will be
required to meet the new Common Equity Tier 1 ratio standard during a transition period beginning January 1, 2013
and ending on January 1, 2019. The minimum requirement, which includes a conservation buffer, increases during
the transition period.
Increasing the minimum Tier 1 capital and Total capital ratios. These increases will also be phased in commencing
January 1, 2013 with financial institutions expected to meet the new standards through a transition period ending on
January 1, 2019.
- 85 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
33. Financial Instruments (continued)
•
Introducing a new global leverage ratio to address balance sheet leverage. The BCBS will be monitoring and refining
this new ratio between 2011 and 2017 before its final implementation in 2018.
The majority of the Company’s consolidated balance sheet consists of financial instruments, and the majority of net income
is derived from the related income, expenses, gains and losses. Financial instruments include cash and cash equivalents,
short-term investments, marketable securities, mortgages, financial investments, other loans, financial liabilities from
securitization, term deposits and derivative financial instruments.
All financial instruments that are carried on the consolidated balance sheets at fair value (marketable securities, certain
financial investments and derivative financial instruments) are estimated using valuation techniques based on observable
market data such as market interest rates currently charged for similar financial investments to expected maturity dates.
The following table summarizes financial assets reported at fair value. Financial assets and liabilities are classified into
three levels, as follows: quoted prices in an active market (Level 1), fair value based on observable inputs other than quoted
prices (Level 2) and fair value based on inputs that are not based on observable data (Level 3).
As at December 31, 2011
Level 1
Level 2
Level 3
Financial Assets
Marketable securities
Financial investments
Derivative financial instruments
$
$
14,330
-
-
14,330
$
$
15,819
-
13,348
29,167
$
$
-
8,250
-
8,250
As at December 31, 2010
Level 1
Level 2
Level 3
Financial Assets
Marketable securities
Financial investments
Derivative financial instruments
As at January 1, 2010
Financial Assets
Financial investments
Derivative financial instruments
$
$
$
$
1,652
-
-
1,652
$
$
4,956
-
13,120
18,076
$
$
-
3,973
-
3,973
Level 1
Level 2
Level 3
-
-
-
$
$
-
11,490
11,490
$
$
100
-
100
The following table shows the continuity of Level 3 financial assets recorded at fair value:
Balance, January 1, 2010
Advances
Balance, December 31, 2010
Advances
Changes in fair value, recognized in other comprehensive income
Balance, December 31, 2011
$
$
100
3,873
3,973
3,028
1,249
8,250
An increase of 0.25% to capitalization rates as at December 31, 2011 would result in a decrease to the fair value at Level 3
financial investments by $688 (December 31, 2010 - $355, January 1, 2010 - $nil). A decrease of 0.25% to capitalization
rates as at December 31, 2011 would result in an increase to the fair value of Level 3 financial investments by $736
(December 31, 2010 - $379, January 1, 2010 - $nil).
There were no transfers between levels during the years ended December 31, 2011 or December 31, 2010. There were no
financial liabilities reported at fair value as at December 31, 2011, December 31, 2010 or January 1, 2010.
Risk Management
The types of risks to which the Company is exposed include interest rate, credit, liquidity and market risk. The Company’s
enterprise risk management framework includes policies, guidelines and procedures, with oversight by senior management
and the Board of Directors. These policies are developed and implemented by management and reviewed and approved
annually by the Board of Directors.
- 86 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
33. Financial Instruments (continued)
The nature of these risks and how they are managed is provided in the Risk Management and Risk Factors section of the
Management’s Discussion and Analysis of Operations (“MD&A”). Certain disclosures required under IFRS 7, Financial
Instruments: Disclosures, related to the management of credit, interest rate, liquidity and market risks inherent with
financial instruments are included in the MD&A. The relevant MD&A sections are identified by shading within boxes and
the content forms an integral part of these consolidated financial statements.
34. Standards Issued But Not Effective
Standards issued but not yet effective up to the date of issuance of the Company’s consolidated financial statements are
listed below. This listing is of standards and interpretations issued, which the Company reasonably expects to be applicable
at a future date. The Company intends to adopt those standards when they become effective.
IFRS 7, Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements
The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to
enable the user of the Company’s consolidated financial statements to understand the relationship with those assets that
have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about
continuing involvement in derecognized assets to enable the user to evaluate the nature of, and risks associated with, the
entity’s continuing involvement in those derecognized assets. The amendment becomes effective for annual periods
beginning on or after July 1, 2011. The Company has not fully assessed the impact of adopting IFRS 7.
IFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities
This standard will require entities to disclose gross amounts subject to right of set-off, amounts set off in accordance with
the accounting standards followed, and the related net credit exposure. Effective for periods beginning on or after January
1, 2013. Retrospective application will be required.
IFRS 9, Financial Instruments: Classification and Measurement
This standard as issued reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to
classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for
annual periods beginning on or after January 1, 2015. In subsequent phases, the IASB will address hedge accounting and
impairment of financial assets. The Company has not fully assessed the impact of adopting IFRS 9.
IFRS 10, Consolidated Financial Statements
This standard is effective for annual periods beginning on or after January 1, 2013 and will replace portions of IAS 27,
Consolidated and Separate Financial Statements and interpretation SIC-12, Consolidation - Special Purpose Entities.
Under IFRS 10, consolidated financial statements include all controlled entities under a single control model that applies to
all entities, including special purpose entities and structured entities. A group will still continue to consist of a parent and
its subsidiaries; however IFRS 10 uses different terminology from IAS 27 in describing its control model. The changes
introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled,
and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. The
Company has not fully assessed the impact of adopting IFRS 10.
IFRS 11, Joint Arrangements
This standard replaces IAS 31, Interests in Joint Ventures and SIC-13, Jointly-Controlled Entities - Non-Monetary
Contributions by Venturers. IFRS 11 uses some of the terms that were used by IAS 31, but with different meanings.
Whereas IAS 31 identified three forms of joint ventures (i.e., jointly controlled operations, jointly controlled assets and
jointly controlled entities), IFRS 11 addresses only two forms of joint arrangements (joint operations and joint ventures)
where there is joint control. IFRS 11 defines joint control as the contractually agreed sharing of control of an arrangement
which exists only when the decisions about the relevant activities require the unanimous consent of the parties sharing
control.
Because IFRS 11 uses the principle of control in IFRS 10 to define joint control, the determination of whether joint control
exists may change. In addition, IFRS 11 removes the option to account for jointly controlled entities (“JCEs”) using
proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity
method. For joint operations (which includes former jointly controlled operations, jointly controlled assets, and potentially
some former JCEs), an entity recognizes its assets, liabilities, revenues and expenses, and/or its relative share of those
items, if any. In addition, when specifying the appropriate accounting, IAS 31 focused on the legal form of the entity,
whereas IFRS 11 focuses on the nature of the rights and obligations arising from the arrangement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / 2011 CONSOLIDATED FINANCIAL STATEMENTS
MCAN MORTGAGE CORPORATION
December 31, 2011 (Dollar amounts in thousands except for per share amounts)
34. Standards Issued But Not Effective (continued)
IFRS 11 is effective for annual periods commencing on or after January 1, 2013. The Company has not fully assessed the
impact of adopting IFRS 11.
IFRS 12, Disclosure of Interests in Other Entities
This standard includes disclosure requirements about subsidiaries, joint ventures, and associates, as well as unconsolidated
structured entities. Many of the disclosure requirements were previously included in IAS 27, IAS 1 and IAS 28 while
others are new. This standard is effective for annual periods beginning on or after January 1, 2013. The Company has not
fully assessed the impact of adopting IFRS 12.
IFRS 13, Fair Value Measurement
This standard provides guidance on how to measure the fair value of financial and non-financial assets and liabilities when
fair value is required or permitted per IFRS. While many of the concepts in IFRS 13 are consistent with current practice,
certain principles could have a significant effect on some entities adopting the standard. IFRS 13 is effective January 1,
2013 and will be adopted prospectively. The Company has not fully assessed the impact of adopting IFRS 13.
35. Comparative Amounts
Certain comparative amounts have been reclassified to conform to the presentation adopted in the current year. There was
no impact to the financial position or net income as a result of these reclassifications.
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2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
DIRECTORS
David G. Broadhurst
President, Poynton Investments Limited; Chair of the Audit
Committee; Member of Conduct Review, Corporate
Governance and Human Resources Committee; Director since
May 1997.
Brydon Cruise
President and Managing Partner, Brookfield Financial;
Member of Conduct Review, Corporate Governance and
Human Resources Committee; Member of Investment
Committee; Director since May 2010.
Susan Doré
Corporate Director; Chair of Information Technology
Committee; Member of Audit Committee; Member of Conduct
Review, Corporate Governance and Human Resources
Committee; Director since May 2010.
Brian A. Johnson
Partner, Crown Capital Partners and Crown Realty Partners;
Member of Investment Committee; Chair of Conduct Review,
Corporate Governance and Human Resources Committee;
Member of Information Technology Committee; Director since
January 2001.
Derek A. Norton
President and CEO, MCAP Commercial LP; Member of
Information Technology Committee; Director since July 2000.
Jean C. Pinard
Corporate Director; Member of Investment Committee;
Director since November 2005.
Robert A. Stuebing
Corporate Director; Member of Audit Committee; Chair of
Investment Committee; Director since April 2004.
Ian Sutherland
Chair, MCAN Mortgage Corporation; Director since January
1991.
William Jandrisits
President and Chief Executive Officer, MCAN Mortgage
Corporation; Member of Information Technology Committee;
Director since August 2010.
Karen Weaver
Executive Vice President & Chief Financial Officer
First Capital Realty Inc.; Member of Audit Committee;
Member of Information Technology Committee; Director
since November 2011.
OFFICERS AND MANAGEMENT
William Jandrisits
President and Chief Executive Officer
Derek Sutherland
Vice President, Operations
Tammy Oldenburg
Vice President and Chief Financial Officer
Paul Bowers
Vice President and Chief Risk Officer
Michael Misener
Vice President, Investments
Paco Lai
Senior Manager, Cash Operations
Sylvia Pinto
Corporate Secretary
Chief Compliance Officer
Sal Jadavji
Enterprise Risk Management Officer
Chief Anti-Money Laundering Officer
Privacy Officer
Business Continuity/Disaster Recovery Coordinator
Robert Horton
Chief Audit Officer
Hassan Shaikh
Assistant Vice President, Investments
Dipti Patel
Senior Manager, Investments
John Tyas
Controller
Eloise Goodwin
Manager of Finance
Murtuza Lakdawala
Assistant Controller
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CORPORATE INFORMATION
Head Office
200 King Street West, Suite 400
Toronto, Ontario
M5H 3T4
Tel: (416) 598-2665
Fax: (416) 598-4142
Corporate Counsel
Goodmans LLP
Toronto, Ontario
Auditors
Ernst & Young LLP
Toronto, Ontario
Public Listing
Toronto Stock Exchange
Exchange symbol MKP
Bank
Bank of Montreal
First Canadian Place
Toronto, Ontario
Website
www.mcanmortgage.com
2011 ANNUAL REPORT / MCAN MORTGAGE CORPORATION
Corporate Information
This MCAN Mortgage Corporation 2011 Annual Report is available for
viewing/printing on our website at www.mcanmortgage.com, or additionally on
SEDAR at www.sedar.com. To request a printed copy, please contact Ms. Sylvia
Pinto, Corporate Secretary, 200 King Street West, Suite 400, Toronto, Ontario
M5H 3T4, by phone 416-591-5214 or 1-800-387-4405, or e-mail
spinto@mcanmortgage.com.
Registrar and Transfer Agent
For dividend information, change in share registration or address, lost certificates,
estate transfers, or to advise of duplicate mailings, please call MCAN Mortgage
Corporation’s Transfer Agent and Registrar at 1-800-564-6253, or write to
Computershare Trust Company of Canada, 100 University Avenue, 9th Floor,
Toronto, Ontario M5J 2Y1.
Dividend Reinvestment Plan
For information regarding MCAN’s Dividend Reinvestment Plan, please visit the
Company’s website at www.mcanmortgage.com under Shareholders > Dividend
Reinvestment Plan. An Enrolment Form may be obtained at any time upon
written request addressed to the Plan Agent, Computershare. Registered
Participants may
at
www.computershare.com/investorcentrecanada.
Enrolment
Forms
online
obtain
also
General Information
For general enquiries about MCAN Mortgage Corporation, please write to Ms.
Sylvia Pinto, Corporate Secretary or e-mail mcanexecutive@mcanmortgage.com.
Annual Meeting
Wednesday, May 9, 2012
4:30 p.m. (Eastern Daylight Savings Time)
St. Andrew’s Club & Conference Centre
150 King Street West
27th Floor
Toronto, Ontario
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